Stanley Black & Decker (SWK) will gain from diversified business structure, better organic growth, operational excellence and synergistic benefits from acquired assets.
Pennsylvania Real Estate Investment Trust (PEI), better known as PREIT, making every effort to enhance and diversify its tenant mix.
As a potential investor, ask yourself whether you trust Sears Holdings (NASDAQ:SHLD) CEO Eddie Lampert. Currently trading for about $7, Sears stock is about 27% off its recent lows of $5.50. Sears has done some things right.
Kohl's (KSS) extends its partnership with Amazon.com to lure customers and improve store traffic.
With the holiday season approaching, retailers are gearing up for the busiest part of the year and it goes without saying that competition will be tough.
After claiming its 27th victim of the year in the form of the Toys 'R' Us bankruptcy filed earlier this morning, the Amazon-induced retail bloodbath of 2017 has just turned full-on apocalyptic. According to data aggregated by Reorg First Day, the Toys "R" Us filing brings the total amount of defaulted retail debt to over $14 billion so far in 2017. All of which should be sufficient to drive U.S. equity markets to fresh new highs before the end of the day. Meanwhile, according to Bankrupty Data, Toys "R" Us marks the third largest U.S. retail bankruptcy in history, based on assets, exceeded only by Kmart and Federated Department Stores... ...and here is how the 2017 retail bankruptcies have stacked up. Of course, the real question is whether the 3rd largest retail bankruptcy in U.S. history is enough to once again push Amazon's Jeff Bezos to the top the world's list of biggest douches wealthiest men.
Back in March, when we detailed the ongoing catastrophic deterioration in the US retail sector, manifesting itself in empty malls, mass store closures, soaring layoffs and growing bankruptcies - demonstrated most vividly by the overnight bankruptcy of Toys "R" Us, the second largest retail bankruptcy in US history after K-Mart - we said that "just like 10 years ago, when the "big short" was putting on the RMBX trade, and to a smaller extent, its cousin the CMBX, so now too some are starting to short CMBS through the CMBX, a CDS index which tracks the values of bonds backed by various commercial properties. They are betting against securities backed by malls in weaker locations where stores could close in quick succession, triggering debt defaults." We dubbed this retail short via CMBX the next "Big Short" trade, and others promptly followed. In a subsequent post just a few days later, we underscored why the correct way to short the great retail collapse was not so much through stocks, but CMBX: The trade, as we discussed before, is not so much shorting the equities where a persistent threat of a short squeeze has burned the bears on more than one occasion, but going long default risk via CMBX or otherwise shorting the CMBS complex. Based on fundamentals, the trade indeed appears justified: Sold in 2012, the mortgage bonds have a higher concentration of loans to regional malls and shopping centers than similar securities issued since the financial crisis. And because of the way CMBS are structured, the BBB- and BB rated notes are the first to suffer losses when underlying loans go belly up. As we also noted, cracks had started to appear. As of mid-March, prices on the BBB- pool of CMBS have slumped from roughly 96 cents on the dollar in late January to 87.08 cents last week, index data compiled by Markit show. So fast forward 6 months to today, when Goldman Sachs - a firm known to dabble with prop positions in both RMBS and CMBS in the past - itself takes aim at the CMBX trade, and in a report by Marty Young, writes that the "CMBX market doubts viability of US retail malls," which highlighting the dramatic crash in select CMBX issues we touched upon over half a year ago. Explicitly using the term coined here first, and calling it the next "big short", Goldman writes that while 2017 has generally been a year of low volatility and tight spreads across most asset classes, the CMBX market has been a notable exception. Spreads on CMBX 6 BBB- have widened 300bp since the start of the year and now trade 385bp wide to CDX HY (Exhibit 1). More notable, the trade appears to be accelearting to the downside, and in the past six weeks alone, spreads have moved more than 100bp. In other words, in a world in which all asset classes appears to be only going up, CMBX, and specifically the CMBX 6 BBB- tranch, has indeed emerged as this year's "Big Short." What has driven such a significant sell-off, Goldman asks, and then provides the following answer. A market narrative has emerged that CMBX 6 