If one were to step foot into a Sears store today, one might find a truly sad state of affairs for the retailer, run by once former high flyer and billionaire, Eddie Lampert of ESL Investments.  Empty carparks, chaotic arrangement of goods that are in no demand and a sparse density of people will greet you as you walk in. And we wonder what the heck is going on? Afterall, this wunderkid, Eddie Lampert, used to have the midas touch. Whatever he touched used to turn to gold. Not so anymore!  And a company  spokesperson mentions that they are still in the midst of turning operations around. Is that a joke and who are they kidding?

This is the chart of Sears Holdings from the year 2004. And it isn’t a pretty picture for shareholders. The share price has been languishing from 2007.

To find out what had been happening to Sears, let us examine some of the numbers reported by the company.

Now revenues are the lifeblood of a retailer. Falling revenues mean serious trouble. This of course can be attributed in part to the  closure of retail outlets. And partly, Sears no longer carries the kind of products that its customers value. This has been exacerbated by the fact that retail is dying, largely due to the effects of ecommerce. I think Eddie didn’t see that coming ten years ago. More on the effects on ecommerce later.

Falling Revenues

The revenues for Sears 46.7 mill, 44.04 mill, 42.66 mill, 41.57 mill, 39.85 mill, 36.19 mill, 31.2 mill and 25.15 mill for the years from 2009 to 2016. Now it does not take a genius  to see a falling trend in its sales. One may say that looking at the sales revenue of the company is insufficient. I agree with that.

Now let us look at the operating income then.

Similar Trend In Operating Income

They are recorded as 0.3 bill, 0.71 bill, 0.44 bill, -1.5 bill, -0.84 bill, -0.93 bill, -1.51 bill, – 1 bill. These occurred from the same years of 2009 to 2016. So for the last 5 years, their operating income has been negative.

Now of course, since the operating income figures are negative for the last 5 years, those figures would flow along the income statement and affect net income figures as well.

The Thesis 10 years Ago

About 10 years back, the thesis amongst some of the more notable fund managers including Eddie Lampert and Bruce Berkowitz was that the real estate that it owned was a lot more valuable than reflected on its balance sheet.  The other thing was that it carried a portfolio of well known brands to carry the retailer forward. That was then.

While it still has some remnant real estate leftover on its balance sheet, Eddie is beginning to see that a turnaround for Sears is next to impossible. And with regards to Bruce Berkowitz, sticking to the same investment thesis he held close to 10 years back, would that be a case of commitment tendency, psychological denial and consistency bias? Well that remains to be seen. But the truth of the matter is that Sears currently has a negative book value.

Corporate Actions 

Perhaps a clearer picture emerges when looking at the corporate actions of the company in concern. The company has loaned $200 million from Eddie Lampert, sold the Craftsman brand for $900 million, closed a heck of a lot of stores and has even obtained further credit facilities from the subsidiaries of ESL Investments  which are controlled by Eddie Lampert. These facilities are of a secured nature.  So these events confirm that not only is Sears running out of liquidity, Eddie may also be preparing for the worse by taking on a creditor status to Sears. After all, like I said, Sears does have some remnant portfolio which may be of some value if sold. This is not good for shareholders in general. When the main promoter of the company makes a loan to the company, he is putting himself before shareholders. However, if this crisis of sorts does tide over, shareholders may be rewarded with a turnaround. Still, that is unlikely. As I see it, Eddie has not found the right balance between capital expenditures and share buybacks. All of this may be the result of a failed strategic vision on Eddie’s part.

In fact this was what he said in 2007.

“Unless we believe we will receive an adequate return on investment, we will not spend money on capital expenditures to build new stores or upgrade our existing base simply because our competitors do. If share repurchases or acquisitions appear to be more productive, then we will allocate capital to those options appropriately.”

While I understand that a share repurchase can boost earnings figures, what good will that do if earnings are in fact negative. Yes, the objective of management is to be an adept allocator of capital. That I agree. Management has to allocate  capital to projects with the highest return on capital. But in the case of Sears, did Eddie take share repurchases too far and ignore capital expenditures totally?

