Last week, bond-rating agency Fitch reported that struggling retailer Sears Holdings Corp (NASDAQ:SHLD) would very likely be forced to reorganize — a softer word for “declare bankruptcy” — within the next year or two. The large debt load of SHLD stock, Fitch believes, significantly increases the risk of default. With Fitch’s warning, it’s believed that its Kmart division is on the verge of shuttering.
Sears CEO (and major SHLD shareholder) quickly rejected the idea:
“I can tell you that there are no plans and there have never been any plans to close the Kmart format. In fact, we’ve been working hard to make Kmart a more fun, engaging place to shop, powered by our integrated retail innovations and Shop Your Way.”
And as it turns out, if the latest headlines are a hint of what’s to come, Lampert will indeed be able to prop Kmart for at least another year. As of yesterday, Sears is said to be in talks with potential buyers for its Craftsman brand, which may net $2 billion for the retailer.
Sears shares jumped as much as 20% on Tuesday’s news before peeling back to a more muted 6% gain. Still, a 6% gain is compelling, and such a cash infusion will indeed provide the company some much-needed liquidity.
None of it changes the fact, however, that owning equity in Sears remains unwise, simply because none of the other fundraising activities Sears has employed over the course of nearly a decade have done anything to turn the business around. In fact, it’s getting worse.
Sears Is a Lost Cause
Were it any other CEO or any other company, that $2 billion in cash might be viewed as the seed money for a turnaround effort. For Lampert and Sears, though, it’s difficult to think spending that cash is anything but throwing away good money after bad.
For perspective, since 2012, SHLD has sold nearly $4 billion worth of assets and raised roughly another $1 billion through conventional financing activities. Loans, mostly. Yet, since 2012, the top line has fallen from $41 billion to $24 billion over the past year. Analysts (the few who are still following SHLD) are looking for the top line to continue deteriorating the rest of this year.
Sears isn’t shrinking its way to success either. The retailer has lost $1.9 billion over the course of the past four reported quarters, and Fitch believes SHLD will burn through somewhere between $1.6 billion and $1.8 billion in cash this year on the heels of a $1 billion-plus Ebitda loss.
Indeed, Sears’ top line has fallen every year since 2007, and the company hasn’t been profitable on a full-year basis since 2012, even though “transformation” talk has been a common corporate talking point since 2012. So far, none of the transformation work has meant sales growth or profitability.
And let that sink in: An extra $5 billion worth of funding since 2012, and not only has the bleeding not stopped, it’s become even more profuse.
Turnarounds take time. They shouldn’t, however, take this much time and money.
Bottom Line for Sears
Bids for the Craftsman brand are due by the end of this month, though bear in mind it’s not just Craftsman that Sears has put on the auction block. Kenmore and DieHard are also for sale, and would likely bring comparable figures if a suitor was willing to pull the trigger.
That’s a big if, however. All three brand names were put up for sale in May, and this is the first serious suggestion that a buyer was interested. And, there’s no guarantee a deal will get done.
One potential impasse to a sale is the possibility that while the names are recognizable, they don’t necessarily prompt purchases. Sears has been licensing all three names since 2012, yet sales have continued to shrink.
Even if Sears successfully unloads Craftsman, so what? It’s still unable to grow sales corporately or on a same-store sales basis. Taking the wholly-owned Craftsman revenue out of the mix will only exacerbate the company’s current cash flow problems.
Sears doesn’t have an organizational problem or a balance sheet problem. It’s got a retailing problem — it doesn’t know how to sell the right merchandise at the right price in the right way at the right place.
Shedding the Craftsman brand as well as the DieHard and Kenmore brands doesn’t solve the problem. Unless something miraculous happens soon, it merely delays the inevitable collapse.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