BBB- is the next “big short” of brick-and-mortar retail. The “death of retail” story is nothing new, but fresh fears have arisen this year that 2017 marks the tipping point. Following an inexplicably weak holiday retail season and a raft of store closures and bankruptcies this year, concerns are growing that the pace of deterioration has inflected higher for brick-and-mortar retailers. Although the disruption from e-commerce has been clearly visible for more than a decade, store-based retailers have been unprepared for the onslaught of online retail (“The Store of the Future,” Profiles in Innovation, August 2, 2017). The market’s increasing anxiety over regional malls and traditional anchor stores is also evident in retail stocks. Exhibit 2 shows that as equity markets have grown enthusiastic about the big names in e-commerce, they have grown only more negative on department stores. These struggling anchors in turn threaten the mall ecosystem. Markets have been acutely concerned with Sears in particular this year: Exhibit 3 shows that, with a spread level of roughly 3500bp, the CDS market is implicitly pricing a high likelihood that the company experiences distress. For those who are unfamiliar with the basis of the trade, Goldman lays them out, as well as providing a detailed perspective on whether this "Big Short" has (much) more room to run. First, what is it? CMBX 6 BBB- is a synthetic, equal-weighted index of 25 CMBS mezzanine bonds that were rated BBB- at issue and issued between March and December of 2012 (CMBX 6 has AAA through BB tranches, but in this report we focus on the BBB- layer as it has been the focus of markets this year). Retail is the largest underlying property type (39%), which explains the exposure to negative retail sentiment. Office (27%) and lodging (11%) properties are second- and third-largest property types, respectively. The average loan-to-value (LTV) of the underlying collateral was approximately 64% at origination, with a debt service coverage ratio (DSCR) of approximately 1.9x. While the average deal was comprised of a pool of 64 loans, the top 10 loans account for nearly 55% of each deal on average, with the largest loan averaging approximately 10%. Most of these loans have a maturity of ten years, and thus will mature in 2022. The tranched nature of CMBX reference entities is critical from a pricing perspective and distinguishes the product from corporate CDX. Since the most junior tranches in a CMBS deal incur losses first, there is a potential convexity to the spreads on CMBX BBB- as they need to price the possibility that these tranches could be completely wiped out. Put differently, even though CMBX 6 contains roughly 1,600 loans overall, the performance of the BBB- tranches is tied significantly to the lowest-quality mortgages in the portfolio, which is not offset by a strong performance of the aggregate portfolio. This is what makes CMBX 6 BBB- particularly vulnerable to the headwinds facing regional malls. Exhibit 4 shows in four charts how a unique market narrative has formed around CMBX 6 BBB-. First, the spread on the BBB- tranche of CMBX series 7 ? a largely similar product comprised of CMBS issued in 2013 ? has also widened meaningful this year, but the move has been far more pronounced for the 6 series. Second, while the spreads on the synthetic index have widened hundreds of basis points since January, the spreads on the CMBS cash bond underliers have widened only a fraction of that. This deviation between cash and index could, to a degree, represent stale pricing marks on the cash bonds, given the limited trading volumes in the bond space. However, there have been enough trade prints in the sector to indicate that the pressure on spreads has been felt more acutely in index than in cash. Third, when CMBS investors have come under pressure in the past, spreads have widened at every level of the quality spectrum. This time, however, the more junior tranches have clearly underperformed, suggesting markets are pricing a scenario in which distressed assets default en masse. Fourth, the open interest in CMBX 6 BBB- has increased significantly this year, consistent with the story that this is the new "big short." Goldman next lays out the "bear case" which as one can imagine, is substantial. Retail malls face significant pressure from online retail, which continues to grow at roughly 15% each year, as well as fast-fashion chains and off-price retailers. Moreover, many of the anchor stores on which malls depend appear to be experiencing difficulties, and 2017 has seen the big department stores announce a host of store closures. The CDS market appears to be pricing in a high probability of distress