Here’s the One Thing People are not Talking About with Sears’ Downfall

Sears is in trouble. This is the furthest thing from breaking news, but it seems with each passing day the company takes another hit. The latest gut shot was an announcement that an additional 46 Sears Holdings stores would close—33 Sears and 13 Kmart locations—with their liquidation processes starting as early as August 27th.

But it was a headline in mid-August that really became something of a head scratcher for a good majority of the media and analysts that have been following the retailer’s slow and steady demise. CEO Eddie Lampert, who is also the chairman and largest shareholder of Sears Holdings, made an official offer to buy the struggling retailer’s Kenmore appliance brand for $400 million. Separately, he also offered something in the neighborhood of $70 to $80 million for the Sears Home Services division—all through his ESL Investments hedge fund.

Those numbers combined are eye opening for a few reasons, but mainly because they represent a total that’s roughly four times the value of Sears’ current $120 million market cap. Why exactly would Lampert offer to throw that much money for pieces of a company that he’s already throwing a lot of his own money towards, and isn’t even worth that much? Or is he really just trying to drive the price up in the hopes that another potential buyer comes to the table? And what role will the company's vastly underfunded pension program play in all of this?

Credit: Bloomberg

It’s easy to speculate on the answers to those questions, but the practice of selling off pieces of a failing business is a common strategy for businesses in a situation like the one Sears is currently facing. Just ask Robert Baird, a longtime retail industry veteran who’s spent the past two-plus years as a consultant. In speaking engagements, Baird often refers to his resume as something of a retail graveyard with names like Montgomery Ward, Circuit City, and The Good Guys running alongside his time at still-active brands like Home Depot and Maytag.

“We did the same thing at Montgomery Ward,” Baird said of selling off parts of a retail business during a recent interview with Dealerscope. “At some point in time you just start what's called burning the furniture where you just sell some parts and try to get as much cash as you can and that's because it's easier to get cash now than when you go Chapter 7 obviously.”

Since his initial investment in Sears Holdings back in the mid-2000s, Lampert has guided the company through a volatile and unkind retail environment. He took over as CEO in 2013 and has seen the number of stores decline from more than 2,000 to a few hundred across the country. The strategy, initially, had been to shrink Sears to a point of profitability, as Baird called it. But the company really doesn’t have much more room to shrink at this point.

“I hate to say it, but I don't know how you can go from $42 billion annual revenue to something under $15 billion and still turn yourself around,” Baird said. “There's so much momentum going in this direction that I don't know how you turn it around. Even at Montgomery Ward where we had GE pumping a fair amount of money, once you go down that track it's really hard to undo it. I can't think off the top of my head of any retailer that's had that kind of sales decrease and was able to save it in any fashion at all.”

One Glimmer of Hope

While the Kenmore brand is essentially the last remaining notable piece of business that Sears has, there's a sort of dark horse entity that no one has been talking about, and that could end up being more valuable to Sears in the long run: Innovel Solutions.

Founded back in 1939, the offshoot company was initially known as Sears Logistics until Lampert renamed it as Innovel in 2014. Sears' logistics arm provides warehousing, transportation, installation, and home delivery services to retail, manufacturing, and commercial clients like Costco, Electrolux, and Amazon. It operates 11 regional warehouses throughout the country and a fleet of more than 1,100 trucks that make more than 4 million deliveries annually, and it claims to offer 24- to 48-hour delivery for 85 percent of households and 93 percent of orders made in the U.S.

Credit: Daily Journal by Mike Voss

What's most impressive about Innovel, though, is that its the one portion of Sears Holdings' portfolio that seems to be making them money. Granted, Sears the retailer remains Innovel's largest "client," the logistics firm has the potential to become one of two things: either it's most valuable bargaining chip or the portion of the business that Sears decides to hang on to when the rest of it ultimately collapses and vanishes. One of the main reasons for the firms success is its specialty in big and bulky items. Though it provides fulfillment services for a wide variety of products, Innovel specializes in large items like appliances.

If they opt to sell it—and because of that latter fact—a company like Amazon rises to the surface as one of the most likely interested buyers.

"When it comes to getting a small box to a house, Amazon is best in class in getting there quickly and cheaply. When it comes to a big box they're worst in class," Baird said. "The total appliance business is about $38 billion, of which $31 billion is retail. Of that $31 billion, Amazon is about $250 million, so they're a tiny bit. And the reason is because they don't have any way to get a big box to a house. Until they get a solid fulfillment network, they're never going to be a factor in appliances. And that could come from Innovel."

Recent studies from, and our own discussions with, NPD have addressed the importance of omnichannel logistics in the appliances space. The market research firm found that roughly one-third of all consumer dollars spent on primary home products were spent online and that number is growing rapidly. Major home appliances represented a much smaller portion of that total (just 2 percent), but that doesn't mean retailers should ignore the online channel. The struggle, NPD told us, is the logistical challenges in online appliance sales.

“If I as a consumer try to put an appliance in my house and it doesn't fit, how do I return it and get one that does fit? You're relying on the consumer to make the correct choice, and this is where a lot of the planning, and the VR/AR will help the consumer buy the right product,” Joe Derochowski, executive director and home industry analyst for The NPD Group, told Dealerscope. “But if they end up accidentally getting the wrong thing and they want to send it back, can we do that in a way that's easy for the consumer and yet not run the manufacturer or the retailer out of business. That's where the magic is going to have to happen.”

Innovel Solutions, if given the opportunity, could turn out to be the magician the online appliance space is looking for.