Listening to a Sears earnings call is like realizing that the twinkling light you’re admiring in the night sky is from a star that died 50 years ago. Sears Holdings Corp. lost $748 million last quarter amid falling sales, an even worse performance than the dismal losses of the period a year earlier. There is no obvious reason that the business might improve.
We can argue about whether its problems date to the Great Recession or the 2005 merger with Kmart, in which some bright strategist decided that the solution to the problems of two struggling retailers with badly dated business models was to lash them together and hope that these two rotted timbers could hold each other up. But this is a distraction because the seeds of this decline were planted decades ago, during the last time Sears needed to reinvent itself, in the aftermath of World War II.
Sears was the Wal-Mart of its era. It used economies of scale to become the comprehensive retailer to the large segment of the population that lived in small towns with few retail options. Then, as now, smaller local retailers might resent it, but the “wishbook” — the Sears Roebuck catalog selling spices, plows, player pianos and seemingly everything else — could be found in almost every farmhouse in America.
Eventually, the firm moved into brick-and-mortar retail. World War II left the company in trouble. With inventories and cash low because of wartime shortages, Sears embarked on an audacious expansion plan, building stores and investing heavily in the automobile suburbs that were springing up everywhere.
That the Sears store might not have a plow, but it could sell you tires for your car, a refrigerator for your kitchen and makeup for your 16-year-old daughter’s first dance. It was an impressive act of reinvention, at the kind of crisis point that often drives previous titans of industry out of business.
However brilliant this move was at the time, it has heavy costs now. Retailers have a lot of assets: brand, human talent and their physical inventory. But ultimately every major brick-and-mortar retailer’s biggest asset is geography. Geography saved Sears, for a time, but now its biggest asset is an albatross.
The malls that Sears anchored for decades seem to be slowly dying as they suffer from online competition. Companies in this situation often are urged to find a new business model, but when your core asset is prime locations that are no longer prime, that’s hard advice to follow.
Not that Sears hasn’t tried. In its most recent earnings release, the company presented cheerily arranged facts and figures that aimed to soften the fact that the company has not turned a profit in years. During the earnings call, the chief financial officer, Jason Hollar, spoke almost lovingly of the stores they were planning to close: “As we reduce our overall store base, we believe we will inevitably end up with stores that are profitable, operate at a small loss, or have a clear path to profitability.”
In the meantime, the company still is hemorrhaging cash as it waits for those leases to expire. Selling off remaining brands like Kenmore and Craftsman may temporarily staunch the bleeding in its cash flow, but that’s not a trick the company can repeat very often, and it makes the underlying business even less valuable. It’s looking increasingly likely that Sears will lose the race to close stores before the cost of running them chokes it to death.
It’s fashionable to bash “dinosaurs” that can’t evolve to survive, but I won’t. Sears revolutionized American retail not once but twice, and made a lot of Americans immeasurably better off. But Sears built a great business for an America that no longer exists. That business required a lot of investment in business expertise and real estate that the company could not change as fast as America changed around it. And there’s no shame in that. Even the brightest stars eventually burn out.
Megan McArdle is a Bloomberg View columnist.