Retail -- a Dead Shark?

Above is a much quoted scene from the Woody Allen film, Annie Hall.

Substitute the word "retail" for "relationship," and you get an analogy for retail stores today.

Some data points:

     -- Macy's missed its sales targets for the second quarter.  Its CEO said afterward that
     he expected overall retail spending to be flat through the rest of the year and that the
     company's strategy was to gain a greater share of that flat market, especially with
     promotions to attract more buying from Macy's regular customers.

     -- Nordstrom's store strategy is to open many more of its discount Nordstrom Rack stores
     and only a few full-line Nordstrom stores.

     -- Radio Shack sales continue to drop, even after revival attempts, and one analyst's recent
     optimism about Best Buy had to do with continued cost-cutting efforts, not a strategy to
     increase sales.

     -- The hottest retail outlets for investors and store buyers are dollar stores.

The economy may be improving, but a lot of people aren't feeling the effects.  If wages go up, it is likely that more of the money will be devoted to IRA accounts and overdue student loans than non-essential consumer purchases.

In addition, online sales are rising while brick-and-mortar retail is declining.  If your town does not have growing numbers of empty retail storefronts, it is one of the few in the country.

And then there is Sears.

Sears

I am not a regular Sears shopper, but I drove to the nearest store in my area today.  Here is what I saw from the parking lot.

Then I went inside the store, and here is how it looked.

In total, there were fewer than 15 people in the store, including the sales clerks.  Just about all the merchandise was on markdown, including a shabby-looking Kardashian Kollection with skirts on sale for as little as $11.

Sears has perhaps the most storied history in American retail, dating to its establishment in 1886.  It was an innovator, launching mail-order sales catalogs that supplied the largely rural country with a broad array of home and farm products.

In the early part of the last century, Sears released a Modern Home catalog with examples from cottages to grand banker-style homes.  The company mass-purchased the materials for homes -- and shipped them to customers who, alone or with help assembled them on their lots.  If you have lived in a neighborhood built between 1910 and 1940, there is a good chance that many of the houses there were assembled from kits bought from Sears.

In 1925, Sears opened its first retail store and continued to build many more.  The stores did good business for many years, selling clothes, tools and home appliances.  Many Sears stores today look pretty much as they did 30 years ago.

In 2004 Sears was bought by Kmart and both chains are now known as Sears Holdings.  At the time, Sears Holdings was the third largest retailer in the country, following Walmart and Home Depot. Today, Walmart is still No. 1, and Sears has slipped to No. 16.

In recent years, Sears has been scrambling for cash.  Last year, when it could not find a buyer for Lands' End, which it had purchased in 2002, it spun the company off to shareholders, giving three-tenths of a share of Lands' End stock for each share of Sears stock.

Last month Fitch dropped Sears debt rating rating from CC to CCC, from junk quality to really bad junk quality.  Fitch forecast Sears' EBITDA (earnings before interest, taxes, depreciation and amortization) of a negative $1 billion this year, and worse in 2015.

Sears already has sold its Hometown, Sears Outlet and Orchard Supply Hardware stores.  Now it is planning to sell its Canadian stores to raise $380 million, and the company reports it is also in talks to sell its Sears Auto Center business.

A couple years ago, stock analysts saw residual value in Sears real estate -- the stores.  But as other large retailers have downsized or dropped out of the market, it is unlikely that there will be many buyers interested in retail spaces the size of a typical Sears store.  As the retail marketplace shrinks, the value of Sears real estate can be expected to shrink as well.  Not far from the Sears I visited are empty buildings that used to house Borders and Linens n Things stores.

Retailing has become a much more challenging business in recent years.  Some innovators have flourished, and some are trying to hang on.   But the ones that stood still, including Sears, are starting to look like dead sharks.