Despite Sears Holdings ' (NASDAQOTH: SHLDQ) diminished relevancy over the past decade, its bankruptcy is still going to create upheaval in the retail world. While Sears plans to continue operating , at least for a little while, it is going to be a much smaller business. Chairman Eddie Lampert's plan is to shed all but around 400 of the company's most profitable stores, which means the customers who did shop those other locations will be looking for another place to go.
Products like appliances, consumer electronics, hardware, and lawn and garden equipment remain Sears' biggest sellers, generating $1.4 billion in sales last quarter, while apparel and soft home goods contributed another $700 million. Below are those retailers in various categories likely to benefit most from Sears' demise, and one group that will be hurt the most.
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Even though the prestige of the Kenmore brand has dwindled over the years, its appliances still enabled Sears to be a top destination for appliance buyers. Lowe's (NYSE: LOW) became the largest appliance retailer in 2013, followed by Home Depot and Best Buy . The latter surpassed Sears to become the third-largest appliance retailer in 2017.
But it may be J.C. Penney (NYSE: JCP) that comes out best. It brought back appliances two years ago after a 33-year absence, and because it shares over 300 mall locations with Sears, shoppers could migrate to its stores.
Some analysts believe that Sears' store closures could actually hurt J.C. Penney, as having a "dark anchor store" could cause mall traffic to decline. That might be the case if it were a Macy's or Target store that was closing. However, it's doubtful that Sears was driving much customer traffic to those malls anyway.
Sears sold its Craftsman tool brand to Stanley Black & Decker (NYSE: SWK) last year for $900 million, but did carve out for itself an arrangement that allowed it to receive royalties for a time from all Craftsman tool sales that Stanley generated. The deal also allowed Sears to continue manufacturing and selling Craftsman tools without paying any royalties for 15 years.
Such sales are likely to be insignificant going forward. But Stanley recently announced that it would begin supplying Lowe's with Craftsman tools. Those sales could increase, now that competition from most Sears stores will be eliminated, giving Stanley a lift from the situation.
Analysts at Cowen & Co. calculate that there are 740 Walmart stores and 583 Target stores within a five-mile radius of a Sears store, as well as almost 1,400 stores belonging to TJX Companies , whether it's a Marshalls, T.J. Maxx, or HomeGoods. All should be able to pick up some customers.
However, it is J.C. Penney (along with Walmart and Burlington ) that has the best chance to gain in the apparel market, because Penney's customer profile most closely matches the Sears shopper. Also, because J.C. Penney gets roughly half of its revenue from apparel sales, it could be the retailer that does best here. The proximity of the two companies' mall-based stores to each other also bodes well for J.C. Penney's apparel business.
Even shopping malls can benefit from Sears closing stores. It often paid rent below market rates on its properties, and malls that divide up empty Sears stores can bring in substantially more rent from new tenants.
Real estate investment trust Seritage Growth Properties (NYSE: SRG) has done that with many of the hundreds of properties it acquired from Sears when it was spun off. Where Sears had been paying around $4 per square foot for the space, Seritage has been able to get an average of over $17 per square foot from new leases. Seritage has steadily distanced itself from Sears since its creation, and nearly 70% of its rental income under contract now comes from tenants other than Sears Holdings.
The biggest loser
It's easy to see Sears workers and retirees as the true losers in Sears' bankruptcy, as they're likely to lose their jobs or see their benefits cut if the federal Pension Benefit Guaranty Corporation (PBGC) takes over their pensions. Although retirees' basic benefits will be protected since they are under the PBGC's guaranteed maximum levels, health and welfare benefits, life insurance, vacation pay, severance benefits, and certain lump-sum and disability benefits are not covered.
Lampert did "de-risk" the pensions of about 71,000 retirees last year by transferring just over $1 billion in pension liabilities to MetLife . He's also contributed more money to Sears Holdings' pension plans in recent years prior to the bankruptcy. Part of the proceeds from selling the Craftsman tool brand was pledged to the pension plans as well, but it's unclear whether the recent bankruptcy filing will impact that.
While certain suppliers will feel the pinch, most saw Sears Holdings' demise coming and planned accordingly. Appliance maker Electrolux is Sears' eighth-largest creditor, with $18.6 million in unsecured claims, but says the impact will be immaterial despite Sears representing 10% of sales for its North American major appliance unit. Similarly, Whirlpool expected Sears would go belly up eventually. While it is Sears' seventh-largest creditor, with $23.4 million in unsecured claims from manufacturing Kenmore appliances, it yanked its own brand from Sears stores last year.
The key takeaway
The loss of the iconic retailer is no reason to celebrate. And while many of Sears' wounds were self-inflicted, the tough retail environment also contributed to its demise.
Still, a failing business like Sears wastes resources and capital, and its bankruptcy may mean that others that currently find themselves on the ropes -- like J.C. Penney -- can now get stronger and perhaps even thrive.
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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has the following options: short February 2019 $185 calls on Home Depot and long January 2020 $110 calls on Home Depot. The Motley Fool recommends Home Depot, Lowe's, and The TJX Companies. The Motley Fool has a disclosure policy .