at Sears, which would send a tremor through the mall ecosystem. And some malls have co-tenancy clauses that can amplify the impact of the department store distress by allowing other tenants to reduce their rent if an anchor closes. The slew of store closures is not limited to anchor stores, as malls are grappling with the poor performance of many national retailers. Given its significant retail exposure, CMBX faces the same headwinds that currently plague mall REITs. The nature of the CMBX product makes it especially vulnerable to a retail downturn. First, as we noted before, CMBX is a tranched product, which means that if losses for a deal are severe enough (i.e., exceed the tranche detachment point), the recovery rates on the bonds can be 0%. By comparison, high yield corporate bond defaults usually have material recovery value. Second, the 25 deals that comprise CMBX 6 are not homogenous and the high-risk mall loans are not evenly distributed among them. If the high risk loans were spread evenly across the 25 deals, it is likely that, even if we assumed 100% losses on all of these loans, no one deal would incur sufficient losses to affect CMBX 6 BBB- in the aggregate (i.e., deal-level losses would never reach the attachment points). However, the high concentration of high-risk loans in a handful of deals threatens large losses on the product as a whole from a relatively small number of defaults. Finally, a popular narrative that has helped drive this year’s spread widening is that Sears – commonly a tenant for many of the weaker malls in CMBX 6 – is itself at risk of imminent default. The CMBX market is worried that, if Sears defaults, it jeopardizes many of these weaker malls. For example, the Midland Mall in Midland, MI defaulted on its loan last year shortly after the Sears at that location closed. While it is difficult to tie the default directly to the Sears closure, the loss of a large tenant likely increased the pressure on the mall. Earlier this year, J.C. Penney announced plans to close its store at Midland Mall, demonstrating the potential spiral that struggling malls face upon losing a tenant like Sears. Since many of the at-risk malls in CMBX 6 share the same few large tenants such as Sears, J.C. Penney, and Macy’s, a round of store closures or a bankruptcy filing from a single retailer could do disproportionate damage to the CMBX portfolio. To be sure, Goldman then goes through the bull case, and looks at the remittance data, which - so far - show no major signs of trouble (readers can bother their friendly Goldman sales coverage for the full report), suggesting that it is possible that the CMBX market may be getting ahead of itself. Or perhaps, like in the case of TOYS bonds, which snapped from par to 20 cents in the matter of days, what the market is underestimating is the risk of a sharp, downward inflection point as the economy, and especially US consumer, slows down further, resulting in another step wise spike in defaults. Goldman's analyst reports as much and notes, that while the CMBX "big short" may work, it will require an inflection in performance. Here is the conclusion. Brick-and-mortar retailers have been fighting competition from e-commerce for years. This long-running trend is visible in the rising e-commerce share of retail sales, declining same-store sales numbers, and increasing numbers of store closures. These trends, combined with the highly leveraged nature of CMBS deal structures, have fueled a bearish market narrative that has repriced the mezzanine tranches of CMBX significantly wider. This view has been particularly focused on scenarios where a subset of the lowest-quality malls generate a large number of mortgage defaults. So far, such a deterioration in mortgage quality is not yet visible in recent vintage delinquency performance data. We find the bearish narrative persuasive, but to realize the defaults being priced by CMBX 6 BBB- will require a future deterioration in mortgage performance, which our analysis suggests would be a departure from historical predictive relationships. In our view, this “top-down” assessment highlights the critical importance of modeling the “bottom-up” credit stories. As described above, it is not hard to construct scenarios with significantly higher default losses than what we find using our narrative-free statistical analyses, and structured CMBS bonds would be highly exposed to such a collapse of the retail sector. What Goldman is effecitvely saying is that absent a recession, or a market crash, the trade may have little widening left. Which, of course is ironic, because just several days ago, it was also Goldman that calculated that the risk of a market crash