Sears Holding Co. filed for protection under Chapter 11 bankruptcy on October 15, 2018 to avoid a $134 million debt payment. Thus, an American icon which issued its first catalog in 1887 and opened its first store in 1925 came to an end. Between 1906 when the company had the largest retail IPO in the United States up until that time and 1972 when the stock peaked, Sears’ stock market capitalization increased over 1200-fold from $15 million in 1906 to $18 billion in 1972. The stock price rose 2000-fold providing a 12% annual return between 1908 and 1972. After reinvesting dividends, $1 invested in Sears in 1908 grew to over $20,000 by 1972 providing an annual return over 16%, making Sears one of the greatest investments in American history. The company was bought out by K-Mart in 2005 and since 2007, Sears Holding Corp. stock has seen a steady decline from $195 in 2007 to 30 cents today.
Sears, which had led the retail market from the 1890s to the 1970s was unable to find its retail focus and became a shadow of its former self. Sears did innovate and introduce new products and lines, but this only delayed the inevitable collapse of the company. Sears has been unable to reinvent itself during the past 50 years and instead of other retailers following in its footsteps, it tried to imitate its competitors and ultimately failed. Today, however, Amazon is the Sears of the twenty-first century and one wonders whether Amazon will repeat Sears’ mistakes in the years to come.
The First Sears Catalog
Sears was originally a watch business, just as Amazon was originally a book business. Its founder, Richard W. Sears worked as a freight agent for the Minneapolis and St. Louis Railroad in 1886 when a local jeweler gave him an unwanted shipment of pocket watches which Sears resold. Sears bought and resold more watches and soon quit his railroad job to form the R.W. Sears Watch Co. in Minneapolis. Sears hired Alvah Roebuck as a watch repairman in 1887, moved to Chicago in 1887, and in 1888 published his first mail-order catalog. By 1890, the 80-page catalog had grown to 322 pages and by 1895 to 532 pages. Anyone wanting to understand what life was like in America 100 years ago need only purchase one of the reproductions of a Sears catalog to see the thousands of goods people were able to buy. Unfortunately, no Amazon catalog will exist 100 years from now.
Sears bought out Roebuck in 1893 and recapitalized the company at $150,000 with two new partners, Aaron Nusbaum and Julius Rosenwald. Sears was a classic entrepreneur and always pushed to expand the company. As one person put it, Sears could “probably sell a breath of air.” In the nineteenth century, America was still a rural country. Farmers had to buy their goods at the local general store, pay high prices and have little choice in what they could buy. However, Sears offered a large catalog with hundreds of pages of items that farmers needed and wanted. Sears provided an unconditional money-back guarantee for all of the items in the catalog and his willingness to accommodate his customers at every level paid off. As Sears once put it, “Honesty is the best policy. I know it. I’ve tried it both ways.” Sears sold on a low margin to get rural America hooked on buying through the mail rather than go to the local general store, and his plan succeeded. Sears enjoyed phenomenal growth for the next 30 years.
Two postal changes helped Sears to penetrate the rural market. The Rural Free Delivery Act was introduced in 1896 and parcel post was introduced in 1913. Before Rural Free Delivery, farmers had to go to distant post offices to pick up packages. In fact, before 1863, all letters were delivered from one post office to another post office. No home delivery existed. Beginning in 1863, mail was delivered to homes in major cities, and in 1896, mail was delivered directly to rural farms, but 4 pounds was the limit on the size of packages delivered by the post office. All other goods had to be shipped by railway freight or railway express. Before parcel post, four express companies divided up the delivery market between them with little competition. The government wanted to destroy this cartel and in 1913, the post office began delivering parcel post across America. Once the post office entered the business, companies like Sears could mail packages to anyone anywhere in the United States. Both of these changes made it easy for Sears to send millions of items through the mail to eager customers in rural areas.
Sears Conducts the Largest Retail IPO
1906 brought two major changes to Sears. First, Sears established its distribution through its Sears Merchandise Building in Chicago, which covered 3 million square feet, and which symbolized Sears dominance of the mail order business. The building remained the corporate headquarters for the company until the Sears Tower was built in the 1970s. Second, Sears reincorporated in New York and went public, issuing shares at $50 a share and increasing the company’s capitalization to $15 million, a 100-fold increase over 1893. But this was just the beginning of Sears’ growth. By 1929, Sears reached a market capitalization of $775 million, 50 times greater than in 1906. Sears clearly used the capital it raised in 1906 and after to expand the company throughout the United States. Consequently, sales grew six-fold between 1906 and 1920 and in 1911, Sears began offering credit to its customers to increase its sales even more.
