Which Retailers Would Gain from a Sears Closure?

Which Retailers Would Gain from a Sears Closure? Sears Holdings has filed for bankruptcy. In this report, we consider which major retailers could gain sales should all Sears department stores ultimately close. Walmart and Target would be in strong positions to pick up sales: Coresight Research s consumer data shows high apparel cross-shopping rates at Walmart and Target among Sears shoppers, and over half of Sears stores have a Walmart or Target store nearby. Among the department stores, JCPenney looks best placed to capture shopper dollars in the event of a total Sears closure. JCPenney sees high rates of apparel crossshopping with Sears, it registers the highest geographical overlap with Sears stores, and its position is bolstered by the recent strengthening of its appliances offering. Home Depot and Lowe s would likely capture some share of appliance sales should Sears close down: 40% or more of Sears stores have such rivals within two miles. Warehouse clubs Costco and Sam s Club see a much lower geographical overlap with Sears stores. On Monday, October 15, Sears Holdings filed for Chapter 11 bankruptcy protection in the US Bankruptcy Court for the Southern District of New York. The company intends to reorganize around a smaller network of profitable stores, with 142 closures slated as part of the restructuring. However, there doubts linger over the long-term prospects for Sears Holdings and many commentators expect the company to be liquidated at some point in the near future. Sears Holding s revenues have been falling fast, but the company still turned over a substantial $16.7 billion in the year ended February 3, 2018, with the Sears banner accounting for $11.1 billion of that total. On a trailing 12-month basis, group revenue fell by $14.3 billion in the period ended August 4, 2018, according to S&P Capital IQ. 1

Average Income (USD Thous.) So, if Sears Holdings falls, which retailers will gain? In this report, we offer a number of data points that help answer that question. Sears Holdings operates Kmart as well as its eponymous chain, but our analysis here focuses only on the Sears department store chain: it excludes Kmart as well as Sears Hometown and Sears Outlet stores, which are independent of Sears Holdings. We show the merchandise sales mix of Sears department stores for the year ended February 3, 2018 below. Figure 1. Sales Mix at Sears for the Fiscal Year Ended February 3, 2018 (USD Mil.) USD Mil. Hardlines incl. Appliances 5,656 Apparel and Soft Home 2,182 Food and Drug 7 Total Merchandise Sales 7,845 Source: Company reports Apparel Shopper Data Suggest Potential for Walmart and JCPenney to Capture Sales Coresight Research s shopper data show that Sears has the oldest average apparel shopper of all the major department stores and that its average apparel shopper s income is slightly above the average for all apparel shoppers. As shown below, Kohl s and Costco are the major retailers whose average customer profiles are most similar to Sears, while those of JCPenney and Macy s are also close. The off-pricers, such as T.J. Maxx, attract a notably younger average shopper. Costco s proposition differs significantly from that of Sears, and we would expect this to limit its gains in apparel though it could capture some appliance sales. Figure 2. Selected Apparel Retailers: Average Shopper Profiles, by Age and Household Income 100 Nordstrom/ Nordstrom Rack 90 80 70 60 Gap Old Navy Target Burlington Amazon T.J. Maxx/ Marshalls Macy s Walmart JCPenney Kohl s Costco Sears Average Apparel Shopper 50 38 40 42 44 46 48 50 52 Average Age Base: 1,564 US Internet users ages 18+ who have bought clothing or footwear in the past 12 months, surveyed in January 2018 Bubble size represents shopper numbers. Note that average age excludes shoppers under age 18, who were not surveyed. Source: Coresight Research 2