has soared to roughly 67%, as high as it was before the dot com and Global Financial Crisis crashes: One final "hedging" observation from Goldman: in case the cautiously optimistic outlook is unwarranted, will a potential implosion in the CMBX 6 result in systemic risk? Here is Goldman's answer: The spread widening in mezzanine CMBX tranches – and not in more senior tranches – is pointing to an expectation of high default rates on a small number of low-quality malls. If this bear case were to be realized, it would not likely cause a systemic risk event comparable to 2008, due to the low amount of mall debt relative to the amount of residential mortgage debt outstanding prior to the financial crisis. If commercial mortgage losses were to occur due to severe declines in commercial property price across all sectors – including retail, office, apartment and hotel – the impacts could be greater, given the large amount of commercial real estate exposure on US bank balance sheets. But this is not the risk scenario that CMBX markets seem to be pricing. Of course, if a Goldman is wrong, and a terminal collapse in CMBX 6 does prompt the next systemic crisis - which of course won't be catalyzed by the losses in this segment of the Commercial Real Estate market but due to a sharper deterioration in the broader economy, all that would result in is another bailout from the Fed because as Deutsche Bank said earlier today: "... by continually using stimulus to deal with crises and not letting creative destruction take over, you make a subsequent crisis more likely by passing the problem along to some other part of the global financial system, and usually in bigger size. In a fiat currency world, intervention and money creation is the path of least resistance. In a Gold standard world, mining new gold was the only stable way of increasing the money supply. we think this leaves the current global economy particularly prone to a cycle of booms, busts, heavy intervention, recovery and the cycle starting again. There is no natural point where a purge of the excesses is forced by a restriction on credit creation."
Kohl's shares were up 4 percent at $46.66 in morning trading. The move follows Kohl's announcement earlier this month that it would sell Amazon's devices, including the voice-controlled speaker Echo, at 10 of its stores in Los Angeles and Chicago. Kohl's and other retailers such as Sears Holdings Corp are teaming up with Amazon - which has dented sales at retailers across the United States - ahead of the holiday season.
Kohl's shares were up 4 percent at $46.66 in morning trading. The move follows Kohl's announcement earlier this month that it would sell Amazon's devices, including the voice-controlled speaker Echo, at 10 of its stores in Los Angeles and Chicago. Kohl's and other retailers such as Sears Holdings Corp (SHLD.O) are teaming up with Amazon - which has dented sales at retailers across the United States - ahead of the holiday season.
When we commented back in March on the unexpected "going concern" notice in Sears' 10-K which sent the stock crashing, we pointed out the immediate spin provided by Eddie Lampert's distressed retailer which promised that its comeback plan may help alleviate the concerns, “satisfying our estimated liquidity needs 12 months from the issuance of the financial statements", to which however we added the footnote that "the question is what happens when vendors start demanding cash on delivery as concerns about SHLD.'s liquidity concerns continue to grow." Shortly after, we wrote "Sears Enters Death Spiral: Vendors Halt Shipments, Insurers Bail" in which we described that as Sears financial condition deteriorated, vendors were boosting their "defensive measures", such as reducing shipments and asking for better payment terms, to protect against the risk of nonpayment as the company warned about its finances. The managing director of a Bangladesh-based textile firm said his company is using only a handful of its production lines to manufacture products for Sears' 2017 holiday sales. Last year, nearly half of the company's lines in its four factories were producing for Sears. "We have to protect ourselves from the risk of nonpayment," said the managing director, who declined to be identified for fear of disrupting his company's relationship with Sears. Furthermore, precisely as we predicted, Mark Cohen, the former CEO of Sears Canada and director of retail studies at Columbia Business School said vendors will keep a close eye on Sears' finances. "Whatever vendors continue to support them are now going to put them on even more of a short string. That means they’ll ship them smaller quantities and demand payment either