3 Profitable Lessons Investors Should Learn From Sears’ Bankruptcy

Posted On October 16, 2018 11:19 am

On Monday, October 15th, in a move that shocked absolutely no one, Sears (SHLD) filed for Chapter 11 bankruptcy protection. The company is hoping to line up sufficient financing to make it through the holidays, and shut down stores itself in an orderly fashion. That ability is in doubt, with the company’s largest creditors recommending a wholesale liquidation of the business. That would mean that this 126 year old retailer, once the largest in the world, would cease to exist. The downfall of Sears, a long, slow motion train wreck, has three important, and potentially very profitable lessons for all investors. Lessons that can help you improve your long-term returns, and better reach your financial goals, including of a prosperous retirement.

Buy And Hold Forever Is Best…Unless The Wheels Fall Off

While decades of market studies show that buy and hold investing is generally the best strategy to use, that doesn’t mean you can or should ignore deteriorating fundamentals over time. Even old and well established industry giants, (Kmart was once larger than Walmart and Sears the largest retailer in the world), can fail.

For example, Sears has seen its sales decline rapidly for 13 years. Management, in the form of hedge fund CEO Eddie Lampert, tried to cost cut and financial engineer the company’s revival by closing 2,600 stores over that time. However, the mistake Sears made was not in owning too many stores, but in not adapting to changing consumer tastes. It was one of the last retailers to adopt loyalty programs or incorporating online sales in the omni-channel approach that many of its thriving rivals have proved can survive, and even thrive in the age of Amazon.

Ultimately it was poor capital allocation and strategic decisions that resulted in Sears posting 13 straight years of declining same store sales growth (and $11.2 billion in losses since 2011). And keep in mind that’s even with steadily closing thousands of “weaker performing” locations. This shows that Sears’ problems weren’t in its locations, but in its overall business model. One that simply couldn’t compete with more nimble retail rivals.

The takeaway for investors is that even the bluest of blue chips are not “buy and ignore forever” stocks. You need to check in every year or two, to make sure that the company’s fundamentals remain strong and moving in the right direction. Yes all blue chips must periodically restructure their business models, to adapt to changing conditions. But never ignore steadily declining revenue, profits, and rising debt levels that threaten not just the dividend, but the company’s survival.

However, as important as this lesson is for investors, there are two even more important ones that might help your portfolio prosper in the long-term.

About author

Dividend Sensei
Dividend Sensei

I'm an Army veteran and former energy dividend writer for The Motley Fool. I'm a proud co-founder of Wide Moat Research, Dividend Kings, and the Intelligent Dividend Investor. My work can be found on Seeking Alpha, Dividend Kings, iREIT, and the Intelligent Dividend Investor. My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams and enrich their lives. With 24 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and income streams and achieving long-term financial goals.

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1 Comment

  1. Tim Ho October 16, 2018 at 9:05 pm

    I believe you could have applied your magnifying glass to ‘just what was it that made Sears great?’ which goes beyond stuff arriving in the mail. Sears was known for superiority in quality. It’s brand was special because it meant something of quality. It’s “Craftsman” branded tools were top shelf because (a) they found good tools then mandated the manufacturers improve the quality for long reliability; (b) that reliability was /is backed by a no questions asked replacement policy no matter how old most tools were (or misused); (c) Users of ALL Sears tools could rest assured there would be parts to replace & renew those tools for years and years.
    The “new management” did not appreciate what went into ‘brand loyalty’ that brought all sorts of professionals and handymen to buy ‘Craftsman’. That extra engineering of increase quality requirement went out the door long ago. Their parts program is a perfect example of how computers can mess up a nice dream – all calls for parts are routed to individuals without a clue. Those individuals have only computer files (garbage in = garbage out) and most parts are not available for more than a few years anymore.
    Those are SOME of the reasons a significant portion of Sears business vaporized and it didn’t have all that much to do with e-commerce.
    I know there are more educated types on what went wrong with the clothing end of it …
    Here’s another – Kenmore wash machines – were the industry standard made in Holland, Michigan and good for 20 – 40 years … THEN under the same ‘we have better – the best stuff’ approach to marketing.
    When a business does not have quality to sell it can’t stand up to e-commerce competition. That’s just my take.

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