Cross-shopping data add further depth to our analysis in the apparel category. We looked at which other stores Sears apparel shoppers also shop for apparel, and found that Walmart, JCPenney and Target top the list. Walmart s prominence is unsurprising, as it is the mostshopped retailer among all apparel shoppers. Second-position JCPenney overindexes very strongly among Sears apparel shoppers, while it is only the seventh-most-shopped apparel retailer among the total population. Macy s ranks higher as a cross-shopping destination among Sears shoppers than among the total population, too. This reflects the fact that department store shoppers are effectively a subset of apparel shoppers that browse and buy at a number of department store retailers. Figure 3. Where Sears Apparel Shoppers Have Also Bought Apparel in the Past 12 Months Walmart 62.5% JCPenney 55.8% Target Macy s Kohl s 44.2% 47.1% 46.2% Amazon.com T.J. Maxx/Marshalls Ross Stores 29.8% 33.7% 37.5% Base: Internet users ages 18+ who have bought clothing or footwear from Sears in the past 12 months, surveyed in January 2018 Source: Coresight Research Store Proximity Data Further Suggest that Walmart, Target and JCPenney Are Well Placed to Pick Up Sears Shoppers Coresight Research s store proximity data show a roughly similar picture, with Walmart registering the highest rates of geographical proximity to Sears stores. Among the department stores, JCPenney leads and this retailer s push into appliances since 2016 should bolster its gains should Sears close down. Kohl s locations overlap with Sears locations to a much lesser degree than other major department stores, as many Kohl s stores are located away from malls, where other department stores tend to be based. In terms of home-appliance retailers, Home Depot is close to more Sears stores than is Lowe s, though both retailers see substantial overlap. By contrast, Sam s Club and Costco see relatively low geographical proximity to Sears stores. The Sears banner operated 506 stores as of August 4, 2018 (latest reported). 3

Figure 4. Percentage of Sears Stores that Have Selected Rival Stores Within Two Miles Mass Merchandisers % of Sears Stores Walmart* 71 Target 51 Department Stores JCPenney 48 Macy s 44 Kohl s 30 Off-Pricers TJX Companies (All Banners) 55 Ross Stores 43 Home Improvement Stores (For Appliances) Home Depot 49 Lowe s 40 Warehouse Clubs Sam s Club 22 Costco 18 *Walmart data are for Walmart Supercenter or Walmart Discount Store formats; we have excluded the smallerformat Walmart Neighborhood Market stores from the analysis. Figures should be viewed as approximate due to Sears ongoing store-closure program. Source: Thinknum/Coresight Research Key Takeaways Should the Sears chain close for good, low-price, mass-market chains are positioned to mop up the greatest share of the company s apparel sales. The strength of Walmart and Target in this scenario is relatively unsurprising: Walmart is America s leading apparel retailer in terms of total clothing and footwear sales and Coresight Research data indicate that Walmart and Target are the most-shopped retailers for apparel among the general population. Any boost to Walmart and Target from a Sears closure would come on top of anticipated gains from the closure of Toys R Us. As we have noted previously, our own data show that Walmart and Target are likely to capture the lion s share of store-based sales that would have gone to Toys R Us. Among the department stores, JCPenney looks best placed to capture shopper dollars in the event of a total Sears closure. JCPenney registers disproportionately high apparel crossshopping rates among Sears shoppers, jumping from the seventh-most-shopped retailer for apparel among the general population to the second-most-shopped among Sears apparel shoppers. The company s shopper demographics are also similar to Sears, and almost half of Sears stores have a JCPenney store located nearby. JCPenney s push into appliances since 2016 would support its bid for shopper dollars. TJX Companies, whose banners include T.J. Maxx, Marshalls and HomeGoods, shows a relatively high level of store proximity to Sears stores, and the company s apparel banners fall within the top 10 most-shopped apparel stores among Sears shoppers. However, TJX and other off-pricers attract a significantly younger average apparel shopper than Sears does, which may limit the proportion of dollars they could attract in the event of a Sears closure. 4

Home Depot and Lowe s stand ready to capture some appliance sales, and 40% or more of Sears stores have such rivals within two miles. The major warehouse clubs see a much lower geographical overlap with Sears stores, and this may limit their gains. 5

Deborah Weinswig, CPA CEO and Founder Coresight Research New York: 917.655.6790 Hong Kong: 852.6119.1779 China: 86.186.1420.3016 deborahweinswig@coresight.com John Mercer Senior Analyst Hong Kong: 6/F, LiFung Tower 888 Cheung Sha Wan Road, Kowloon Hong Kong London: 242-246 Marylebone Road London, NW1 6JQ United Kingdom New York: 1359 Broadway, 18th Floor New York, NY 10018 Coresight.com 6