In 1975, it was “Where America Shops.” Today, Sears Holdings Corp (NASDAQ:SHLD) is barely surviving. You know things aren’t going well when a large company’s quarterly highlights include receiving an award for energy efficiency. SHLD stock has lost more than half its value in the past 12 months.
Such is the current state of affairs at Sears.
First quarter (ended April 29) sales fell a sharp 20.2% to $4.3 billion. This is nothing new — sales have eroded rather steadily for decades now. Combined same-store sales fell 11.9% across the namesake store base and Kmart. Specifically, Domestic comps fell 12.4% at Sears stores and 11.2% at Kmart. Store closings accounted for $557 million of the roughly $1 billion total quarterly sales drop.
Still, despite the horrible top-line trends, Sears actually reported positive earnings of $244 million. Cost-cutting efforts appear to be helping somewhat and are targeted to save $1.25 billion annually. Credit facilities were extended on an asset-based credit facility and amendments altered covenants to improve working capital liquidity. Not the ideal type of company news flow.
If the above sounds alarming – it is. There are serious doubts about Sears staying in business. Recent financial filings have talked about concerns of it continuing as a going concern — or namely, staying out of bankruptcy.
The question now is, just how aggressively bearish should you get with SHLD stock?
Asset Sell-Off
Sears believes it can get additional cash out of its real estate. During its first quarter earnings call management talked about being able to sell real estate and raise around $1 billion. The company still owns 350 stores, so there is some room to offset operating losses and interest expense from $3.2 billion in total long-term debt.
Selling off assets to survive is not a new strategy at Sears. In 2015, it squeezed $429 million from three separate real estate transactions. Deals with GGP Inc (NYSE:GGP), Simon Property Group Inc (NYSE:SPG) and Macerich Co (NYSE:MAC) provided the cash and 50% stakes in each of the joint ventures (JVs) it set up in those deals.
Sears more recently sold off its Craftsman tool brand to Stanley Black & Decker, Inc. (NYSE:SWK) for $525 million cash. It will also get a cut of sales for the next 15 years. It still owns the Kenmore and DieHard brands, which likely have value and will be sold off at some point.
The company also recently created a new real estate investment trust (REIT) to house certain real estate. Seritage Growth Properties (NYSE:SRG) owns 235 properties — mostly Sears and Kmart sites — and has stakes in 31 other properties via the JVs.
Sears still owns 12% of Sears Canada Inc. (NASDAQ:SRSC), which recently sported a market capitalization of $107 million but just this week also raised doubts about its going concern status. Again, usually an early warning sign that bankruptcy could happen at any time.
Bottom Line on SHLD Stock
Analysts (well, the two that still follow the stock) expect Sears to lose close to $12 per share this year and a similar amount in 2018. They have sell recommendations on the stock and it is hard to argue with them.
The stock market’s general bias is upward. As a result, I don’t usually consider shorting a stock. But if forced to come up with an investment conclusion on Sears, I just don’t see it surviving in its current form.
With the benefit of perfect hindsight, it should have closed up shop (literally) years ago and given shareholders the proceeds from selling off valuable brands (Craftsman Tools, Lands’ End, Kenmore), real estate and any leases that more-viable retailers could have benefited from.
The backing of billionaire Eddie Lampert, who owns about half of Sears’ outstanding stock, remains a wild card. He has been and will very likely continue to be a huge supporter of the company, and has the financial wherewithal to help keep it afloat.
I would be loath to bet against him by shorting SHLD stock. Any good news tends to send the stock up double digits in short order, largely because of other short sellers panicking their way to the exits.
The best bet may be to stay firmly on the sidelines on this one, both as an investor and a shopper. Sears’ best days are behind it, and that is unlikely to change any time soon.
As of this writing, Ryan Fuhrmann did not own any shares of any company mentioned in this article.
