Readers of this blog know I am no fan of Sears Holdings. Bringing together Mr. Lampert’s Lock-in to private equity cost cutting behavior with Sears’ out of date Success Formula was like finding out you have cancer shortly after suffering a heart attack. One very sick situation.
For months investors played along with Mr. Lampert’s story that he would somehow save his way to prosperity for investors. But now, after 6 years of declining revenue, and a recent report that same-store-sales are down for the second consecutive quarter (see article here), the company equity value is down almost 25% from it’s April peak (see chart here). True to form, Mr. Lampert has proposed propping up the stock price by increasing the share buyback. At the end of the day, this financial machination will leave Sears with only one store and only 1 share of stock, but somehow Mr. Lampert indicates magic comes from this plan.
Mr. Lampert tapped into a long-held business myth. Even though we see businesses fail every year, most of us do not really think the companies we work for, or invest in, will fail, We adopt old-fashioned notions of business lifecycles that assert "mature" companies should accept a low growth rate, and maximize profits instead of revenues. This Myth of Perpetuity allows people investing in, selling to, or working for even failing companies to have faith – long after such faith is poorly placed.
The reality is that businesses either grow or die. Businesses exist in a competitive marketplace. If they don’t grow, they get clobbered by more successful competitors. You aren’t allowed to stand still, because that makes you food for the aggressive competitor running hard to succeed. Mr. Lampert acted as if Sears could stop growing and "milk" the business. What he ignored was the fact that the lions were watching, and while he’s trying to "milk" Sears of cash Target, Kohl’s, JC Penney, Lowe’s and even Home Depot have eyeballed this "cash cow" and decided to simply kill it. They don’t see any reason to allow Mr. Lampert the time to cut costs slowly and generate cash. Not when they want those customers, the revenue and the profits they can make from increased sales — something Sears can’t produce because it’s Success Formula is so out of date.
It was clear 2 years ago that Sears was unable to succeed. Now it has hit a growth stall, and statistically it has only a 7% chance of ever again growing even 2%. Those investors that believed in Mr. Lampert believed in myth. Not just the myth of his heroic skills, but in the Myth of Perpetuity — because they would not accept that the venerable Sears company was heading straight into the Whirlpool.