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Cox: Sears may leave an even bigger finance legacy
March 30, 2017 / 2:16 PM / 8 months ago

Cox: Sears may leave an even bigger finance legacy

NEW YORK (Reuters Breakingviews) - Little is more satisfying than cracking open a vintage Sears, Roebuck & Co catalog and marveling at the breadth of its offerings, dated illustrations and all. The one for the spring and summer of 1971, for instance, runs to 1,071 pages and offers everything from Dacron polyester nurse uniforms to colonial birch-veneer bedroom sets. Sadly, this once-great American retailer of everything may not make it to its 130th birthday in one piece.

The sign on a door to a Sears store is seen in Denver February 26, 2009. REUTERS/Rick Wilking

The more enduring legacy of Sears, however, which published its first catalog back when Grover Cleveland was president, can be glimpsed deep within the nearly half-century-old edition. On page 432 is an application for a credit card. A few pages later there’s the “modernizing credit plan,” allowing consumers in seven states to buy merchandise and defer payment.

Sears Holding, the retailer, looks to be rapidly hurtling toward bankruptcy under the stewardship of hedge-fund boss Eddie Lampert. The financial-services businesses spawned by this empire – so robust a few decades ago that it built, in Chicago, the largest skyscraper in the free world – are alive and kicking. Therein lies a cautionary history lesson for Amazon.com, Alibaba and other internet conglomerates seeking international domination.

The market capitalization of Sears has shrunk to around $1.25 billion, or a fraction of where it was a decade ago after Lampert merged it with rival Kmart to create what his investors hoped would form the foundation of the next Berkshire Hathaway. A recreation of Warren Buffett’s model never happened. In fact, it’s surprising that Sears shares have any value given the company’s warning a week ago that it may not be able to continue as a “going concern,” auditor-speak for bankruptcy.

Lampert dismantled much of what was left. He spun off a collection of real-estate assets, which trade as the $1.25 billion Seritage Growth Properties. He also stripped away the Lands’ End apparel business, which Sears acquired for $1.9 billion in 2002 and now has a market value of $700 million.

Sears set its Hometown and Outlet Stores unit free four years ago, too, and it’s worth $97 million. It did the same for Orchard Supply Hardware, which Lowe’s bought for $205 million in 2013. Sears Canada still sports an independent equity stub worth C$200 million. And earlier this year, Lampert offloaded the iconic Craftsman brand of tools to Stanley Black & Decker for $525 million upfront, some $250 million in a few years and royalties for the next 15 years. All told, that’s more than $4 billion of value scrapped together from the retail remnants.

That sum excludes a significant portion of the Sears heritage, however. The company’s attempts to offer credit to catalog shoppers led it to start the Discover Card in 1985. That business was bundled with Dean Witter Reynolds, the stock brokerage it acquired in 1981, and taken public in 1993. The combination later merged with Morgan Stanley, which spun off the credit-card arm a decade ago.

Since then, Discover stock has more than doubled and the company fetches a $26 billion valuation. And, of course, Sears’ dalliance in the brokerage business, for which it was ridiculed as a purveyor of “socks and stocks,” morphed into a chunk of Morgan Stanley with a 1997 merger of equals. The Wall Street bank today is worth $80 billion, some of which would have accrued to any Sears owners who clung to their shares.

Also linked to the Sears of yore is property-and-casualty insurer Allstate. Originally named after a tire sold in the catalog, Allstate underwrote its first policy in 1931, insuring a Studebaker, after “a customer walked into the one-room Allstate office holding an auto door handle broken off in a theft attempt,” according to the company’s official history.

From there, the business expanded into life, health and commercial policies. In 1993, Sears sold 20 percent of the insurer in an initial public offering, and spun the rest off to shareholders two years later. Allstate now carries a $30 billion market value, making it the most valuable vestige of the Sears realm.

There were a few other operations, some of which endure today, and others that vanished. It bought the Coldwell Banker real-estate franchise in 1981, and sold it off a decade later. It’s now part of $4 billion Realogy. It even had its toe in the early dot-com froth, with online forerunner Prodigy, which it offloaded for a pittance in 1996.

Only with perfect hindsight did Sears fail to alchemize internet access, credit cards and a retail heritage into something resembling Amazon. Even so, there’s the nagging feeling that the company’s legacy will be more in finance than shopping. That may be instructive today, particularly as the global retail industry struggles to adapt to a world of seemingly limitless inventory and increasingly rapid fulfillment and delivery. In that sense, behemoths like Jeff Bezos’ “everything store” and Jack Ma’s Alibaba are taking the innovative promise of the original Sears catalog to its ultimate expression.

The Sears story also suggests, however, that the futures of these modern titans and their rivals go far beyond the retail trade. Financial services, such as those offered by Alibaba’s Ant Financial subsidiary, may one day create more value than its many other activities. Likewise, Amazon Web Services, which offers a suite of cloud-computing services, may one day dwarf its parent company. All that Sears once was may ultimately guide its corporate progeny. A casual browsing though an old catalog could be enough to do the trick.

Breakingviews

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