Sears flagship store begins liquidation as retailer makes heavy bet on digital

The flagship store in Chicago's Loop is set to close in early April, blowout sales have already begun.
The flagship store in Chicago’s Loop is set to close in early April, blowout sales have already begun.

Workers walk up and down State Street in the Loop outside Sears’ flagship store carrying giant cardboard signs reading “Everything Must Go” and “Huge Inventory Blowout.” The troubled retailer plans to shutter the store in early April.

Sears, whose credit rating was lowered by Moody’s Investors Service after it announced the closing earlier this month, said the store’s performance had been poor throughout most of its existence.

“The store has lost millions of dollars since opening and we can no longer continue to support the store’s operating losses,” said Sears’ spokesman, Howard Riefs in an email.

As losses have mounted, Sears has stepped up efforts to restructure, including a planned spinoff of Lands’ End and Sears Auto Center.  The retailer’s net loss for the quarter ending Feb. 1 is expected to be between $250 million and $360 million, or between $2.35 and $3.39 per diluted share.

These estimated losses include $29 million for store closures and severance and $12 million from gains on sale of assets.

Sears is betting heavily on an e-commerce strategy that involves developing digital and social relationships while using data and analytics to make targeted offers to its existing membership base.

It’s a playbook that has worked for other ailing retailers, such as Best Buy Co. Inc. and The Gap Inc., who have improved their fortunes by slowing down the growth of brick and mortar stores.

Both were booming companies in the 1990s and have suffered in the fast-changing retail environment. Instead of worrying about growing their physical locations, managers of Best Buy and Gap have focused on creating an omni-channel experience focused on customer wants.

The question is whether such a strategy will work for Sears. Analysts say one hopeful sign in that the retailer has improved its customer “engagement” in its reward program, Shop Your Way.

“Their e-commerce is one of the better in the space for traditional retailers. They are driving more business on loyalty and membership,” said Neil Stern, senior partner at McMillan Doolittle. “But they have to keep current business going and it continues to deteriorate.”

According to Alexa.com, Sears.com is ranked 163 in web page traffic in the United States, down 37 spots from its standing last May.
Comparatively, retail giant Amazon.com Inc. is listed at No. 5, while companies like Target Brands Inc. (78), Best Buy (69) and Macy’s Inc. (158) still significantly outrank Sears.

But Sears is beating out troubled J.C. Penney Co., listed at No. 359, and Kohl’s Illinois Inc., No. 203.

E-commerce cannot be the only saving grace, Stern said.

“You have to have main brand and main stores be healthy to develop omni-channel. They have to be able to drive more business and get more customers in the door.”

Shares of the retailer aren’t giving investors any comfort. The stock has fallen 23 percent this year so far to $36.46 at Wednesday’s stock market close.

Sears Chairman and CEO Edward S. Lampert, the hedge fund manager who bought and combined Sears and Kmart in 2005, reduced ESL Investment’s stake in the company to 51.6 million shares, or 48 percent of the company, according to an SEC filing on Jan. 3.

Lampert said ESL sold shares, valued at $2.5 billion, to cover redemptions at the end of 2013.

“As Sears passes off its good locations and its profitable segments, and loses market share to stronger retailers in its core franchises, the hope of this disaster turning around becomes remote,” wrote research analyst Gary Balter of Credit-Suisse in a research note on Jan. 13.

Balter has the stock rated as “underperform.”

Earlier this month, Moody’s downgraded Sears Holdings to Caa3, below investment grade, and one notch lower than J.C. Penney.

“Operating performance for fiscal 2013 is meaningfully weaker than our previous expectations, and we expect negative trends in performance to persist into 2014” said Moody’s Vice President Scott Tuhy in a press release following the announcement. “While Sears noted improved engagement metrics for its “Shop Your Way” Rewards program, Moody’s remains uncertain when these improved engagement metrics will lead to stabilization of operating performance.”

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