You don't have to be a sophisticated investor looking at balance sheets and listening to investor conference calls to see what's happening in the retail space. Look no further than your own shopping habits.
If you're like most, you're doing much more shopping online and for purchases more suited to local stores, you're spending your money at the modern, bargain conscious, in-style stores. What was popular when your parents were your age isn't popular now.
That, at least in part, may sum up what is causing retailers like Sears, JC Penny (NYSE:JCP), and most bookstores to be on financial life support going in to 2012.
TUTORIAL: Investing 101
The History of Sears
You might best know Sears as the department store where your grandparents shopped, but the company has a long and storied history. Sears can trace its origins back to 1886, when Richard Sears began selling watches at a train station in Minnesota. He was so successful that he moved to Chicago and published an 80-page mail-order catalog.
Although he wasn't the first to make such a catalog, Sears and his partner, Alvah C. Roebuck, eventually had more than 500 pages of products for sale, making them the largest mail-order retailer in America, the amazon.com of their day. In 1925, Sears and Roebuck opened their first retail store and by 1973, the company they founded had built the largest building in America: the Sears Tower.
By the 1990s, Sears wasn't the iconic mail-order brand that it once was. Since the 1930s, they had purchased companies like AllState Insurance, Dean Witter Financial Services (which subsequently merged with Morgan Stanley), Kenmore Appliances and the internet services provider, Prodigy.
By 1992, Sears was facing crippling competition from Wal-Mart (NYSE:WMT) and Kmart, forcing it to cut 47,000 jobs and post a loss of $2.3 billion. Slowly, the retail side of the business became a smaller part of their revenues. By 1993, Sears had stopped publishing its catalog. In 2004, Kmart purchased Sears and formed Sears Holdings (Nasdaq:SHLD), making them the third largest U.S. retailer behind Walmart and Home Depot (NYSE:HD).
Since the merger, the company has continued its downward spiral, losing 83% of their stocks' value in the past five years. Sears Holdings recently announced that it will close up to 120 Sears and Kmart Stores to shore up its finances, further proving that its retail arm may soon be lost.
Few people are betting on a revitalization of the retail arm of Sears; not even the company itself. In 2010, Sears announced that it would sell its Craftsman and Kenmore brands in other retail stores like Costco (Nasdaq:COST) and Ace Hardware. However, there's another side of Sears that isn't as apparent: Sears Holdings owns a lot of real estate.
In 2011, Sears announced that it was going to open up its 3,800 retail properties to other retailers. This could include smaller outlets on the property, in store kiosks and a retail presence next to a Sears or Kmart store. (For more, read Analyzing Retail Stocks.)
Becoming a real estate investment trust (REIT) may not seem like the mark of a healthy company, but consider this: Sears has a market cap of nearly $3.3 billion. Simon Property Group (NYSE:SPG), one of the best known property leasers, is worth $37 billion and Sears owns a lot more retail property than Simon Properties. Sears' real estate may represent an untapped, highly lucrative potential revenue stream.
Sears is still investing a lot of money into becoming a leading online retailer, but many investors believe that monetizing their properties and building their brands outside of their retail stores is their best hope.
The Bottom Line
If you have shopped at a Sears or Kmart recently, you may know firsthand that the brand is in trouble; however, Sears is larger than its highly visible retail presence. Still, investors are largely unconvinced that the company will survive without a major restructuring and even that may be too late. (For more, read The 4 R's Of Investing In Retail.)