Sears Holdings (SHLD), which owns the Sears and K-mart brand stores, recently announced it will be closing up to a 120 stores. These stores are largely said to be underperforming the general market. The amount of stores is small compared with the nearly 4000 stores the company has. However, the recent news has shown us how far behind management is in implementing a sound strategy. Sears knew these stores were underperforming, but they kept them open believing that the recovery would make these locations profitable again.
After the news was announced, the stock fell more than 20%. Investors are getting frightened as it turns out that the company is in a tough situation. Many are already speculating on a possible bankruptcy. This scenario is a little bit farfetched, but it's more reasonable to see the company downsize its operations and focus on its key locations. While this is a positive in terms of profit, it is a negative for shareholders. This basically means the company is becoming smaller. Many longs have been using a book value as a reason to purchase the stock. However, with store closures and the company contracting, the book value will fall as well.
Sears has been lagging its peers such as Target (TGT) and Macy's (M). Both Target and Macy's have seen consistent revenue growth recently. This could be attributed to the economic recovery that's taking place, but also to the discount pricing measurers that both have used to gain market share from Sears. While Sears saw same-store-sales fall 6%, Target's rose 1.8% and Macy's is up 4.8%.
These closings will not make Sears profitable so it's possible there may be more to come in the future. The company may be taking drastic measures in order to keep the business going.
I recommend investors sell Sears Holding. If investors are looking for exposure to retailers, then I recommend purchasing Target or Macy's. Target trades at a forward P/E of 12 and pays a 2.3% dividend. Macy's has a forward P/E of 10 and pays a 1.2% dividend. The nice thing about both companies is that both pay a dividend compared with Sears, which pays nothing.
One other position investors should consider selling is Whirlpool (WHR). One fifth of the company's sales comes from Sears. This is an issue for Whirlpool as it has already been under pressure recently. With its largest partner experiencing financial difficulty and a potential for even more store closings, Whirlpool could take a larger hit.
One thing is certain, Sears has several problems ahead it needs to address. It is up to Eddie Lambert and management to forge a strategy that would return the company back to profitability, but based on the recent news, investors should sell and wait for more news.