As I shared on Tuesday, I’ve been reading Quit by Annie Duke, a former professional poker player.
It’s been an eye-opening read.
So many of us hate quitting, hate losing. And so, we’ll stay in bad situations (in business, life, or investing) for far longer than we should.
It’s true that perseverance can lead to amazing breakthroughs, financial gains, and personal praise. Unfortunately, it can also lead to stagnation, losses, and missed opportunities.
It very much depends on the people involved, the resources available, and the larger circumstances.
Sometimes, throwing in the towel is your best bet… no matter how much you might resist it. Just ask any poker player.
Adding a whole new layer of complexity, it also can depend on how you quit. And to explain what I mean by that, I want to remind you of a once great company called Sears.
America’s Department Store
Sears was founded in 1886 by the brilliant Richard W. Sears as a mail-order wristwatch business. Just seven years later, he teamed up with Alvah C. Roebuck to expand it into a general mail-order catalog.
The dynamic duo sold everything from clothing to farm equipment to toys this way. In so doing, they transformed the way Americans shopped, especially in rural areas with less access to goods and services. In many ways, the Sears catalogue was like the Amazon of its age.
In the 1920s, as automobile sales rose intensely, most catalogs became less relevant. Yet Sears and Roebuck stayed relevant by offering consumer credit through a no-money-down policy. They also began to expand into physical locations, the first one being in Chicago, Illinois.
By 1929, the company had more than 300 Sears stores. And two years later, it further cemented its business reputation by creating two trusted brands: Craftsman to sell tools and Kenmore for appliances.
Throughout all these changes though, the Sears catalog remained the central part of its operations, selling almost everything a family could need to run a household. It even sold the houses themselves!
Source: HA! Designs/Flickr Creative Commons/CC BY-NC-ND 2.0
Consumers could order entire house kits in any one of 447 designs, from the grand “Magnolia” model that sold for $5,140 to $5,972 to the more economic “Winona” for $744 to $1,998. All the parts and pieces were shipped, ready to assemble, to tens of thousands of takers between 1908 and 1940.
That was the legacy Sears built… and future management ultimately destroyed because they didn’t know how to quit.
The Sad Art of Quitting a Good Thing
The Sears story kept going strong through the 1950s. That’s when it began selling insurance of all kinds – automobile, personal liability, life, health, commercial, and property – through the Allstate name.
Yup. That’s right. Allstate began as a subsidiary of Sears.
In the ’70s then, the retailer added another offering in the form of financial services such as its in-store credit card. This quickly became more popular than Visa (V) and Mastercard (MA) for a time.
Toward the end of the decade, Sears also started buying up shares of Coldwell Banker, America’s largest real estate brokerage firm. And before long, it bought up the entire company for $175 million.
Sears did the same with Dean Witter, one of the largest securities brokerage firms back then, for $600 million. Then it created a new general-use credit card as well, showing an increasing interest in financing over retail.
I quoted Annie Duke in both Tuesday’s and Wednesday’s articles. And since she has been the inspiration for this week’s essays, it’s worth looking at her take on Sears:
By the beginning of the [’90s], Allstate, Dean Witter, Discover, and Coldwell Banker were successful, growing, profitable subsidiaries of Sears. These assets had a combined market value… of more than $16.5 billion. They were and (excepting Dean Witter) still are household names…
Whereas Sears itself, we know, is pretty much dead and gone. Only eight of its once 3,500-plus stores are still in existence.
So where did it go wrong?
Sears’ Final Chapter
As Duke explains, “It turns out that quitting” was to blame. “Or, more specifically, quitting the wrong things.” Ever increasing retail competition was dragging its stores’ profitability down.
So “the institutional investors who owned most of the company’s stock pressured management to do something.” And that’s exactly what management did.
In September 1992, Sears announced that it was breaking up its financial services empire. It would sell off all those money-making assets and use the funds to return to a strict focus on retail.
The company properly recognized that it needed to quit something in order to thrive. It just chose all the wrong holdings to break up with.
Over the next two and a half years, Sears sold 10% of Allstate in an IPO that raised more than $2 billion. Then it distributed the remaining 90% to shareholders in a stock dividend valued at $9 billion.
Management followed the same two-step process for Dean Witter, raising $900 million in that spinoff. And it sold Coldwell Banker outright for $230 million.
Exactly as planned, that left it with nothing but its retail stores. And they ran headfirst into competition… and disruption.
Duke explains how:
On the one hand, the spread of low-price retailers (especially Walmart, Kmart, and Target) ate into Sears’ image as the thriftiest place to shop. Sears was too top-heavy to compete on price with the new chains and was fighting a losing battle…
On the other hand, more affluent consumers became attracted to the upscale image of department stores like Saks Fifth Avenue, Nordstrom, Macy’s, and Neiman Marcus.
Sears wasn’t winning no matter how you sliced it.
The company continued to make poor decisions from there, refusing to renovate its locations, whether inside or out. This was despite repeated promises to revamp its appearance into something more appealing.
As the early 2000s dawned, Sears also faced a new form of competition – e-commerce, specifically from the likes of Amazon.
Management’s “solution” was to merge with the ill-fated Kmart in 2005 – once again doubling down on the old instead of embracing the new. As a result, Sears’ investment capital continued to evaporate year after year.
Along the way, it also sold off all its brands, from Craftsman to Kenmore to DieHard batteries and Lands’ End clothing… all to focus entirely on something that clearly wasn’t working.
I followed Sears’ final years closely as an investment analyst, especially after 2015. That’s when the company spun off its property holdings into a real estate investment trust (“REIT”) called Seritage Growth Properties (SRG).
That was yet another doomed move though, since Sears itself filed for the bankruptcy everyone expected just three years later.
Sears strikes me as the type of business that “cut its flowers to water its weeds,” to borrow a phrase from Peter Lynch.
The company could have tried to reinvent itself. It wouldn’t have been easy, but it also wouldn’t have been the first company to do so. Even Berkshire Hathaway once existed as a New England textile business.
Instead, Sears quit all the wrong things and doubled down on a business model that was in obvious decline.
As I wrote on Tuesday, “Quitting is never fun… or easy. But sometimes, when the odds are stacked against you, the best move is not to play.”
Just make sure you’re quitting the right things…
Regards,
Brad Thomas
Editor, Wide Moat Daily
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