Some K-Mart associates have said that they believe the company may be closing. Image source: Sears.
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While it has already closed or plans to shutter over 100 K-Mart locations this year,Sears Holdings (NASDAQ: SHLD) has shot down rumors that it plans to do away with the entire chain.
Those rumors arose recently when employees of the remaining K-Mart stores began reporting that they have been emptying their stockrooms and putting merchandise out on the sales floor. That's a common step a chain would take if it were on a path toward liquidation.
While it does not always happen this way, it makes sense to try to sell off inventory at regular prices before having a closeout sale. That's because once the going-out-of-business sign is up, consumers expect a bargain.
So, in appearance, at least to some of its employees, K-Mart seems to be in the early stages of going out of business, but the parent company insists that's not true.
What is Sears saying?
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While it never actually uses the words "we're not planning to close K-Mart," Sears Holding issued a blog post that explains why it's emptying its stockrooms.
"Our store associates are currently rolling out a phased project that gets our newly delivered products on the stores' shelves immediately rather than in the stock rooms and ensuring that the member does not wait in line at the checkout," wrote K-Mart executives Alasdair James and Gareth Glynne. "We're focused on giving our members a 'WOW' experience and this change is helping our stores operate more efficiently."
That makes sense, but it's also exactly what a company would say if it's in the middle of slowly closing down. Sears has insisted, however,that the warehouse purge is focused on restoring profitability to the chain, which "remains a key part of our asset portfolio," James and Glynne wrote."We continue to educate associates on the strategy, just as we continue to evaluate and optimize our cost structure with a focus on store-level marketing expenditures, staffing levels and improved inventory management."
Is the company telling the truth?
Likely what Sears is saying about K-Mart is true -- for the moment. It is possible to manage your way out of near-disaster. Best Buy (NYSE: BBY), for example, managed to institute huge cost savings under CEO Hubert Joly that kept the company in business. The electronics retailer changed how it handled inventory, retrained employees, shifted its focus to service, and starting matching online prices.
Unfortunately, what happened at Best Buy is not the norm. Radio Shack, Sports Authority, and countless other chains followed plans like K-Mart's in an effort to turn around their fortunes. These efforts are usually the first steps toward going out of business.
Sears Holdings appears to be making an honest effort with K-Mart to help the chain survive while also being willing to close stores that don't make the cut. The current changes are likely both an early effort to liquidate mixed with a referendum on survival.
Sure, K-Mart -- like Best Buy -- may be able to make its way out of a death spiral. But it's unlikely, and even with the company's denials, it appears that some, if not all, of the remaining 1,000 or so K-Marts are in jeopardy of joining Caldor, Woolworth, Bradlees, Lechmere, and many other department stores that could not stay open.
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Daniel Kline has no position in any stocks mentioned. He misses Caldor. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.