Pension Problem is the Nail in Sears’ Coffin, but Does it Deserve All the Blame?
The numbers continue to look bleak for Sears Holdings. In its recent earnings report, the company showed same-store sales were down nearly 4 percent year-over-year during the second quarter, while total revenue was down 25 percent, and losses in value doubled from $250 million last year to $508 million this year—roughly $4.68 per share.
There are plenty of causes that deserve blame for the company’s current abysmal state of affairs. However, in a blog post that accompanied the earnings report, CEO Eddie Lampert seemed to point his finger at one problem in particular: pensions.
“In addition to the very difficult retail environment, Sears has also been significantly impacted by its long-term pension obligations,” he wrote in the post. “In the last five years, we contributed almost $2 billion, and since 2005 we have contributed over $4.5 billion, to fund our Pension Plans. … Had the Company been able to employ those billions of dollars in its operations, we would have been in a better position to compete with other large retail companies, many of which don’t have large pension plans, and thus have not been required to allocate billions of dollars to these liabilities.”
To be fair, Lampert’s not wrong in his assessment of the impact the company’s pension commitments have had on their ability to invest in itself. That $4.5 billion total over the past decade plus equals roughly $350 million per year that Sears could have used to reinvest in itself and its stores. Instead, they haven’t been able to do that, and the stores that remain appear to be ripped right out of a 1980s sitcom. If you’ve walked through a Sears recently, you’d know what I mean, with their outdated fixtures, old and stained carpets, and the very structured retail layout.
Whereas other major retailers like Best Buy and Target have been spending billions to redesign and reformat their stores over the past few years, Sears has been forced to close countless stores and sell off parts of the business garage-sale style. And, as it turns out, a solid portion of the money raised by Sears in those sales has been used to fund its pension plan through the Pension Benefit Guarantee Corporation—a federal agency that insures defined benefit plans. The PBGC, according to filings, has an agreement in place with Sears under which it has the right to “initiate an involuntary termination” of the plan if it feels Sears’ financial difficulties become too extreme.
Sears' Strategy Shortcomings
So, it’s clear that the pension issue, at present, is a major problem—perhaps even the direst problem Sears is facing in its mission to return to profitability. But it’s far from the only reason for the company’s current situation.
Many analysts will (perhaps rightfully so) point their fingers right back at Lampert and say he’s only driven Sears further into the ground since he took over in 2013 as CEO. It’s hard to disagree if you’ve followed this story over the past several years. But Sears’ issues certainly extend back, prior to Lampert’s rise to the top—starting with severe mismanagement of the same pension structure that’s currently hammering the company’s bottom line.
For starters, whereas other retail firms have transferred their pension plans to an insurance company in order to rid themselves of pension liability, Sears opted to hold onto that liability. According to financial reports, Sears pension deficit in 2007 was less than $1 billion, and even after the stock market crash in 2008 it was less than $2 billion. Today, the company’s plan is less than 70 percent funded, whereas other major retailers maintain pension plan assets that total at least 97 percent of their projected obligations.
"Typically this kind of situation is always a function of the leadership just not having the correct vision, or having the correct vision and not doing the proper things. It's never, unfortunately, about the workers or the managers," Robert Baird, a longtime retail industry veteran who’s spent the past two-plus years as a consultant, told Dealerscope in a recent interview. "You go to a Sears store today and everybody is working hard, they're doing what they're supposed to do. But when you have leaders who just don't have the right vision or don't choose to make the right decisions it ultimately gets pretty expensive for somebody."
To Baird's point, Lampert’s vision of turning Sears into a “member-centric company” has all but completely backfired. In order for a store to become member-centric you first need to attract shoppers to come in and willingly shop your store. You have to provide them with an experience that’s impactful, that they’ll remember fondly, and that will entice them to return to the store again in the future. That’s a tough ask when you’re a retailer that’s essentially unwilling to make capital expenditures to up the quality of the in-store shopping experience.
Over the past decade, Sears has consistently spent around or less than 1 percent of its revenue on capital expenditures, according to a The Motley Fool report. Instead, the report said, Sears decided to focus on spending roughly $5 billion in share buybacks between 2005 and 2010.
So, yes, the pension problem is a major one and puts Sears in a position where it feels like it’s not prudent to spend money upgrading stores—especially ones it believes are not profitable. But the damage appears to be self-inflicted. Sears created its own catch 22 by mishandling its pension plan, and it could be that mismanagement of a decade ago that ultimately buries the company.