By Jeff Reeves, Editor, InvestorPlace.com and The Slant
Sears Holdings (NASDAQ:SHLD) has been a dumpster fire for a while now, with something like 18 consecutive quarters of same-store sales declines. I simply didn’t understand how the company could turn around, and I don’t see this big-box store existing in a few years.
Yes, hedgie Eddie Lampert has deep pockets and now carte blanche as CEO. And yes, he is remarkably in-the-money according to a Bloomberg analysis; his cost basis is apparently around $16 a share for its SHLD stock. But to me that smacks of an incentive to stay on the same troubled road rather than a kick in the pants to truly fix Sears.
Losses are persistent and substantial despite cost-cutting. Since 2005, Lampert has helped Sears shutter more than 170 stores and fire more than 40,000 workers, but it hasn’t resulted in a penny of profits. Furthermore, all the merchandise at closed stores has provided a nice cash bump as inventories are liquidated.
Then there are the tarnished Craftsman tools and Kenmore appliance brands, aging storefronts, poor e-commerce and a shopping public that is reluctant at best to step foot in a Sears or Kmart, considering the alternatives.
Worst of all, Sears is dangerously close to “junk” debt designation, with a CCC+ rating from Standard & Poor’s. Granted, Sears got an upgrade last summer from “negative” to “stable,” but borrowing costs are still very steep. For instance, a recent bond auction included notes due October 2018 that yielded 6.625% even in this rock-bottom interest-rate environment. What will happen to Sears if it continues to bleed cash two or three years from now when interest rates rise and it has to pay much more to borrow?
Much has been made of Lampert’s love of Sears’ real estate holdings above any retail operations — and yes, substantial property holdings for the corporation could be cashed out for a substantial sum or spun out in a REIT if you believe some of the crazy chatter over the last two years.
But the bottom line is still the bottom line, and SHLD as a big-box retailer under the Kmart and Sears brand names may be doomed in the long-term.
At the time of publication, Reeves had no positions in the securities mentioned.