One thing may be left on Eddie’s mind currently : To milk Sears for what it is worth and to live to fight another battle. Afterall, his portfolio at ESL Investments have dropped from a height of $15 billion to $3 billion.

Retailers Going Bankrupt

The list is getting longer. Retailers are beginning to file for bankruptcy and this may be the beginning of the end for retail.  Some familiar names include Hancock Fabrics and Sports Authority and Vestis Retail Group.  And this trend is not likely to reverse soon. While there are instances where online retailers are venturing into brick and mortar, sales have for the most part shifted online. A glimpse of this can be seen from the stock prices of Sears and Amazon.

While Sears stock price has declined, Amazon’s has flourished.

Coming back closer to home, Singapore that is, we see a similar trend. We won’t go as far as to say that retail is dead in Singapore. But retail is suffering . One need only look at FJ Benjamin.

Yet again, a languishing share price. Revenue from 2012 onwards was 393 mill, 373 mill, 368 mill, 293 mill and 254 mill. In addition to that, operating income was negative for the recent 3 fiscal years reported.  Of course, for FJ Benjamin there are other headwinds for the retail sector here in Singapore, with one of them being the falling tourism receipts. But, I don’t think there is firm acknowledgement from many about what the rise of ecommerce brings with it. It is not readily apparent from management talk. But what we do know is that companies like FJ Benjamin are setting up their own online sales platforms. To us, this speaks volumes. Ecommerce is a huge disruptor and traditional retailers have something to worry about. This was what the CEO of FJ Benjamin, Nash Benjamin said regarding the rise of ecommerce in the latest annual report.

“Much has been written about the rise of e-commerce and the impending demise of brickand mortar businesses. The reality for fashion retail tells a different story. Consumers buying fashion products are, by and large, still visiting stores and online share of fashion remains in low digits. In recent years, however, what is not as well publicised is the growing embrace of omnichannel marketing where retailers seek to offer consumers a more holistic experience by integrating both offline and online channels. This approach means that we can no longer look at physical stores in a binary manner but as a seamless whole, with offline and online channels complementing and feeding off one another. With the recent approval by our principals to develop this platform, we are now planning its implementation.”

~ Nash Benjamin (CEO of FJ Benjamin)

Perhaps, this was a subtle acknowledgement of how ecommerce may change the game for traditional retailers from Nash himself. We may never know what he is thinking truly. But again, we see similar trends working out for both retailers, Sears and FJ Benjamin. The closure of stores, falling sales revenue and operating losses. To counter what Nash has said about high fashion, I would raise the example of Zappos. Zappos sells branded shoes and more to women. Branded shoes are high fashion aren’t they? And if people are buying shoes and footwear online, what about Jeans and others then? At home, companies like Reebonz and Lazada have done a terrific job also. I am not sure if they are profitable but it does not seem unreasonable to think that online retailers are eating into offline profits.

I leave you with this quote from Warren Buffet on his investing experience in retail.

“Retailing is like shooting at a moving target. In the past, people didn’t like to go excessive distances from the street cars to buy things. People would flock to those retailers that were near by. In 1996 we bought the Hochschild Kohn department store in Baltimore. We learned quickly that it wasn’t going to be a winner, long-term, in a very short period of time. We had an antiquated distribution system. We did everything else right. We put in escalators. We gave people more credit. We had a great guy running it, and we still couldn’t win. So we sold it around 1970. That store isn’t there anymore. It isn’t good enough that there were smart people running it.”

 

Categories: Eddie LampertGurusUSA

kingsley

I have been an investor for 15 years now and my journey has meandered from Warren Buffett to Ben Graham. My start, like many, really was the naive idea that Buffett's skills could be replicated in some fashion. I was proven wrong when some of the supposed stock picks that I chose had dismal performances. Then, I learnt that it is no point trying to be someone I am not. Gradually, through failure and some success in deep value investing, my approach towards stocks gradually shifted to an approach based around Graham's techniques. So, I give credit where credit is due and to Ben Graham, I and many other investors around the world, owe him a great deal. So, if you want to read up on biographies, read about Ben Graham. His seminal work, Security Analysis is a gem. My books are just rich interpretations of what he has taught.

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