Kudos and congrats to the Sears Holdings Corp (NASDAQ:SHLD) shareholders who had the guts — and foresight — to step into SHLD stock in front of its Q4 report on March 9. Shares jumped 15% on that news, and perhaps more surprisingly, they’ve held their ground since.
Well, until today, anyway.
SHLD stock is down 15% on Wednesday following an announcement that proves what many have been saying for some time: It’s a walking zombie, more than Macy’s Inc (NYSE:M) and other struggling retailers, whether or not Sears or anyone else cared to acknowledge it.
Well, anyone who bought into Sears stock between early February and March 8 may want to walk away with their profits while they can. The end is nigh.
Sears acknowledged it.
What About That ‘Positive Momentum’?
If you’re reading this, then you’re likely already aware Sears raised a red flag Tuesday evening when it added the dreaded boilerplate “going concern” language to its annual report.
Specifically, it said:
“Our historical operating results indicate substantial doubt exists related to the company’s ability to continue as a going concern.”
That is a far cry from the optimism the company’s chiefs were touting just a couple of weeks ago in its fourth-quarter wrap-up. That’s when CEO Eddie Lampert commented:
“We delivered significant Adjusted EBITDA improvement in the fourth quarter, reflecting our firm focus on profitability to offset ongoing revenue pressures. Building on this positive momentum, we are taking decisive actions to become a more agile and competitive retailer with a clear path toward profitability.”
Were investors duped, being led to believe Sears was en route to a turnaround only to be sucker-punched by the “going concern” warning?
Respectfully to … well, anyone even vaguely aware of the Sears saga: If you didn’t recognize Sears was battered beyond repair until Tuesday’s SEC filing was made public, then you simply haven’t been paying attention.
It does beg the question, though: If EBITDA is getting better, how is the company’s continued existence less certain now than it was a year ago? Answer: As we’ve seen (and heard) before, Lampert makes creative use of the words “significant” and “improvement,” as well as the phrase “positive momentum.”
New owners of SHLD stock may want to buckle up, or dive out of the car.
Take a Closer Look
I’m a firm believer in the idea that a picture is worth a thousand words.
So, rather than rant, I’ll just let a look at a portion of the Sears’ Q4 report tell a key part of the story — the adjusted EBITDA reconciliation report. (The circles are mine.)
What does it all mean?
Had it not been for an additional $206 million in backed-out impairment charges and an additional $140 million closed-store and severance costs removes from expenses, Sears’ adjusted EBITDA loss would have $201 million for the prior quarter, versus the $137 million EBITDA loss booked in the fourth quarter a year earlier.
It’s not an accusation of accounting shenanigans; Sears accounted for everything the right way. It’s simply an explanation. The crux of the reason the EBITDA tally looked better is only because the retailer is closing stores and taking impairment charges that ultimately get added back to the EBITDA total.
That’s not growth, and that’s not progress.
In that regard, Sears’ store closures almost make sense, until you go back to the top of the table and see the operational net loss is getting bigger. See, all those store closings (1) wipe away the company’s much-needed scale, and (2) erode SHLD’s capacity to generate revenue to even give it a shot at turning some of it into a profit.
Bottom Line for SHLD Stock
The moral of the story is, Lampert can tout the EBITDA progress all he wants, but it’s still a meaningless data point for Sears shareholders. Imagine that kind of year-over-year operational deterioration you saw above for every quarter for the past several years.
That’s Sears, and that has been going on for a while.
Sears needs to sell more merchandise to more customers at the right price. There’s only so much financial engineering that can be done with a struggling retailer to change that reality. Culling another batch of stores isn’t a step in the right direction, even if there’s an EBITDA benefit … even if those stores are bleeding money. Those units need to be fixed rather than discarded.
Barring that, Lampert just needs to bite the bullet and sell the whole shebang, putting the iconic retailer out of its misery for good, and ending the drama in SHLD stock we all know is going to end ugly at some point. At least then, struggling rival J C Penney Company Inc (NYSE:JCP) might be salvaged.
Of course, it’s not as if any of this is news to anyone who has looked beyond the headlines. The thing most surprising about the “going concern” chatter Tuesday evening was that anyone who has been watching closely was actually surprised.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
