By: Dividend Sensei
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.