Analysis: Sears is headed in entirely the wrong direction
As much as Sears deserves credit for the various actions it has been taking to shore up the company, there is no denying that this (Sears second quarter financials) is a miserable set of numbers. Indeed, the precipitous drop in comparable sales and the continued lack of progress on profit suggests the company isn't moving far or fast enough to ensure its long-term survival.
The ongoing slide in same-store sales, which dipped by 11.5% this quarter, reveals the fundamental weakness with both Sears and Kmart: fewer and fewer people want to shop there, and both firms continue to lose relevance. This is hardly surprising as store environments across much of the estate are now so profoundly unappealing that many consumers seek to actively avoid them, let alone making a conscious decision to shop there.
Sears has long since argued in its transition to a nimbler organization with a lighter asset base, stores are a much less relevant part of the mix. This is one of the reasons why 180 outlets have been shuttered so far this year, with 178 further shops earmarked for closure by the end of 2017, including the 28 new Kmart disposals announced this morning.
Right-sizing the store portfolio is laudable and is something to which every retailer should be attending. The difficulty for Sears, however, is that as weak stores are disposed of comparable sales from the remaining parts of the chain should, in theory, be improving. However, this is not the case.
The decline in same-store sales appears to be accelerating, especially at Sears. Other metrics are also on the slide. Gross margin rates for merchandise are down over the prior year; expenses as a proportion of revenue are up sharply; and, interest payments are higher. All in all, Sears is headed in entirely the wrong direction.
Against such weak financials, Sears has been monetizing assets and securing credit lines to ensure it can stay afloat. However, this financial wizardry is not fixing the underlying problems; it is merely kicking the can further down the road. Worryingly, despite all the changes, Sears still lost $251 million over the quarter — and this is after the $380 million gain from asset sales is taken into account. Moreover, the gap between assets and liabilities continues to rise and now stands at $3.6 billion.
As much as Sears is in a dire position, it would be unfair to accuse it of doing nothing whatsoever. The opening of a new store format in Texas that just sells mattresses and appliances is interesting and provides a much more compelling destination than traditional stores. Meanwhile, the decision to sell Kenmore appliances on Amazon is a smart move that will help expand the distribution of the brand. The problem is that both of these initiatives are tiny drops of positivity in a vast ocean of problems and, as such, are not going to save the company.
The bottom line is that as a retail proposition Sears is fundamentally broken. And its long and painful slide into oblivion shows no signs of abating.