By: Jeff Pollock
June 22, 2017

Following a 56% collapse in its revenue over the past decade and after posting a $422 million operating loss last fiscal year, Sears Canada announced this week that it had filed for creditor protection. Not only have shareholders lost 72% of their capital year-to-date, but 2,900 employees will also lose their jobs unfortunately as the company plans to close 59 of its stores coast-to-coast while it attempts to restructure.

The demise of brick and mortar retail is nothing new. Sears Canada isn’t the first to need help, and they surely won’t be the last. Target Canada opened its first Canadian store in March 2013 but promptly closed their doors by April 2015 after its own disastrous experience north of the border. The trend is equally as pronounced in the United States. Earlier this year, Macy’s announced it would close at least 100 of its 728 stores after stomaching two years of declining same-store sales results.

Some have suggested that the less-than-robust economic environment and weak consumer spending is to blame, but the problems facing brick and mortar retail department stores are far more structural than transitory.

Online purchases have proliferated at the expense of brick and mortar sales. Last year, online sales grew by 14% compared to the year before. Expectations are for another 11% growth this year. While online buying currently commands a mere 11% share of the retail sales market, FTI Consulting projects that 21% of all dollars spent in 2020 will be made online.

While the valuation multiples appear compelling on several brick and mortar retail stocks, we believe these represent value traps that trade at cheap prices for good reason. Our Investment Committee looks beyond quantitative data as we screen for stock ideas. This involves reviewing the “Risk Factors” enclosed in each Annual Report, listening to quarterly conference calls, and analyzing 10 years of historical financial data to assess a company’s performance in good times and bad. We believe further declines in the sector are probable and have no position in the brick and mortar department store sector for clients.


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