What Investors Can Learn From Sears And J. C. Penney

Summary

• History often does repeat itself.
• Being innovative matters now more than ever as America reopens.
• The J. C. Penney and Sears experiences can inform investors looking for retail stocks worthy of their attention.
• At this point, other than obvious names such as Starbucks and Home Depot, it's best to take a wait-and-see approach.
• New, innovative leaders will emerge in the retail space over the next few weeks and months.

Image taken by author

As I resume writing for Seeking Alpha after a roughly four-year hiatus, I'm spending a fair but healthy bit of time looking back. In recent articles, I have considered where I was wrong on Sirius XM (SIRI) and right and wrong on Netflix (NFLX). These thought processes can help investors. Not only can we all learn from my past mistakes, but we can also see history repeat itself at the company and sector level.

Netflix dominates because broadcast and traditional pay television didn't take the streaming threat seriously or react aggressively enough in response. Now, after years of standing still, the large content providers are finally fighting back with solid initiatives such as Disney+ (DIS), HBO Max (T), and a stronger Hulu.

Sirius XM (with Pandora in tow), Spotify (SPOT), and YouTube (GOOG) (GOOGL) dominate, in part, because terrestrial radio did nothing other than tout its ease of use as these services not only made themselves easier to use, but also indispensable to music consumers. Unlike the aforementioned old school content providers, broadcast radio still isn't doing anything substantive to compete in a world where satellite and streaming rule.

All of this said, there might not be anything more instructive than brick and mortar retail's lack of foresight foreshadowing its abject failure. In this article, we consider what investors can learn from the miserable experiences of Sears (OTCPK:SHLDQ) and J. C. Penney (OTCPK:JCPNQ).

Now Those Memories Come Back To Haunt Me

I have fond childhood memories of Sears and J. C. Penney.

When I was a kid, the massive Sears and J. C. Penney catalogs would come in the mail in the summertime. Back to school shopping season! If I recall correctly, Sears and J. C. Penney bookended our local mall. When I attended Catholic School, my mother ordered my uniform (green pants and yellow shirt!) from one or the other, though I think it was most often Sears.

We would go to what Sears called "the catalog department." It was set up sort of like a post office. A long counter with workers who retrieved your order from any number of slots or larger spaces in the bowels of Sears, just adjacent to the actual department store itself. You walk up, give them your name, and they grab your order. From there, my mother would generally make me walk around Sears and the mall with her for what felt like hours.

In some cases, nostalgia can do a brand wonders. However, when it's all you have, that's a red flag for investors.

A Static History

Take the radio industry as an example. Around the same time as I was spending time in Sears and J. C. Penney stores, I was also obsessed with radio. As a preteen, I listened to radio constantly, enamored with disc jockeys and talk show hosts. I started working in the radio business shortly after I turned 13, in 1988. More fond memories.

I used to struggle to tune in faraway stations from my perch in Niagara Falls, New York. I recall being able to listen consistently to AM stations from New York (WFAN), Chicago (AM 1000 WLUP), and St. Louis (KMOX). A couple of times I was even able to listen to the 50,000 watt powerhouse out of Denver, KOA Radio. To listen to the legendary Top 40 station, Z-100 out of New York, I used to call the station and ask to get put on hold!

Though I couldn't envision how it might look, I dreamed about the days when listening to any station anywhere would require much less effort.

Today - and for the last decade or two - you can use satellite or the internet to listen to any station in the world. The radio industry evolved, but it wasn't these beloved stations I listened to leading the charge. It was people such as Mark Cuban who helped put radio on the Internet. Then it was Napster, satellite radio, and a whole host of streaming services that changed the way we listen to radio, be it music or talk. All individual terrestrial radio stations ever did that was even a hint innovative (and I'm being super generous with that word) was utilize other people's technology to stream their content live.

We saw something similar take place in retail. I assume I share the same or similar memories of Sears and J.C. Penney with other people around my age. Retail transformed itself, but old school retailers, like terrestrial radio stations, didn't shape these transformations. It was the tech companies. Of course, Amazon.com (AMZN) transformed retail. And Apple (NASDAQ:AAPL) restructured the in-store experience under Steve Jobs.

Hope Is Not A Strategy

I wonder if J. C. Penney asked former Apple retail head, Ron Johnson, any questions when they interviewed him for their CEO gig in 2011. Or did they just hope he'd recreate the magic he supposedly used to make Apple Stores among the most inviting and innovative in brick and mortar retail? There's no doubt I was hopeful early on, but I quickly turned sour as I watched Johnson fail miserably at J. C. Penney.

It became evident that Johnson deserved little, if any, credit for retail success at Apple. Beyond listening to and implementing Jobs' vision, Johnson didn't do much, if the J. C. Penney experiment is any indication. And I think it is. Or, as the Observer put it in a June 2019 piece:

No other CEO in the history of retail generated worse results in such a short period as Johnson.

Johnson didn't change the experience of walking into and shopping at a department store, whereas Apple (Jobs) completely transformed the way we buy computers and mobile devices. And that's really the key for investors - is the company you're looking at not only leading, but also transforming its sector in a meaningful way?

As usual, Starbucks (SBUX) provides the best example of this. It took the coffee shop experience, then elevated and perfected it at the international level. But it didn't stop there. It didn't rest on the nostalgia the Starbucks brand initially developed. It didn't rest on consistency and convenience across stores. It took things to the next level by leading the build-out of its digital and mobile platforms. It generated excitement among consumers (which could be translated to investors).

I remember being excited to use the Starbucks mobile app for the first time. I remember when a friend (one-time Seeking Alpha contributor Robert Weinstein) sent me a gold Starbucks card. I was excited. More recently, I remember when Starbucks made the move to longer hours with beer, wine, and cheese at some locations. I'm not stuck reminiscing about the 1980s when I think of Starbucks like I am when Sears and J. C. Penney come to mind.

Who's leading? That's the question to ask as an investor. Apple leads. Amazon leads. That's why Amazon is reportedly kicking at J. C. Penney's carcass. How amazing is it to think that Amazon not only can take partial (or more) credit for J. C. Penney's demise, but it also can be at the table as the failed retailer dismantles itself?

Conclusion

Looking at how history can repeat itself. Asking who's out in front in their space? Now more than ever, this is how investors need to approach the stock market. Because it absolutely is a stock pickers' market. At the moment - and maybe for a long time - buying an index fund probably isn't the best choice. Because you'll be investing in plenty of companies not built for a pandemic or recession.

But it goes beyond just buying names you'd place on a COVID-19 index. It's about asking who's taking the lead during uncertain times. I think there will be retail stocks to invest in beyond Starbucks and, say, Home Depot (HD) going forward. There will be tech-oriented retail companies other than Amazon worthy of your time. As America reopens, investors should be on the lookout for the companies who recreate themselves in this not-so-brave new world.

You can't do what you have always done the way you have always done it if the world around you looks completely different than it did before. Most retailers that come back will simply open their doors and wait for consumers to come. If they don't come, the retailers investors should stay away from are the ones who lament the situation, referring to consumers as just "not ready." It's the ones who create a little bit of FOMO and reasons to take the risk of being ready, in a safe and responsible way, that you'll want to invest in.

I have to think there are retail executives on Zoom (ZM) calls right now devising reopening plans that will knock our socks off. I plan to spend time in the next several weeks and months searching for them as long-term investment opportunities.

Disclosure: I am/we are long SBUX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.