in advance or immediately upon delivery." He added: "Sears stores are pathetically badly inventoried today and they will become worse." Fast forward five month when just after Sears reported another quarter of painfully bad results including an unexpected double-digit drop in same store sales, Reuters writes that the "worst case" scenario we envisioned for Sears is now accelerating, and that Sears is having trouble stocking shelves, "as some vendors have fled while others are demanding stricter payment terms because of difficulties hedging against default risk." One reason why Sears' supply chain is in greater turmoil than ever - in addition to Sears' woeful financials of course - is due to the scarcity and high cost of a type of vendor insurance known as accounts receivable puts, which ensure a supplier will be paid even if the retailer files for bankruptcy. Think of them as CDS contracts vendors can buy on a counterparty, in this case their (increasingly insolvent) client, and just like CDS, the puts become prohibitively expensive the closer the underlying entity is to bankruptcy. “It’s too expensive,” Michael Fellner, owner of Montreal-based women’s wear company Lori Michaels Apparel & Manufacturing Inc, told Reuters about the specialized vendor insurance. He also said he stopped shipping to Sears in March, when his insurer stopped providing coverage. Two other small vendors told Reuters they stopped supplying Sears this year because they could not afford the insurance, whose cost spiked after Sears warned in March of “substantial doubt” over its ability to continue as a going concern. They asked not to be identified discussing confidential commercial arrangements. Most concerning, however, is the discovery that Eddie Lampert himself appears to be throwing in the towel on the supply chain: as Reuters explains, Sears’ vendors had previously benefited from support from Sears CEO, billionaire Eddie Lampert, who owns almost half of the company’s shares and is also its largest lender. Through his hedge fund, ESL Investments, Lampert invested in vendor insurance contracts worth $93.3 million in 2012, $234 million in 2013 and $80 million in 2014, according to SEC filings. Lampert's implicit support of vendors however ended one year ago: filings show no investment by Lampert in vendor insurance contracts since 2015. A Sears spokesman said the 55-year-old billionaire is not currently investing in these contracts and declined to say why. In addition to Sears' top stakeholder dropping support, for whatever reason, other hedge funds such as Avenue Capital Group, and traditional credit insurance firms such as Euler Hermes Group, have also exited the insurance market, brokers and investors said. They did not specify the timing of their withdrawal. Predictably, as the number of market participants in the receivables puts market collapse, the cost of insurance contracts surged as they became harder to come by, putting pressure on Sears’ ability to maintain a robust inventory of goods. As a result, merchandise inventory at Sears fell to $3.4 billion as of July 29 from $4.7 billion a year ago, the company disclosed on Thursday. Sears has attributed the inventory decline to its transformation to an online-oriented business from bricks-and-mortar stores. “We continue to work to manage our vendor relationships in a constructive manner… we will continue to ensure that our vendors deliver on their obligations to Sears,” Sears said in its second-quarter earnings statement on Thursday. The reality is that it simply does not have as many suppliers as it once did. Meanwhile, those who can find puts to buy are simply unable to afford them: brokers and investors said that Sears insurance contracts for vendors are currently quoted at more than 4 percent of the value of the vendor’s shipment per month, making them uneconomical for many suppliers whose profit margins are in the single digits. Three years ago, the contracts were being quoted at about 3 percent per month. LG Electronics Inc, which makes Kenmore-branded washing machines and refrigerators as well as LG-branded appliances, told Reuters it has not bought vendor insurance in the past year because of the cost. Instead, LG said it negotiated shorter payment schedules to minimize the risk of not being paid by Sears. It declined to say how short the payment period was. The typical payment schedule in the industry is close to 90 days, though it can vary by item. Of course, the shorter the payment terms, the bigger the hit to Sears' working capital and, thus, liquidity, with the most dire option being cash on delivery in which vendors simply will not provide the much needed inventory unless they are paid on