In spite of disappointing results, Sears (SHLD) has had a big run-up lately, more than doubling from recent lows. The reason? The company is placing some of its stores on sale. Should investors buy?
We don't think so. Sears has a long tradition of committing strategic mistakes that destroy rather than create shareholder value. In 1981, Sears, Roebuck & Co. made the first strategic mistake, the diversification outside its "core" retailing business into financial and real estate services by purchasing the Dean Witter Reynolds securities firm and the Coldwell Banker real estate operation. The problem, however, was that these new business lines had little synergies with the company's core business. Besides, it offered Sears' competitors such as Macy's Inc. (NYSE: M), Wal-Mart Stores (WMT) and Home Depot Inc. (HD) the opportunity to invade the company's turf.
In 2006, Sears made another mistake, restructuring its operations in several units, often run by people with little retailing experience. It should come as no surprise that this policy was doomed to fail, as evidenced by the company's financial results in recent years, including those published this week.
Now, Sears is about to make its third strategic mistake, selling off company stores. The trouble with this strategy could be that it is a sale of wrong assets at the wrong time. Sears' stores are usually stand-alone units in local community malls that have been falling out of favor among shoppers who prefer the big shopping malls where Macy's and JCPenney (JCP) are usually housed. Sears' sales further come at a bad time, as the commercial real estate market is in a glut that depresses prices.
But what would have been the alternative for Sears? Reorganize its operations to cut costs to catch-up with rivals like Wal-Mart Stores and Home Depot; modernize its stores to improve customer experience as JCPenney has been doing; and come up with innovative product lines to attract the new shopping generations.