Throwing Good Money After Bad: Sears Holdings Corporation (SHLD), Target Corporation (TGT), Kohl’s Corporation (KSS)

Sometimes companies need to admit mistakes and just move on. Sears Holdings Corporation (NASDAQ:SHLD) has been moving in this direction by closing underperforming stores and selling off part of its Sears Canada division, but there is one big step left to take. If the company takes this step, Sears has a future, if not than management is cutting off its nose to spite its face.

A merger that never made sense
When I first heard that Kmart and Sears Holdings Corporation (NASDAQ:SHLD) would merge, my thought was, why? Years later, this merger still baffles me. The traditional Sears store is normally located in an enclosed mall, is well known for appliances, tools, and lawn care, and recently the company’s fashion selection has improved. The traditional Kmart store is normally free standing, and is best known by Dustin Hoffman’s line in Rain Man, “Kmart sucks.”

The merger of these two completely different companies was supposed to bring efficiency and better profits. In theory, Kmart could show Sears how to sell items at a discount, and Sears Holdings Corporation (NASDAQ:SHLD) could bring some of their higher-end retail knowledge to Kmart. However, what has actually happened is Kmart is constantly stuck playing third string to Target Corporation (NYSE:TGT) and Wal-Mart Stores, Inc. (NYSE:WMT). Sears, on the other hand, has been so distracted by Kmart and Sears Canada, that results have been less than impressive. The bottom line is, these two companies need to part ways.

What can Sears do?
Sears domestic division saw increased comparable store sales in apparel, home appliances and other home categories. The company’s weakest areas were consumer electronics, sporting goods, and lawn & garden. While Sears domestic unit reported same-store sales up 0.8%, there is room for significant improvement.

To be blunt, Sears Holdings Corporation (NASDAQ:SHLD) needs to take a page out of Kohl’s Corporation (NYSE:KSS) playbook. Kohl’s is centered around fashion choices, and Sears needs to take this step. Companies like Dicks Sporting Goods Inc (NYSE:DKS), Foot Locker, Inc. (NYSE:FL), and Amazon.com, Inc. (NASDAQ:AMZN) are killing Sears in the sporting goods area, and this part of the store needs to go. Electronics are also not Sears’ strong suit, and need to be eliminated also. Let’s face it, Amazon.com can sell it cheaper, Best Buy Co., Inc. (NYSE:BBY) has more selection, and Target Corporation (NYSE:TGT) and Walmart are more convenient.

If the company makes these choices, they will play to their strengths. Sears Holdings Corporation (NASDAQ:SHLD) is well known for appliance sales. The company’s Land’s End, and other clothing lines would have more store space by eliminating sporting goods and electronics. These changes would theoretically improve Sears’ gross margin, which is 27.1% domestically. The cut throat pricing in electronics and sporting goods is dragging the company down. Kohl’s Corporation (NYSE:KSS) is more fashion focused and carries a gross margin of 38.13%. You can see the type of margin improvement that might occur if Sears focused on clothing.