Summary
In a country that prides itself in nurturing the free market system, more and more large companies are falling victim to our peculiar form of it. Here are some of the reasons why.
Analysis
After posturing that Circuit City would close stores, cut costs, and reorganize, management now chooses to liquidate in the midst of the worst recession since the Great Depression. One of the early category killers, Circuit City changed the way America shopped for both personal and home electronics. Now it’s a victim of the very business model that it helped create.
Some analysts will point to the recession as the reason Circuit City failed, but they would be wrong. Others will say it was a strategic issue and they would be wrong too. The fact is Circuit City is closing its doors and terminating 30,000 employees because of bad decisions by previous management that created boring stores and alienated sales associates and customers alike.
Certainly, there was room for more than one uber electronic company in the world’s largest economy, just not a poorly run one which raises the question of culpability on the part of directors, management, and investors too, especially institutions that invest pension fund and 401k money. In a society fixated on assigning blame, levying punishment, and extracting compensation from individuals when things go wrong, it seems incredulous that neglectful and incompetent management skirts by with no more than an “Oops” and a big severance package, while the livelihood of employees and future retirement of investors alike is irreparably harmed.
By definition, any kind of investment carries risk, but the free market is supposed to quantify that for all to see, a process that’s completely inadequate today. Granted there’s lot of disclosure, but it’s obtuse at best and misleading at worst. For example, how could Fannie Mae, Lehman Bros., and Merrill Lynch be sound investments one day and insolvent the next? It couldn’t if the free market was working. Clearly, the fix was in at the highest levels including the Federal Reserve, Treasury Department, and the SEC. The same might be said about ordinary stocks where large institutions have a vested interested in keeping prices high even if it obscures bad management.
Circuit City is a victim of that process. More scrutiny by institutional management, realistic accounting practices that links specific management decisions to business results, and consequential accountability for directors and executive management could have possibly prevented Circuits City's demise. Unfortunately, the degenerative process continues to threaten some of the nation’s largest retail institutions; case in point, Sears Holding.
It has amazed me the degree to which the market has tried to rehabilitate Sears Holdings and its Chairman Ed Lampert despite being one of the worst run retail businesses in America. It’s true Kmart did better than expected during the holiday season, specifically because of the use of lay-a-way enabled cash pressed consumers to buy gifts. That begs the question why lay-a-way wasn’t started six months earlier or why it was discontinued to begin with.
Then there's Sears which performed much worse. An ideal candidate for lay-a-way, especially for high value, infrequently purchased products like power tools, electronics, and appliances. Perhaps, management didn’t think $3,000 refrigerators and $1,600 washers and dryers could be sold that way. But one thing is certain they weren’t sold on credit either as a floor full of what looks like a Robb’s Report of luxury appliances attests to. Just why Sears’ management thought $600 refrigerators could be sold for three times as much because of $100 worth of new electronics and a handful of energy efficient LED’s, all enclosed in a stainless steel shell isn’t clear. But what is clear is they ignored market trends that began nearly two years earlier and that's professed hands on manager Lampert's fault. Still, Sears Holding has more cash in the bank than expected, which makes Lampert poor retail management ok according to some analysts. I believe it’s that kind of thinking that distorts the free market process and ultimately jeopardizes the long term viability of some of the nation's largest employers like Sears.
Lampert will probably burn through Sears’ cash quick enough through the likes of more stock buy backs that benefit his hedge fund more than it does Sears. Meanwhile, pundits will continue to spin Sears’ vast real estate holdings as a reason for investors not to be concerned about declining operational value. However, that may change with the Circuit City bankruptcy. While it’s not like for like real estate comparison, Sears isn’t quite the real estate play that institutional investors thought with Circuit City’s big boxes coming to market at fire sale prices for the…few if any… buyers that can be found. Another “Oops” maybe, but real analysis and direct accoutablilty might change what otherwise will be the inevitable end for Sears and its 302,000 employees.
