Listening to a Sears earnings call in 2016 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. And yet executives are still discussing how important its shopper loyalty program is “to the future and growth of the company,” as if the company were going to have growth, and shoppers and a future.
We can argue about whether the current problems date to the Great Recession or to 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 somehow these two rotted timbers could hold each other up. But this is a distraction, because in fact, 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, that era being the 1890s to the 1930s. The company 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,” aka the Sears Roebuck catalog selling spices and plows and 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 new stores and investing heavily in the automobile suburbs that were springing up everywhere. This decision by Sears helped create the retail landscape that many of us remember from our childhood: the massive suburban shopping mall, anchored by a giant Sears store.
That 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.
The malls that Sears anchored for decades now seem to be slowly dying. They, like Sears itself, are suffering from online competition. Companies in this situation are often urged to find a new business model, but when your core asset is prime locations that are no longer so 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, but could not hide, 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 all 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.”
This rosy forecast is, of course, eminently evitable. It could be evited pretty darn quick. Closing stores can be the path back to profitability for fundamentally sound businesses that expanded too quickly, or into the wrong areas. But it is precisely Sears’s basic competitive strengths that have been badly impaired by the changing retail landscape, so there’s no obvious profitable core that the company can shrink back to.
In the meantime, the company is still 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 is going to lose the race to close stores before the cost of running them chokes the company to death – or that if somehow it does manage to close stores faster than it loses money, it will eventually discover that the equilibrium number of Sears locations is zero.
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: eyes on the burgeoning suburbs, lives centered on cars, aesthetics relentlessly bourgeois. That business required a lot of investment in both business expertise and real estate that the company could not change, or shed, 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. Contract her at email@example.com.