Sears Holdings Corp (NASDAQ:SHLD) rallied last week on news of fresh cash infusions. But investors should not be drawn in by this speculative rally in SHLD stock.
Sears has had plenty of time to fix its situation. After more than five years of watching revenues get slashed, and watching Sears stock lose as much as 90% of its value, it’s pretty clear that the company cannot execute a turnaround. Sears’ third quarter featured a $748 million loss compared to a $454 million loss in 2015. Comparable-store sales for Sears fell 10% while Kmart stores suffered a 4.4% decline.
These are not the kinds of numbers you expect to see in a “turnaround.”
On Dec. 28, the company announced it was closing 30 more Sears/Kmart stores. These locations will be in addition to closures and aggressive streamlining that have already taken place. This week, SHLD announced an additional 150 store closures.
Store levels have declined from 4,000 in 2011 to 1,500 today, and profitability still isn’t there. If closing nearly two-thirds of your stores hasn’t weeded out the “underperformers,” there’s a problem that closures won’t solve.
E-Commerce Is a Problem
One of Sears’ biggest issues is inherent to the industry in which it operates. Large department stores like SHLD are under fire from e-commerce commerce portals, specifically Amazon.com, Inc. (NASDAQ:AMZN).
Macy’s Inc (NYSE:M), which recently was considered a healthy company within the industry, is closing 15% of its stores and recently announced a 2.1% decline in November/December sales relative to a year ago. Despite the fact that Macy’s recorded a double-digit gain in its online business, expected diluted earnings for the year were reduced to a range of $2.95-$3.10 from $3.15-$3.40.J C Penney Company Inc (NYSE:JCP) has had its own problems.
It’s no coincidence that while all these physical stores are suffering, Amazon is throwing up big numbers. While I don’t believe physical stores will ever disappear, e-commerce has definitely eaten their their market share. AMZN has more than doubled its revenue since 2011 while Macy’s has battled just to maintain growth (succeeding on the revenue side, but not in earnings). The National Retail Federation forecasts that non-store sales growth (an estimated 7%-10%) for the holiday season will drastically outpace overall holiday sales growth (3.4% estimate).
This paints a very grim picture for those that aren’t well-equipped to stave off the march of e-commerce — including Sears.
How Long Can SHLD Last?
As of the third quarter, Sears has $3.7 billion in long-term debt. SHLD stock holders are increasingly concerned about how SHLD will service that debt in the next year. This will prove especially difficult considering how Sears loses capital. Since last July, the firm has burned through 85% of its cash. The $258 million on hand won’t even come close to covering the fourth quarter’s estimated losses of $2.91 per share. That will equate to $311.37 million based on Q3 diluted shares outstanding.
Without the cash to cover those projected losses, how can SHLD possibly service its debt obligations?
This leads us to Sears’ new round of financing moves.
Under the conditions of Sears’ $1.97 billion revolving credit facility, the retailer was able to borrow about $174 million more. That wasn’t enough,so Sears CEO Eddie Lampert used affiliates of his own ESL Investments to put together financing.
The new $200 million loan can technically be extended by an additional $300 million credit line if needed, but that only leaves the company with $1.03 billion of current and “available” cash. If the final quarter does involve another big loss (seems likely) then they’re down to $718.63 million for 2017 ($1.03 billion – $311.37 million, if you use estimates).
In the same week, Sears announced it secured another loan from ESL Investments affiliates, backed by 46 mortgaged properties, in the value of $500 million. This transaction should bring SHLD’s available capital to $2.118 billion.
Moody’s analyst Christina Boni estimates the firm will need to raise $1.5 billion to survive 2017.