What Will Sears' Stock Woes Mean for Other Retailers?
As the big box giant continues in freefall, the emerging winner may well be Wal-Mart.
Sears' (SHLD) slow grind continues. After many quarters of underperformance, the retailer announced yesterday that it would be closing more Sears and Kmart stores. The retailer cited a difficult economic environment and slow sales on big-ticket items as drivers behind the closures. The announcement pushed the stock down 27.2% to $33.38, and it is now down over 80% from 2007 highs. It’s yet another bitter pill for Sears’ investors to swallow.
So what does this mean for Sears’ future? And the landscape of Big Box retail? Well, the closures are just a small percentage of Sears’ total stores, so the focus shouldn’t be on the announcement alone, but on the continued struggles of Sears and Kmart branded retail stores.
As it is, Target (TGT), Wal-Mart (WMT), and Costco (COST) have taken control of each level of targeted big box consumers, leaving the niche big box home improvement to Home Depot (HD) and Lowe’s (LOW). Fading brands like Sears, Kmart, and Shopko have become a thing of the past due to a lack of differentiation and weakening brand equity. Furthermore, Wal-Mart, Sam’s Club, and Home Depot have pushed into rural America, where consumers have migrated to their selection and low price.
And what about the real estate that Sears (and investors) long thought was so valuable? Well, the real estate crisis took the air out of that balloon, and the struggling retailer has been forced to rely on sales or subleasing to generate additional cash to support the core business. To be honest, it’s difficult to watch. But that’s the nature of the retail business; it’s a dog-eat-dog world in real estate development, as well as product pricing and retail sales. Other big box retailers have too much to offer in terms of brand equity, jobs, and sales growth for cities and developers to turn down, so they get the prime digs.
As for the Sears and Kmart store closures (and continued struggles), I think the true winner is Wal-Mart. The mammoth retailer will not only benefit from consumer overlap and migration, but possibly from the real estate (if Sears ever offers it up to Wal-Mart).
At the same time that we write about Sears' demise, I think it is helpful to note that there is still some value in the name. We just don’t know exactly how to define that value. And more importantly, at what price value investors will decide to enter the name. I certainly don’t find the name attractive longer term, but stranger things have happened. With a $3.5 billion market cap (and shrinking), the stock is well under book value and sliding into “shark” territory… by “shark,” I mean investment shark. And although the retailer probably needs a complete overhaul, facelift, and new business strategy, it does have a familiar name, along with the aforementioned real estate.
Investmentwise, the stock is technically on a bar 7 of a TD DeMark weekly buy setup, meaning that this week's low will need to be exceeded next week or the following week to perfect the buy setup. This doesn't say much for the long-term prospects of Sears, but it does say that the falling knife should find some support in the next couple of weeks… and may be tradable for those with ice in their veins.
Editor's Note: Andrew Nyquist is an independent investor based in the Minneapolis area. This article originally appeared on his investing and economics site, See It Market. His writings also appear on Minyanville's blog community.
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