Guest Post by Justin Spittler
One of the world’s most iconic retailers is on its deathbed.
Sears is one of America’s oldest companies. It opened its first store in 1886, five years before the zipper was invented.
The company later pioneered the mail-order catalog business. At one point, it was also the world’s biggest retailer.
Those were the good ol’ days. But they’re never coming back.
Just look at this chart. You can see that Sears Holdings Corp. (SHLD) has plunged more than 90% over the last decade. That’s a staggering decline.
Anyone could look at this chart and tell you Sears is finished.
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But the company didn’t officially admit this until a few days ago. On Wednesday, Sears management shared its dire outlook in the company’s latest annual report:
Our historical operating results indicate substantial doubt exists related to the company’s ability to continue as a going concern.
In other words, management just admitted what everyone else has been saying for years.
• Sears plunged 14% on the news…
Wednesday was the stock’s worst day in more than two years.
To be clear, Sears hasn’t officially thrown in the towel. It’s actually doing everything it can to survive.
It’s laid off thousands of workers. It plans to close 150 (10%) of its stores. And it’s selling core assets to raise cash.
Just a few weeks ago, it sold its Craftsman Tools brand to Stanley Black & Decker Inc. for $900 million. Management is also thinking about parting ways with its Kenmore and DieHard brands.
Normally, I’d say a company’s in “survival mode” when it’s selling key assets to raise money. But I’m not going to say that this time…because Sears won’t survive this.
Right now, the company is like a dying patient that’s tried every possible procedure.
And nothing has worked.
It can’t afford another surgery. So it’s selling its life-support system to the highest bidder.
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• Now, these desperate measures could buy Sears time…
But make no mistake. Its days are numbered.
Now, you might not think that this is your problem if you don’t own shares of Sears.
But you have to understand something… Sears isn’t the only major retailer fighting for its life.
J.C. Penney (JCP) is down 94% since 2007.
Macy’s (M) stock price is down 56% over the last two years.
Regular readers know why this is happening.
In short, online shopping is eating traditional retailers alive.
Now, I didn’t write this issue just to rehash this argument. I wrote it because I think the collapse of Sears could trigger a violent chain reaction in the retail sector…one that could put countless other retailers out of business.
It could even spark the worst real estate crisis since the U.S. housing market imploded a decade ago.
I know this is a bold statement. But I have the facts to back it up.
Before I share them with you, you have to understand something about retail real estate…
• Department stores are what real estate professionals like to call “anchor tenants”…
These are the most important tenants in shopping malls.
They occupy the biggest spaces. They account for a large chunk of the mall’s rental income. And they drive the most foot traffic.
But that’s not the only reason anchor tenants are critical to the health of a mall.
You see, many retail lease agreements include something called a “co-tenancy” clause. This clause allows smaller stores like Gap, Williams Sonoma, and Foot Locker to negotiate lower rental rates if a tenant like Sears walks. Some co-tenancy clauses even allow tenants to prematurely terminate their lease.
The good news is that many co-tenancy clauses are only triggered if more than one anchor tenant goes dark. The bad news is that department stores are failing left and right.
• J.C. Penney plans to close 120 stores in the coming months…
That’s about 14% of its stores.
Meanwhile, Macy’s (M) plans to close 100 of its stores.
These department store closures are already rippling across the retail sector.
Just look at how many stores these major companies plan to close in the coming months:
- Payless – 1,000 stores
- RadioShack – 552 stores
- The Limited – 250 stores
- Wet Seal – 171 stores
- American Apparel – 110 stores
- Abercrombie & Fitch – 60 stores
- Guess – 60 stores
And that’s just scratching the surface. According to Business Insider, retailers expect to close more than 3,500 stores in the coming months.
As if that’s not enough, three of the above companies—Payless, RadioShack, and American Apparel—have all filed for bankruptcy in the past year.
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• The “retail apocalypse” is turning malls across America into wastelands…
Just look at what happened to this mall in Akron, Ohio.
And another in Harvey, Illinois.
Sadly, this is just the beginning.
According to real estate research firm Green Street Advisors, 334 U.S. shopping malls are now at “high risk” of closing. That’s about one-third of the nation’s malls.
• Investors are not taking this threat seriously…
You can see what I mean in the chart below.
It compares the Bloomberg Regional Mall Index with Casey Research’s Department Store Index. This is our in-house index that tracks the performance of Sears, Macy’s, Nordstrom, and J.C. Penney.
Notice anything?
Department stores are down big. And yet, mall stocks are still treading water.
I don’t expect this to last much longer.
If you haven’t already, get out of mall real estate investment trusts (REITs) now. It’s only a matter of time before their shares nosedive like major department stores.
The nature of retail sales is changing, the internet probably the cause.
