In 1979, Nobel Prize-winning economist Milton Friedman made a then-controversial statement. He said in an interview that regulators should allow Sears (OTCMKTS:SHLDQ) to buy Kmart. In the late 1970s, Sears had accounted for about 1% of GDP and faced a rising competitive threat from Kmart. At the time, regulators would have likely not allowed Sears stock to take such a dominant position.
By the time Dr. Friedman died in 2006, competitive forces and attitudes had changed, Sears and Kmart had, in fact, become one. Emerging companies such as Walmart (NYSE:WMT) and Home Depot (NYSE:HD) had long-since supplanted the dominance of Sears and Kmart, and the long death spiral in Sears stock had begun.
Today, as both Sears and Kmart fight for survival, they have now sued former chairman, Eddie Lampert for looting the company and leaving it no other option besides bankruptcy. Many possible outcomes exist for this lawsuit, which includes Lampert’s ESL investment and Treasury Secretary Steven Mnuchin, a former ESL director. However, finding a result that will save Sears stock appears much less likely.
Sears Trades as a Penny Stock As It Sues Its Former Chairman
Lampert’s actions might justify such a lawsuit. In February, Mr. Lampert bought most of the company’s remaining assets for $4 billion. This left Sears stock holding billions in debt. Now, it seeks to reorganize with an estimated 425 stores. Unfortunately, it will do so without the Kenmore and DieHard brands that Lampert bought in February. It will also move forward without the iconic Craftsman brand that Lampert sold to Stanley Black & Decker (NYSE:SWK).
However, the question investors need to ask is how winning a lawsuit against Lampert will help Sears stock. Admittedly, those who have gambling money could make a profit. Traders who bought at the 12-cent-per-share low of last December have earned a return of about sixfold. However, the stock has also lost around 80% of its value from year-ago levels.
Even worse, the company appears irreparably damaged. Thanks to the bankruptcy, Sears stock now trades on the pink sheets as SHLDQ. Even worse, what remains of the business will have to move forward with only its name to bolster the company. Also, even if it wins some of its brands back from Lampert, the company holds no obvious competitive advantage.
The Future of Sears
While Sears may have served consumers well in the 20th century, it remains unclear what Sears offers today’s retail world. Sears plans to open small-format stores called Sears Home & Life. These stores will sell “hardline” items such as tools, lawn and garden equipment, appliances, and mattresses. In the old Sears, hardline items had long outsold “softlines” such as clothing.
Still, as mentioned earlier, the company has lost the well-regarded brands it used to control. Today, we can now see how its catalog business served as a precursor to e-commerce. However, the company stopped publishing the catalog in 1993, the year before Jeff Bezos founded Amazon (NASDAQ:AMZN). Moreover, despite the strength of Sears in hardline items, consumers have grown accustomed to buying those items elsewhere. Given these challenges, earning long-term profits in Sears stock remains difficult even at its depressed share price.
The Bottom Line on Sears Stock
Neither suing its former chairman nor the move toward hardlines gives Sears stock much of a chance of re-emerging. Sears may have a strong case against Mr. Lampert and ESL. However, even if the lawsuit succeeds, Sears must again make itself a destination store, this time without the brands which bolstered the company in the 20th century.
Unfortunately, it appears the retail world has moved on from Sears. Yes, it is possible to place one’s gambling money in Sears stock and earn a massive payoff in a revitalized Sears. However, if we apply the lessons from the Milton Friedman interview, it is also possible that a merger of Amazon and Walmart could also happen someday. Such is the power of the market forces in retail that Dr. Friedman understood during his lifetime.
While knowing the past can benefit investors, it is still the future that drives returns. SHLDQ will struggle to become part of that future.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
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