By the 1920s, the population of the United States was moving off the farms and into the cites and suburbs. Sears hired Robert Ward, the “General” (since he had served as the U.S. Army’s Quartermaster General during World War I), from Montgomery Ward in 1924 and Ward drove the growth of Sears over the next 30 years. One of the main innovations that Ward introduced in 1925 was to have physical stores where customers could buy their goods directly from Sears rather than wait for the goods to be delivered by the post office. Using the U.S. Census and the Statistical Abstract of the United States, Robert Ward plotted where to build retail stores to maximize Sears’ growth. Montgomery Ward followed suit in 1926 and opened its first store. Sears was added to the Dow Jones Industrial Average in 1924 and remained a member until 1999.
The key to Sears’ success was to open up stores in the suburbs, not in the city centers where Sears would have had to compete with high-end department stores. Sears made their stores easily accessible to motorists with free parking. Montgomery Ward built their stores in rural areas and Woolworth focused on urban centers, but Sears built their stores in the suburbs where people were moving to. The introduction of the stores was a huge success and by 1930, only five years later, Sears operated over 300 stores nationwide.
By 1931, store sales exceeded catalog sales. Sears began working more closely with its suppliers, converting the Nineteen Hundred Corp. into Whirlpool, and in 1931 Allstate Insurance began providing automobile insurance to Sears’ customers. In 1942, Sears opened its first store outside of the United States in Havana, in 1947 in Mexico and in 1952 in Canada.
At the end of World War II, both Sears and Montgomery Ward each had sales of around $1 billion, but after the war, Sears’ sales grew to $3 billion in 1952 while Montgomery Wards sales remained around $1 billion. In part this was because Sears concentrated on the Sun Belt states where the population was growing. After the war, Sears also established stores in suburban malls where Sears became the anchor store for each new mall. By 1967, sales had increased to $1 billion per month. However, it was also in the 1960s that Sears began losing business to the lower-end retail companies. In 1962, Target, Walmart and K-Mart were all founded, three companies which would eventually replace Sears in the retail market, and one of which would buy out Sears. In the 1970s, high inflation pushed low-end consumers to discount retail stores like Target and Walmart, while higher end customers went to the more fashionable retail stores.
Sears, Super Stock
Shareholders who invested in Sears saw phenomenal returns as the chart below illustrates. The stock IPO’d at $50 in 1906, declined to $25 by January 1908 during the 1907 recession, then shot up to $200. Stock dividends followed in 1911, 1915, 1917 and in 1920. The stock split 4 for 1 in 1926 and 4 for 1 again in 1945. The cumulative value of stock splits, stock dividends and stock and rights distributions over the course of Sears’ history amounts to over 2000 to 1. Between 1908 and 1929, Sears stock increased in price 100-fold and with reinvested dividends, increased 215-fold, generating annual returns of 24.5% on the price and 29% on reinvested dividends. Between August 1906 when Sears had its IPO and December 1972, $1 invested in Sears stock grew to $928, an annual return of 11% and with reinvested dividends, shareholders would have turned $1 into $9915, an annual return of 15% over a period of 66 years. Sears provided one of the highest returns in the history of the American share market.
The Sad but Steady Decline of Sears
In 1974, the 110-story Sears Tower, the tallest building in the world at the time, was completed just as Sears began its slow but steady decline. For the next 45 years, no matter what Sears did to try to stop its decline, it failed. Sears may have delayed the inevitable, but Sears had lost touch with the American market and Sears gradually but inevitably lost market share to companies above them and below them. Sears became a company of the past.
The amount of changes Sears made to try and reverse its decline is impressive. Sears went into the finance business, acquiring the Metropolitan Savings and Loan Association, the broker Dean Witter, the real estate firm Caldwell Banker, and introduced the Discover Card in 1985, but none of these reversed the firm’s fortunes. In 1987, Sears introduced specialty superstores, in 1988, Sears acquired Eye Centers of America, Pinstripes Petites and Western Auto Supply. All to no avail. By the 1980s, K-Mart sales exceeded Sears’ sales.
But the company could not change its core business and sales continued to decline and by 1991, Walmart’s sales exceeded those of Sears. In 1992, Sears slashed 47,000 jobs when it lost over $2 billion. The company introduced Canyon River Blues apparel, bought Lands End, purchased Orchard Supply Hardware, and introduced a Sears credit card.
No matter what Sears did, it ultimately failed because it was Sears. It was a retailer of the past hemmed in by its product line. The company could not reinvent itself no matter how hard it tried. In 2003, Sears sold its financial and credit business to Citigroup, but by then Wal-Mart, Target and Home Depot all had greater sales than Sears. Sears was the retailer people used to go to, not the one they went to. Sears was no longer innovating and showing other retail stores how they needed to change. They were imitating the innovations of other companies, introducing financial products that others could provide better and were stuck with locations where growth was no longer occurring.
Sears, Roebuck & Co. Becomes Sears Holding Corp.
