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Sunday, May 25, 2014

Dismal economic news keeps coming

Lately, the economic news has been less than stellar. Much of the disappointing data has been attributed to weather. Fortunately, that problem is in the rearview mirror. The data needs to turn around – and quickly – if this year is to be better than the last, growth-wise.

Existing home sales constitutes one positive data point in a row. Don’t forget, all winning streaks start with the first win. According to the National Association of Realtors, sales of existing homes rose 1.3 percent in April. Although an increase, the sales volume remains 6.8 percent below last year’s level. The decline from last year is not that unexpected given we experienced a sales surge from 2012 through the first half of 2013. ...

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Lately, the economic news has been less than stellar. Much of the disappointing data has been attributed to weather. Fortunately, that problem is in the rearview mirror. The data needs to turn around – and quickly – if this year is to be better than the last, growth-wise.

Existing home sales constitutes one positive data point in a row. Don’t forget, all winning streaks start with the first win. According to the National Association of Realtors, sales of existing homes rose 1.3 percent in April. Although an increase, the sales volume remains 6.8 percent below last year’s level. The decline from last year is not that unexpected given we experienced a sales surge from 2012 through the first half of 2013.

April marked the first month this year that existing homes sales have increased. That’s good news for two reasons: April is the beginning of the all-important summer selling season, and existing home sales account for roughly 90 percent of all home sales. However, only cautious optimism is warranted since it was sales of multi-family homes and not single family homes that drove the positive results.

I haven’t discussed China in a while, but it seems my prediction of slowing growth there will prove accurate. The first quarter wasn’t a good one for the world’s second largest economy. Hopefully, the improved preliminary May manufacturing data portends a return to growth for China’s core economic engine.

I frequently refer to the Purchasing Managers Index because it is the best gauge of manufacturing activity. A reading of 50 or above signals expansion. So far this year, China hasn’t registered a 50 or above. April’s number registered 48.1. But May’s preliminary reading came within spitting distance of 50 with a 49.7 reading. More encouraging is that the factory and export order components rose above 50.

Nonetheless, the somewhat positive news out of China might be completely negated by the unexpected decline in sales and profit at Sears. For new readers, that’s my idea of humor.

Sears is the retail equivalent of Sean Penn in “Dead Man Walking.” It’s dead. The switch just hasn’t been flipped yet. I predicted General Motors’ fate years before its bankruptcy. And I’ll go on record to say that one of America’s retail icons will suffer the same demise.

Granted, the first quarter wasn’t glowing for any retailer. Still, it would be hard to argue that the problems at Sears are in any way weather related. Sears has many problem but the biggest is the ego of its fearless leader.

A man simply must know his limitations. Billionaire hedge fund investor Eddie Lampert – the man pulling all the strings at Sears – hasn’t located his yet.

Eddie, let me offer a helping hand: You don’t know jack about running a retail operation. In fact, you probably don’t know jack about running anything outside of the “shell games” Wall Street is so adept at playing to increase its own wealth.

Sears posted a first-quarter loss of $440 million. That compares to a $279 million loss in Q1 of 2013. Sales declined 6.8 percent, mostly because of the closing of Sears and Kmart stores, and the separation of the Land’s End business. Eddie did manage to pull off one feat: He hit the trifecta of dismal financials by also overseeing a reduction in gross margins.

To be fair, Sears did manage to increase the critical same-store-sales metric by 0.2 percent. That was the first time the company has managed to accomplish that in a year.

And there’s always the chance I may be selling Mr. Lampert short. He was smart enough to realize that it might not be wise to try to compete in the ultra-competitive electronics business. I wonder what his first clue was? Could it have been former king-of-the-electronics-hill – Best Buy – turning into second best buy to Amazon.com?

Sears is contemplating selling off its stake in Sears Canada and spinning off its auto center business. The Canadian business makes the U.S. operation look like a well oiled machine. Its first-quarter loss almost doubled from the previous year. I suspect both divestitures will happen. At some point, the company will need operating capital to stave off bankruptcy for a while longer.

Mr. Lampert is nothing if not busy.

He has indicated that the plan is to shift from selling televisions to a “connected living” strategy that focuses on appliances, fitness equipment, electronics and auto services. Maybe he should take a page out of high-tech and experiment with “cloud retailing.” I have no idea what that means, but I also have no idea how appliances, fitness equipment, autos and electronics are connected.

The company is also looking to revamp its apparel business because the higher markdowns associated with clothing have hurt margins. Maybe the strategy there should be “unconnected living.”

But Eddie’s ace in the hole is his pursuit of a member-focused model versus a focus on the stores. I haven’t the foggiest what that means either, but I like it. Who wouldn’t want to be a member of a dying retail giant?

I think I’m going to cut up my Barney’s and Armani credit cards.

Author, professor, entrepreneur, radio and TV commentator Tony Paradiso can be reached at
tparadiso@tds.net.