the spot. Here's Reuters: Sears has promised to pay some suppliers within 15 days, according to a source familiar with the matter who requested anonymity to discuss confidential commercial arrangements. Sears declined to comment. A 15-day payment schedule gives a vendor priority for repayment in the event of a bankruptcy. This is because claims received within 20 days of a bankruptcy filing are typically repaid in full. Some vendors are so keen for this protection, that they have offered Sears a small discount of around 5 percent on their merchandise, the source said. As noted above, the increasingly shorter terms means a sharp erosion in working capital: William Danner, president of CreditRiskMonitor.com told Reuters that at the end of the second quarter, Sears would likely have used $587 million to boost working capital – mostly from asset sales – due to the decision by some vendors to not extend as much credit. Sears’ available liquidity at the end of July was $810 million. “Even for a huge company like Sears, finding this much more capital is a burden. This apparent loss of confidence in Sears by its vendors is greater now than it was at the end of 2016,” he said. Should more vendors demand the same payment terms, there is a risk that Sears entire liquidity cushion could disappear. Eddie Lampert, who has valiantly fought for years to delay Sears' inevitable bankruptcy, has complained on several occasions that vendors are trying to exploit Sears’ woes to negotiate better terms. He said last month that some of its vendors reduced their support, “thereby placing additional pressure” on Sears. Sears took the issue to court in June, when it sued Ideal Industries Inc after the maker of Craftsman-branded tools declined to fulfill purchase orders because of Sears' "known fragile financial condition," according to court documents. Ideal Industries declined to comment. And while Lampert may no longer be funding vendor insurance, he is still supporting Sears in more "brute force." He held about $1.7 billion in debt mainly backed by the company's real estate and inventory as of April 29, according to regulatory filings. The reason for this shift is that unlike secured debt, vendor insurance contracts are not backed by any collateral. Underscoring his "support", last month, Lampert extended a $200 million 151-day credit line to Sears at an annual interest rate of 9.75 percent. To be sure, not everyone has thrown in the towel on Sears: at least one investment firm, Blackstone Group LP's distressed credit arm GSO Capital Partners is backing Sears contracts through December although they did not disclose their value to Reuters. However, it's only a matter of time - in this case a few more quarters of declining same store sales - before virtually everyone gives up on Sears, forcing Lampert to decide between directly funding the company's inventory or finally admitting defeat to the Jeff Bezos juggernaut, and pulling the plug.
Near insolvent retailer Sears Holdings reported another quarterly loss, with same store sales plunging in Q2 more than expected as the company offered more margin-crushing discounts amid an industry that is, in the words of Dick's CEO, in "panic mode". The company blamed a "retail environment that remained challenging, with continued softness in store traffic and elevated price competition." For Q2, Eddie Lampert's company reported a net loss of $251 million, or $2.34 per share from $395 million or $3.70 per share, a year earlier. The adjusted loss was $1.16 a share, beating expectations loss of $2.48 per share, while revenue tumbled from $5.66 billion to $4.37 billion Y/Y primarily due to store closures, modestly beating expectations of $4.21 billion. As part of its restructuring effort and attempt to return to profitability, Sears has been trimming its real estate portfolio, cutting costs and seeking additional liquidity. The retailer announced that it will be closing an additional 28 Kmart stores this year, in addition to the 180 Sears and Kmart stores that have already been shuttered this year, and the 150 stores that are slated to be closed by the end of the third quarter. And while the company's cost-cutting is a welcome, if long overdue, change a bigger problem for Kmart is the collapse in store traffic, as same-store sales plunged 11.5%, worse than the expected 7.1 percent decline. Trying to put a favorable spin on another lousy quarter, CEO Eddie Lampert said that "we are making progress on the strategic priorities we outlined earlier this year and remain focused on returning our Company to profitability... While the third quarter has historically been our most difficult quarter over the past several years, we are working