The challenge of any brick-and-mortar retail chain at this juncture in history is best summarized in how my kids behave. When they ask, “Dad, can we buy an X?” and I say, “sure,” within moments they are logged onto Amazon (AMZN). In my day, I would have to wait in anticipation before we were next in the car and in the area of whatever store sold X. This is but one reason — but a primary one — why Sears Holdings (SHLD) is destined for the junk heap, and why the time has come to short SHLD stock.
The simple truth is that you can now buy anything on Amazon. You can do it immediately, have it shipped to your door, and almost always get it for the same price at a storefront. More than likely, it will cost less. Outside of clothes shopping, and perhaps things like appliances or other objects you want to get an in-person glance at, there is simply no reason to go to a store.
And just so you know that I’m not picking on SHLD stock, I feel the same way about Best Buy (BBY) and JCPenney (JCP).
Sears, however, is a problem unto itself.
Have you been to one of the stores lately? They feel run-down. They feel pre-Amazon. They feel old. They are old.
If SHLD stock is ever going to recover from the roughly 70% drubbing it has sustained since its 2010 peak, the company must innovate. It must figure out a way to bring people into its stores when, quite frankly, there’s no reason to. Creating a loyalty program, as Sears did, is not innovation — it’s the norm — and thus it is not going to bring people crashing into the stores in record numbers.
As for more evidence that SHLD stock is going down the hole, Sears just announced that it is closing its flagship Chicago store. This store sits in a busy urban shopping district. If you can’t attract customers in that kind of high-traffic area, you are dead.
Sears is a relic of the past, and so is SHLD stock. The question is not if SHLD will go bankrupt, but when. So let’s take a look at the financials and see if we can get an idea of what the future may hold for Sears stock.
Revenue for FY10, FY11, and FY12 was $42.66 billion, $41.57 billion and $39.85 billion, respectively. Through the first nine months of fiscal 2013, the company has scored only $25.6 billion, and analysts expect an overall 9% drop in revenue for the year. The resulting earnings for SHLD? A tiny profit of $133 million in FY10, a $2.5 billion loss in FY11 (backing out non-recurring items), and a $600 million loss in FY12. Meanwhile, SHLD has already lost more than a billion dollars in the first nine months of FY13, and expects a $250 million to $360 million loss in Q4.
Free cash flow has been negative throughout this period as well, at -$300 million in FY10, -$707 million in FY11, -$681 million in FY12 and a whopping -$1.88 billion for the first three quarters of FY13. Now, the fourth quarter is traditionally much better, so for that full-year number, I expect Sears’ negative free cash flow to come around a billion dollars.
That takes us to the balance sheet. The company has $600 million in cash offset by $2.86 billion in long-term debt. And that debt is priced very high — at about 13.7% when you look at the interest paid in FY12 on the year-end long-term debt balance. Add in current liabilities of almost $10 billion, and I don’t think Sears is long for this world.
Yes, I know all about the alleged real estate value in SHLD stock. The problem with this thought is that if Sears sells off its real estate, it leaves less and less of a retail operation — it’s certainly doable, but most likely would result in volatile swings of value and certainly no long-term sustainability.
It also isn’t so easy to just lay off thousands of employees and cancel leases, and sell existing inventory.
Most importantly, selling off real estate to shore up the balance sheet doesn’t change the initial premise of this article: That Sears means little as an operating company anymore because as a retail operation, it’s toast.
I went short Tuesday. Shares were hard to borrow, and I had to pony an 8% annual interest rate on the borrowing.
Fine by me.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at pdlcapital66@gmail.com and follow his tweets @ichabodscranium.