Between 1972 and Sears’ buy out by K-Mart Holding Corp. in 2005, the stock only doubled in price as is illustrated above. In 2005, K-Mart acquired Sears, Roebuck and Co. for $11 billion after K-Mart completed its bankruptcy and re-emerged as K-Mart Holding Corp. Sears shareholders could choose to receive either $50 in cash or one-half share of Sears Holding Corp. Although the company made $1.5 billion in 2006, by 2010, Sears Holding Corp. was losing money and lost money every year after that.
The Sears disease infected the renamed Sears Holding Corp. and the steady decline began as is illustrated below. K-Mart Holding Corp. stock had done well after it emerged from bankruptcy in 2003, rising from around $10 to $100 by the time the company acquired Sears, Roebuck and Co.The stock peaked in 2007 at around $195, but declined steadily after that. At $0.30 a share, the stock is back to the same level Sears, Roebuck & Co. was at in 1915, over 100 years of stock growth down the drain.
The story of Sears Holding Corp. is the same as the story of Sears, Roebuck & Co. Sears spent its time trying to imitate successful retailers but never found a formula that worked for the company. Sears was still living in the 1970s, not the twenty-first century. Sears had 3,500 stores in 2010, but only 695 in 2017 and a little over 100 stores by the time its bankruptcy was announced in October 2018. Soon there will be none.
Amazon vs. Sears
The parallels between Sears and Amazon are instructive. While Sears had its catalog, Amazon has the internet. Both companies want to provide everything to everybody. Both companies rely heavily upon mail to ship millions of good from their distribution centers to millions of customers. Both companies rely upon low margins to build their business and drive out the competition. One hundred years ago, Sears drove the local general store out of business while Amazon is driving malls and retail stores (such as Sears) into bankruptcy. Both companies went from being a single-product company (watches for Sears and books for Amazon) into being a multi-product corporation that sells everything. Both companies didn’t want to just be the BEST retail option to its customers, but the ONLY retail option to its customers. Sears expanded into insurance with Allstate while Amazon has expanded into television through Prime and Amazon Web Services offering internet access through the cloud.
Amazon shareholders have benefitted tremendously from the growth of the company. Between Amazon’s IPO on May 15, 1997 and the stock’s peak at $2050 in September 2018, Amazon stock increased 1000-fold generating an annual return of 39% over a period of 21 years. By contrast, between 1908 and 1929, Sears’ stock price rose 100-fold and 200-fold with reinvested dividends.
The only other retail company that had similar rates of growth was Walmart. Between November 1970 and December 1999, Walmart Stock increased 6088-fold and allowing for reinvested dividends, increased by a factor of 7,185, generating annual rates of growth of 35% in the stock price and 35.8% with reinvested dividends. Walmart’s capitalization grew from $30 million in November 1970 to $308 billion in 1999, an annualized increase of 37.5%. It should be remembered that between 1970 and 1999 while Walmart was growing by leaps and bounds, Sears was floundering and shrinking in size.
Although Walmart hasn’t retraced its steps as Sears did after 1929 and Amazon after 1999, in 2018, Walmart stock was only 50% higher than it was in 1999. Its annualized return has fallen to 20% between 1970 and 2018, and because of share buybacks, the market cap in 2018 is actually less than it was in 1999.
Looking at market cap, Sears grew from $150,000 in 1893 to $15 million in 1906 and to $775 million in 1929, a 5000-fold increase between 1893 and 1929. Amazon has grown from a market cap of $560 million when the stock debuted on May 15, 1997 to $1 trillion in September 2018, increasing in size almost 2000-fold for an annual rate of growth of 42%. But as with the growth of Sears, Amazon will be unable to sustain its 42% growth rate into the future. At the current rate of growth, in 10 years, Amazon’s market cap would be greater than the GDP of the United States. You also have to remember that Amazon stock peaked in April 1999, lost 95% of its value over the next two years, and remained below its 1999 peak until October 2009, 10 years of no growth in the stock price. Similarly, Sears fell 95% between 1929 and 1933 and remained below its 1929 stock price until 1949, a 20-year fallow period. A similar 95% drop in Amazon would push the stock back to $100, a thought that is unimaginable to current Amazon shareholders.
Amazon: The Sears of the Twenty-First Century
Sears successfully moved from the mail-order business to the retail business in the 1920s, and generating continuous growth until the 1970s. Amazon is now where Sears was in the 1920s. Amazon is opening up its own stores and has purchased Whole Food Markets to provide groceries to its customers. So far, Amazon has successfully followed in Sears’s footsteps and may do so for decades to come. But no company can grow at 40% per annum forever. At some point, Amazon’s growth will stall, and Amazon shareholders can only pray that the company has 50 years of growth ahead of it as Sears did in the 1920s. But if Amazon every builds a 100-story Amazon Tower, my advice would be to sell the stock.