towards making meaningful improvement in our performance this year as a result of the restructuring actions we have put in place." As noted above, Sears same-store sales fell 11.5%, including a decline of 9.4% for Kmart stores, and a drop of -13.2% at Sears stores. Spinning the worse than expected drop in traffic, Sears said that July was the best quarter for the company in terms of comparable sales, "as the restructuring program actions, including the closing of unprofitable stores, have begun to take effect." Sears said it continues to explore opportunities for its Sears Home Services and Sears Auto Centers, as well as its Kenmore and Diehard brands. This could include "potential partnerships or other transactions that could expand distribution of our brands and service offerings to realize significant growth," the company said in a statement. On the balance side, the struggling retail chain said it has been working to generate additional liquidity and ended the second quarter with $442 million cash on hand, compared with $286 million at the end of the first quarter. Sears has used up $605 million of its $1.5 billion revolving credit facility, leaving about $191 million in availability. Total debt at the end of the latest period was $3.5 billion, compared to $4.2 billion at the end of the first quarter of 2017, following recent asset sales. Sears also said it has reached an agreement with Metropolitan Life to annuitize an additional $512 million of its pension liability, under which MLIC will pay future pension benefit payments to roughly 20,000 retirees, helping Sears further trim administrative overhead. As discussed earlier in the year, Sears' deteriorating financial conditions forced the retailer to disclose that there was "substantial doubt" about its ability to "continue as a going concern." Met with fears by the Street that a bankruptcy was looming, Sears countered by saying it remained focused on trying to improve its business, saying the language was in adherence to regulatory standards, CNBC otes. To ease bankruptcy fears, last month Sears said it would begin selling Kenmore-branded and Alexa-enabled appliances on Amazon, although that announcement had little effect on company shares, which have fallen more than 40% over the past 12 months.
Authored by Simon Black via SovereignMan.com, In 1886 there were only 38 states in the United States. Electric power was still cutting edge technology that few people had ever seen. The Statue of Liberty hadn’t even been dedicated yet. But it was that year that a man named Richard Sears founded a small retail company in Minneapolis, Minnesota that would grow into a retail juggernaut. Sears was truly the Amazon of its day. Even in the late 1800s the company was able to deliver just about any product you wanted right to your doorstep. This was no small feat considering the first delivery truck wouldn’t be invented until 1895. There was no transportation infrastructure. And two-thirds of the population lived in remote rural areas. Yet despite those challenges, Sears was still able to put any product you wanted in your hands. Over time as consumer trends changed, the company started opening physical retail stores. And once the concept of the ‘shopping mall’ became popular, Sears department stores became a mainstay at malls across America. To give you an idea of the size and dominance of Sears back at its peak– the company owned stock broker Dean Witter Reynolds (now part of Morgan Stanley), Coldwell Banker (real estate brokerage), Allstate Insurance (currently a $33 billion company) and it started the Discover card (a $22 billion company). Sears seemed unstoppable… a company so large and powerful that it would rule retail forever. Then Wal-Mart entered the scene. And after years of focusing on efficient logistics and cost savings, Wal Mart eventually outmaneuvered Sears to become the world’s largest retailer. By 2001, Wal-Mart’s revenues were about five times that of Sears. Then Amazon was founded… and consumers began changing their tastes to shop online. Sears totally missed the trend. And today the company is a tiny shell of its former self. Over the past three years alone, Sears has lost more than $5 billion. And its stock price is down nearly 75% since 2014. Plus the company has had to lay off more than half of its peak workforce, around 200,000 employees. To add insult to injury, the company spent about $6 billion over the past decade buying back its shares at prices as high as $174 a share. Shares now trade below $9. That’s a 95% loss to shareholders. Sears recently announced it will close an additional 43 stores (on top of the 265 closures it already announced this fiscal year). This