Sears May Rebound from Certain Destruction

To the surprise of many, Sears may not be entirely dead yet. Sears has had an incredibly volatile year, with a sequence of difficult decisions, a number of stores closing, and a declaration of bankruptcy. However, a new agreement with Eddie Lampert may save the store — leaving many to question whether there is a place for the store in the modern market.

While many believed that Sears was destroyed by a failure to transition to the new world of eCommerce, it was actually a long series of bad financial decisions. Sears diversified into a number of areas, including its financial and real estate holdings. Unfortunately, this diversification weakened Sears rather than strengthened it, and it lost focus on its retail marketplaces.

It’s an irony that Sears first started by supplanting retail stores through its mail order marketplace — very much like Amazon would later do with big box retail outlets. Sears was not a company that was afraid to change; rather, it is a company that over-burdened and over-extended itself with disparate investment types.

Moving into the last decade, Sears quickly lost relevance and failed to compete with other very similar stores. In the last few years, Sears struggled to hold on by spinning off some of its more popular brands, and making deals with companies such as Amazon. For Amazon, Sears made a bargain to provide in-person servicing for Amazon’s online automobile-targeted sales.

Still, this wasn’t enough. Sears was eventually forced to declare bankruptcy, and most thought that the Sears legacy had ended entirely until the recent bankruptcy auction.

While the sequence of decisions above may paint a negative picture, it’s actually a positive one to the right person. A series of bad decisions is easier to fix than a company that is simply irrelevant and unable to be saved. Nevertheless, it’s true that Sears hasn’t made a profit since 2010, and that its competitors — Walmart, Target, and Amazon — have been performing far better.

In a bid to save the brand, ESL Investments — a hedge fund headed by Eddie Lambert — is making a $5 billion bid to save the company. If this bid goes through, then the company’s most profitable 400 stores would stay open. However, it’s unknown whether this downsized infrastructure would remain profitable, and whether these stores would be able to stay profitable in the new world.

While Amazon alone may not have killed Sears, it is now consuming large parts of the retail market. Amazon’s market share does keep growing, and the role that large retail stores are playing in society is shifting. If there is very little room for the Walmarts and the Targets of the world, then Sears is going to find itself at a continued and growing disadvantage. In short, it may be the worst possible time to try to save a large chain of national brick-and-mortar stores.

Whether or not this deal will go through depends on many factors, so Sears may not yet have been saved. As the bankruptcy goes through, it is up to the discretion of the judge to determine the best course of action. Creditors will still need to be paid off by the dissolution of the company, and these creditors may not want to put through this type of deal. During a bankruptcy proceeding, a company’s assets are generally liquidated to pay off any creditors that are currently owed money. Whether the deal goes through may depend on whether the creditors believe that this is the best deal they can get.

At the same time, it may be an interesting way to save a company that was struggling not just due to an inability to adapt, but also a sequence of remarkably poor long-term decisions. Sears is a part of American history and has been a staple for many decades, and it may not be a company that goes easily into the night. Further, though the company itself has been notoriously non-profitable, the branding of the company is still worth something as a trustworthy and well-known business.

Regards,

Ethan Warrick
Editor
Wealth Authority

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