Why Sears Will Never Be Great Again

Why Sears Will Never Be Great Again
Why Sears Will Never Be Great Again

There was a time when Sears Holdings (SHLD) mattered, but you have to go all the way back to when you risked paper cuts from the retailer's leafy mail-order catalog to remember it.

Things just haven't been as rosy on this side of the millennium.

As the parent company of Sears and the even more underwhelming Kmart, Sears Holdings has been a meandering disaster since Eddie Lampert played Dr. Frankenstein in piecing the two tattered chains together in 2004.

Lampert's plan made sense at first. Kmart and Sears were fading department store chains at the time, but they were huge generators of cash flow. As a Warren Buffett fan, Lampert figured he could use that money to grow his empire with even more timely acquisitions. Kmart had billions in accumulated tax losses that could be used to offset future profits. Many of these stores were also sitting on juicy real estate.

What could go wrong? Well, how about everything.

Blue Plight Special

As a keen consolidator, Lampert figured that he could milk some serious synergies by eliminating corporate redundancies. It also seemed like a no-brainer to see if Sears' respected Kenmore appliances and Craftsman tools would add prestige to Kmart.

However, there was a reason that both chains could be acquired so cheaply. There was a reason that Kmart had amassed $3.8 billion in tax credits. These weren't chains in which it was prudent to cut corners to squeeze out more cost savings. What the tired concepts needed was a material influx of capital to refresh the stores.

Lampert didn't see it that way. He brought a knife to a gunfight. More specifically, he brought a chainsaw to an ill-advised turnaround situation.

Life hasn't been kind to Sears Holdings under Lampert's watch. Revenue at the combined company has fallen for 19 consecutive quarters. Same-store sales have been routinely negative. Things are bad, but they're about to get even worse.

After posting larger-than-expected losses for three consecutive quarters, Lampert's modest profitability at Sears Holdings on an annual basis is about to see red. Analysts see the retailer posting a loss of $2.34 a share this fiscal year and $1.86 a share in fiscal 2012.

Shears for Sears

Nothing seems to be going right for Lampert lately. What good are tax loss carry-forwards for a company that is unlikely to return to profitability to use them? A real estate play may have intrigued frothy speculators seven years ago, but it's obviously a different landscape these days.

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If Sears and Kmart have any shot at turning around their fortunes, it's going to take material capital expenditures to update the stores. Unfortunately, that just isn't in the DNA of its management team.

I have a sentimental soft spot for Sears. My first job in high school was selling maintenance agreements for Sears. I would hate to see that icon go down, just as I dreaded visiting Chicago this summer and having to tell the cab driver to take me to Willis Tower.

However, there's no way that this has a happy ending with the current players. Sears Holdings doesn't have the scale to compete against Walmart (WMT) on prices. It also doesn't have the cheap-chic panache of Target (TGT), regardless of the initial success of its Kardashian Kollection.

There's No Place Like Home for the Ho-Ho-Holidays

Remember when Sears used to market "the softer side" of its stores? It was a way to remind shoppers that Sears wasn't all Kenmore washers and Craftsman monkey wrenches. These days it seems that the company can't even get consumers to load up on its hard goods.

This holiday season will be profitable for Sears Holdings. It always is. However, we're a long way from 2006 and 2007, when Sears Holdings was in the black all year round. Sears Holdings will be profitable now, but that won't be enough to offset what it lost during the three previous quarters.

Get used to it. Analysts see that happening again in fiscal 2012 and fiscal 2013. There's no reason to expect that trend to reverse itself. We're done milking cost efficiencies here, and customers continue to shop elsewhere in growing numbers.

The Internet didn't do Sears Holdings any favors. It is, after all, the mail-order catalog of our time. However, Walmart and Target have been able to profitably navigate their way through this changing marketplace.

Sears and Kmart were supposed to save each other, but all they've done is combine to sink faster.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. The Motley Fool owns shares of Walmart Stores. Motley Fool newsletter services have recommended buying shares of Walmart Stores, as well as creating a diagonal call position in Walmart Stores.

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