will leave the company with 1,140 stores – just above half its 2012 size. This is a death spiral. And it could mean the sudden loss of 140,000 American jobs. And that’s just Sears. We could see several, large retailers shutter causing hundreds of thousands of lost jobs. Retailers have announced more than 3,200 store closures this year. And investment bank Credit Suisse expects that number will increase to more than 8,600 before the end of the year. For the sake of context, the WORST year on record for retail store closures was in 2008 when the global financial crisis kicked off. But even in 2008, only 6,163 retailers closed. Bear in mind that about one in 10 Americans works in retail. And given the rise of e-commerce, most of those retail jobs are going away. Quickly. E-commerce currently accounts for 9% of the approximately $22 trillion in annual retail sales, up from 0.6% in 1999. And that number is only growing. Most retail stores operate very LOW margin businesses. They rely on having LOTS of customers in order to stay profitable. If even a small percentage of their prospective customers stay home and shop online, they’re finished– from Sears all the way down to the small mom and pop stores. We could see hundreds of thousands of retail workers lose their jobs as companies like Sears fail. Sure, e-commerce will pick up some of the jobs. Large e-commerce companies like Amazon have had to quickly build infrastructure and warehouses to serve customers around the country. That requires lots of hiring. But it’s temporary work. Think of it this way: it took a lot of men to lay railroad tracks across the US. It takes far fewer workers to maintain the rail system. And as shipments increase, you simply run more cars across those tracks. Plus, e-commerce warehouses are becoming more automated and efficient, requiring less human labor than ever before. This sort of creative destruction and disruption isn’t anything to be afraid of; there aren’t exactly too many blacksmiths and buggy repairmen anymore either. Progress occasionally requires the decimation of entire industries, and that’s what’s happening now. In the long-run it’s better for everyone. But shorter-term, there’s going to be a lot of pain. Some of the largest and most vulnerable retailers include Sears, Macy’s and JC Penney, and in total those companies employ close to 400,000 people. All three of these companies could – and probably will – go bankrupt. But it would only take one of these stores going under (a near certainty) to roil the US economy. You may remember during the US Presidential campaign that candidates Trump and Clinton made a big deal about the declining number of coal jobs in the US. To put things in perspective, the US coal industry employs just over 76,000 workers. Sears alone employs almost double that amount. And the pace of job losses across the entire retail sector is gaining steam. The US economy has been in ‘recovery’ now for more than eight years, i.e. it’s been nearly 100 months since the end of the last recession. Yet the average time between recessions in modern US history is 57 months, according to the National Bureau of Economic Research. In other words, the economy is overdue for a recession. And the rapid loss of hundreds of thousands of jobs could certainly end up triggering it.
What went wrong with this icon of American retail? I decided to head to a Sears store myself to try to find out.
If Eddie Lampert thinks he’s going to get out from under his moral obligation to pay severance to longtime employees, he’s got another thing coming. Let me be clear, I’m not an attorney, nor am I an expert on bankruptcy law in either country, but I do know a thing or two about retail, so I feel it’s necessary to say my piece on the subject.
Sears Holdings Corp (NASDAQ:SHLD) is on its last legs despite CEO Eddie Lampert’s best efforts to keep the company afloat. In fact, I’d be surprised to see Sears stock stay afloat for longer than a year. It’s difficult to figure out what exactly is going on in Sears CEO Eddie Lampert’s mind.
Thursday, Lowe’s Companies, Inc. (NYSE:LOW) stock fell 6% without warning. It wasn’t alone as Home Depot Inc (NYSE:HD) fell 4% along with a slew of other retailers. The reason for the mini crash was a headline that Sears Holdings Corp (NASDAQ:SHLD) will be selling a few appliances on Amazon.com, Inc. (NASDAQ:AMZN).
IF YOU CAN’T BEAT ‘EM… Sears to Sell Kenmore Brand on Amazon. Sears Holdings Corp. SHLD 10.60% said Thursday it will start selling its Kenmore appliances on Amazon, loosening its grip on one of its historic product lines and becoming the latest big American brand to capitulate to the online-retail giant. News of Amazon’s move […]