Probably? Hahahabababa
The internet is simply the final illness that is pushing the patient over the edge.When a person w/a disease that weakens their immune system gets the flu or pneumonia and dies,that might be listed as the cause of death but is that what really killed the patient?
When I was a kid nearly all clothing and durable household items came from Penney’s,Sears,Wards,Grants or Fields.
When they tried to change,they got rid of things that they should not have while not doing things they should have.
Plus,in the case of Sears,it’s like they deliberately screwed you over starting 10/15 years ago.It’s a pain to return Craftsman tools,especially yard tools.
Also,many of these retailers have websites that are a pain to use.IMHO,many brick/mortar chains are trying to use their websites to get people interested in their product but confused/frustrated so that they come into the store.
The writer is also correct about the anchor tenants driving the mall traffic and the negative effects it will have on other tenants.I was talking about this yesterday w/a friend who runs the construction dept of a major retail/entertainment company.In the last month,they have postponed several deals and killed a couple of others because of their concerns about the viability of some of these anchor tenants.
Technology is not always for the better in all ways. I only go to a mall once or twice a year ( Christmas shopping because of the ritual of browsing around from store to store and the Sbarro’s Italian buffet, and secondly I might go for a date night with the wife for a movie and dinner at McCormick and Schmit’s…)otherwise, even our high quality mall in a wealthy suburb is usually full with packs of black teens being loud, crass, vulgar and crotch-grabbing at every girl that walks past.
I have memories of the Sears Christmas catalog arriving and looking at potential wish-list items or tools I could get dad for Christmas….
Likewise, the progress of technology has destroyed the art of a well-penned letter to family or friends. I used to love receiving a personal letter in the mail, each person would have a meter, flow, or warmth unique to themselves which you felt as you read their individual, stylized script.
Now it is a quick and to the point email which has no personality and/or the quick texting preferred by most people under 30, which barely uses the English language.
I see not just the closing of stores when I read these articles, I see another part of our American traditions and a greater western culture dying. The memories of teenage dates at the mall, catalog shopping for sleds, hobbies, fishing gear, craftsman tools- items that used to draw community and friends together outside of the walls of our individual homes.
Now we are often self-confined within our conclaves, writing soulless discourse to strangers, ordering our material wants from mega-corps and someday soon, delivered by mechanical drones to our doorsteps…Bleak
Javelin, shopping at the mall is not “another part of our American traditions and a greater western culture.” Earlier in the 20th century people did their shopping on Main Street. Before that they used catalogs from Sears and Wards and other retailers to shop for lots of stuff. In a sense those catalogs were very similar to shopping on the net.
If the big retailers die and take malls and big-box stores with them, I will not be heading any tears. Maybe that will allow us to return to the days of shopping at our local retailers and keeping our money in our communities. I suspect local retailers can better co-exist with Amazon then big, national retailers can. Local retailers can provide personalize service. Something the big boys gave up long ago.
So many pressures are building up it maybe that retail malls will be nothing more than a mess that can’t be concealed behind phony data. A failed mall is just too conspicuous hide. But behind that failed mall lies a host of other problems. Local and state governments lose property and sales tax revenue and that feeds into their ability to maintain payrolls and make pension fund contributions.
At some point these pressures will become too great and the system will blow. Muni bonds will fail as local governments can’t keep their services, payrolls and pension plan balls in the air. I was looking at my city retirement plan today. 4000 retirees, 9800 vested benificiaries, 2000 current employees. 60% funded ( at current market valuations!), no COLA since 2009. Fortunately, I am not dependent on the goddamned thing but a lot of people are going to get a horrible letter telling them their pensions will be cut. Multiply this over and over again by city after city, state after state and the effect on consumer sales as people scramble to adjust will be catastrophic. Throw in rising auto and health insurance rates to say nothing of plain old interest rates and everybody from Joe Sixpack right up to the upper 95th percentile in income is going to feel a severe pinch in their standard of living.
The taxation of internet commerce is coming soon, largely driven by the budgetary issues you describe.
Somebody has warned us about this happening. Who might that be?
In preparing for Obama’s OFA May Day riots, I wanted some useful items like ammo and tactical radios but had to shop online; even Walmart is becoming a drop shipper.
And who’s going to shed a tear for State and local government pensions that take a hit? Most if not all those plans were “bid up” to unrealistic payouts by Democrat politicians selling bribes in the form of pension payments for votes. Same with the unrealistic post-employment healthcare benefits, both of these political bribes NEED to take a hit – the sooner the better as far as I’m concerned.
Who gives a flying f*ck?
Those who worship government would have it be their everything – provider, protector, source of news, comfort, hope. That government cannot perform these functions and never will is lost to them; they BELIEVE with all the devotion of a true fanatic that somehow THEY can design a government that will.
Delusions take all forms and shapes; theirs is just worse than most.