Sears Holdings (NASDAQ: SHLD) got the markets to go crazy by announcing a plan to sell Kenmore appliances through Amazon (NASDAQ: AMZN) on July 20, 2017. That got me to wondering if Amazon would buy Sears?
Several appliance retailers; including Home Depot (NYSE: HD), lost around $12.5 billion in market capitalization after the deal was announced, CNBC reported. That was absolutely dumb; because all Sears and Amazon announced was a modest test of a possible service in one city; Los Angeles, according to The LA Times.
Mr. Market is Just Plain Stupid when it comes to Amazon
It will take months to test and probably years to roll out the appliance delivery service; giving Amazon competitors more than enough time to prepare for it.
Any widespread effect from the appliance business is years away. Unless Amazon has invented a teleportation machine that can “beam” appliances to customers’ homes, something I think Jeff Bezos would not keep secret.
What’s even stupider is that one of the companies affected by the stock sell off was Whirlpool (NYSE: WHR). Whirlpool is an appliance manufacturer if Amazon sales succeed, it’ll simply start selling through Amazon.
All this proves that Mr. Market is not just insane; he’s also very stupid, especially where Amazon is concerned. One reason why Amazon is able to easily befuddle Mr. Market; is that it plays a very long game (engaging in strategic plans that might not come to fruition for years), while he cannot think beyond today’s closing bell.
Therefore it is best to ignore the markets and examine the underlying business where Amazon is concerned. The picture you get will not be totally accurate, but it’ll at least be grounded in reality.
Would Amazon Buy Sears?
This brings us to the next crazy idea that’s sure to go through Mr. Market’s screwy head: Amazon buying Sears.
The idea makes some sense; because Sears operates 651 of its own stores and 624 Kmarts in the US. It also owns a number of popular consumer brands including Diehard batteries and Kenmore, and Sears Canada.
The idea is totally dumb because Sears is a mess; most of its locations are rundown, understaffed, badly-stocked and poorly maintained. Each of those stores would probably require several hundred thousand; if not several million, dollars’ worth of work to get it up to modern retail standards.
That figure would be in addition to the financial mess at Sears which includes a loss of -$1.51 billion reported on April 30, 2017, and a “free cash flow” of -$902 million reported on the same day. To that you can add the legal mess Eddie Lampert has created with lawsuits against his suppliers and probably landlords.
An added problem is Lambert himself who has transferred much, if not most, of Sears’ real estate to his Seritage Growth Properties (NYSE: SRG) investment trust. Since Seritage reported a -$63.06 million on March 31, 2017, you can see the real estate is probably losing money too.
Why Amazon will not buy Sears
Sears is a lousy company that is a poster child for the worst practices in the industry. Jeff Bezos likes to buy good companies that embody the best practices in the business; think Zappos and Whole Foods (NASDAQ: WFC), or cutting edge technologies like Kiva and Graphiq.
That means I cannot imagine the Everything Store buying Sears. Although I can see Sears buying Kenmore or Diehard. An interesting possibility is that Amazon would buy Sears’ appliance service business and Kenmore. Land’s End (NASDAQ: LE) might be another target because Amazon can fold it into the Prime clothing business.
Why Amazon Might buy Nordstrom
This does not mean Amazon would not buy a department store. I can certainly picture it acquiring Nordstrom (NYSE: JWN); which has a “best in the industry” reputation, and a loyal customer following much like Whole Foods. It also likes to implement next generation retail practices like setting up “storefronts” for online merchants and Tesla dealerships in its stores.
Nordstrom has a great reputation and a strong brand that would be an asset to Amazon’s online portfolio. Nordstrom-branded clothes might sell well on Zappos or through Prime.
Like Amazon, Nordstrom is a Seattle based company and it would be really cheap right now. The department store had a market cap of $8.015 billion and an enterprise value of $9.877 billion on July 25, 2017. There are also rumors that the Nordstrom family wants to sell its stake in the company (perhaps to their hometown boy Jeff Bezos).
There are some other department stores, Amazon might look at. One is Macy’s (NYSE: M); which has a great reputation, many choice locations around the country and a strong brand name for fashion.
Why Amazon Might Acquire Best Buy
Although I think Amazon is more likely to go after a downscale retailer next in an attempt to get more middle or working class shoppers. Potential targets here include the privately held Safeway, Office Depot/OfficeMax (NASDAQ: ODP), Staples (NASDAQ: SPLS), Rite Aid (NYSE: RAD) and Best Buy (NYSE: BBY).
Best Buy is an Amazon target; because it has a best in the industry reputation, and strong customer loyalty. Buying Best Buy would also give Amazon a nationwide delivery and service network for appliances and electronics.
Best Buy would also be fairly cheap it had a market cap of $16.82 billion and an enterprise value of $14.46 billion on July 25, 2017. Using Best Buy to service and deliver Kenmore appliances; sold through Amazon, would make a lot of sense and would be a real threat to Lowe’s and Home Depot.
Expect Amazon to make another brick and mortar acquisition soon but expect nobody to see it coming. Instead the market will be taken by surprise again, but it should not be. Physical retailers are just so cheap right now that Amazon is likely to acquire a number of them in the years ahead.