“the report of my death was an exaggeration”
Photo: A.F. Bradley. Source: Library of Congress
That’s how Mark Twain responded to a story that he was dying of poverty while on a visit to London. He was undecided whether to be annoyed or amused. He was just 62 at the time, and while a little frail, was in excellent health. A cousin of his – James Ross Clemens – had been seriously ill, and the papers confused the two. The report of Twain’s illness grew out of his cousin’s illness, who soon recovered.
That’s how I feel when I read reports about the “death” of retail. Amazon and other online retailers have certainly taken a bite out of traditional stores. JC Penney is on bankruptcy watch. And Sears – with 1,600 outlets – is also in the retailing dead-pool. They’re projected to lose $2 billion this year. Their CEO, hedge fund executive Eddie Lambert, has been selling off well-considered brands like Craftsman to raise the cash they need to adapt to today’s internet marketplace. But it’s unclear whether he will run out of cash before they can adjust.
The outlook isn’t good. Sears’ stock price has fallen to under $10 from almost $100 seven years ago. Revenues have dropped to $25 billion, while Amazon has sales over five times as large, with just 30% more employees. Comparable store sales fell 12-13% at Sears this Christmas. I did almost all my Christmas shopping online this year. It’s just so much more convenient than fighting holiday traffic and waiting in long lines at the checkout counter.
But brick-and-mortar stores aren’t going away. There’s no law of nature that says Amazon has to be the only online retailer. Amazon appears to know this: their free-shipping membership, Amazon Prime, increasingly offers other services, like streaming music and movies and online photo storage, to keep customers loyal. And there’s this little detail: we want our stuff—now. Sellers have to have a way to get it to us as quickly as possible. Sears has 1,600 distribution points already. They just have to figure out how to make them profitable.
Retail has always been a fast-changing field. 20 years ago the big-box stores were eating the world, now it’s Amazon. A century ago catalog merchants – including Sears – revolutionized the industry. Now it’s online and mobile apps. CEO Eddie Lambert has been famous for his financial engineering, with rights offerings and trigger loans designed to get him the capital he needs, when he needs it. But Sears needs to answer a harder question: how to get us all the retail goods we want when we want them.
Douglas R. Tengdin, CFA
Chief Investment Officer