Attention, Kmart Shoppers: Flat-Line Special

Rubble remains by the back door of what used to be a Kmart Photograph by Jeff Kowalsky/Bloomberg

Kmart, the discounting pioneer owned by Sears Holdings, is in the throes of a mass shutdown of stores. After a bad 2011 Christmas, Sears Holdings said it would close up to 120 Sears and Kmart locations; as of January, there were just over 1,300 Kmarts in the U.S. and territories, 800 fewer than a decade earlier, when Kmart slid into bankruptcy as an independent company. In February, the parent posted its biggest quarterly loss in at least nine years. It lost $132 million in the July quarter, and analysts expect another loss, on a 10 percent drop in sales, when the company reports on Thursday. (Update, Nov. 16, 1:45 p.m. ET: Sears Holdings’ stock price is down 18 percent, to $47.75, after the company reported a wider, $498 million loss on lower sales.)

Today, as Amazon wallops all of retail, discounting’s old Big Three has been duopolized down to Wal-Mart vs. Target. According to Bloomberg Industries, department stores now make up less than half the share of the retail industry’s core “general merchandise, apparel and accessories, furniture and other” sales than they did 20 years ago. As for the subject of 30 years ago, that’s when Kmart’s rights to Charlie’s Angel Jaclyn Smith’s clothing line (it still exists) might have been worth something.

It must be asked: Are Black Fridays numbered for the Blue Light Specialist?

“If you’re Kmart, there’s no reason for being,” says Howard Davidowitz, chairman of Davidowitz & Associates, a retail consulting and investment banking shop in Manhattan. “Are they building stores? No. Are they improving anything for the customer? No. Sears Holdings as a company is in liquidation.”

Not that the stock and debt of the parent company exactly scream liquidation. Sears Holdings, the brainchild of hedge fund owner Eddie Lampert, has soared this year as the company has raised cash, bought back stock, and shuttered and divested stores and subsidiaries. But this comes amid the retailer’s fifth straight year of declining revenue; in the latest quarter, Kmart’s comparable store sales were down 4.7 percent.

Sears Holdings was recently kicked out of the Standard & Poor’s 500-stock index. It was removed from the Dow Jones industrial average in 1999.

Lampert, in his letters to shareholders, has chafed at the idea that Sears Holdings has to spend more on marketing and store upkeep at Kmart and Sears.

“Despite what some believed, increased marketing spend and increased inventory dollars do not automatically generate higher sales or higher profit,” he wrote in February. “More marketing and inventory dollars are not required to generate higher sales or profits, especially in a company that already spends over $1.5 billion in marketing and has over $8 billion invested in inventory on a consolidated basis. In fact, if you were to compare the amount of space and inventory we invest in our Sears apparel and home fashions businesses to other significant softlines retailers, you would agree that it should be possible to more than double sales and generate significantly higher profits without any additional investment in inventory, marketing or physical space. To do this, however, requires changes in our thinking and our processes, some of which are currently under way.”

To wit: Sears Holdings is subdividing existing, operational store space so it can be subleased to grocery stores, health clubs, and a Forever 21 fashion apparel store. The company openly lists its available square footage.

“I think Eddie is trapped in a no-win situation,” says Steven Platt, director of the Platt Retail Institute, a Hinsdale (Ill.) consultancy that publishes the Journal of Retail Analytics. “He can’t turn around the stores and he can’t sell the chain. He can dump assets to generate cash. But Sears Holdings is a retail dinosaur.” Last year, Platt put out a note titled “Sears acknowledges that it is in the real estate liquidation business (sort of),” where he said he was vindicated in his suspicion that Lampert was chiefly interested in “milking” the venerable, but moribund, retailers for cash.

Survival for Kmart, says Platt, “is a matter of degree. The store is irrelevant and its customer base is hurting. But with some 1,300 or so stores and $15 billion in revenue, they are not likely to go away quickly.”

Enter Kmart’s central paradox: While the store might have no compelling reason for being, it can’t just be shut down overnight, says Davidowitz. There are, he says, too many moving parts for Sears Holdings’ creditors; too many bank agreements and countless square footage that would suddenly inundate a weak market. He cites the parent company’s recent sale of top locations to General Growth Properties as the kind of “orderly liquidation” Lampert can use to preserve its otherwise atrophying value as a retailer. “But can Kmart compete with anyone?” asks Davidowitz. “The answer is no.”

Shannelle Armstrong-Fowler, the Kmart spokeswoman at Sears Holdings, declined to comment, citing a quiet period ahead of the earnings release.

In January, Moody’s analysts Scott Tuhy and Kendra Smith downgraded the company’s credit two levels and kept a negative outlook, citing “persistent negative trends in sales, which continue to significantly underperform peers” as the retailer doesn’t invest enough in its stores and service.

To be in discount retailing nowadays is to be bombarded by peer pressure. Witness the resurgence of layaway, which Kmart offers throughout the year and for which it could traditionally count on certain customers to pay a reliable $5 or $10 fee every few months. In September, though, Kmart moved to free layaway, ostensibly in response to aggressive layaway promotions from Wal-Mart and Toys “R” Us. Then there’s the ubiquitous onslaught of free shipping, as led by Amazon Prime.

All of which makes it ever harder for Kmart to cut to the brutal chase of competing on price. For example, in a Bloomberg Industries study of a basket of back-to-school items, Kmart was mildly cheaper than Staples, after being significantly more expensive just three weeks earlier. But even as it managed to beat Staples on price, Kmart remained “significantly more expensive” than Target and Wal-Mart.

Starved for marketing and more expensive than your discount competition is, to paraphrase Dean Wormer, no way to go through life.

Before it's here, it's on the Bloomberg Terminal.