Sears Holdings (SHLD) said early on Monday that it’s likely to post a profit when it reports its official results for the quarter that ended on Aug. 1. This is obviously welcome news for anyone struggling with their stake in troubled retailer.
The bad news for owners of Sears stock, however, is that this profit isn’t built to last, as Sears’ retailing business continues to deteriorate.
None of this comes as a major surprise, of course. Owners of Sears stock have watched the organization self-destruct over the course of eight years.
Indeed, the only thing that may come as a surprise to SHLD shareholders at this point is why somebody has yet to put this zombie out of its misery.
Sears’ Grim Earnings Outlook
The figures are only preliminary right now, but when the SEC-filed numbers are submitted a month or so from now, Sears Holdings believes it will report a net profit of somewhere between $155 million and $205 million. Those figures translate into a profit of $1.46 and $1.92 per share of Sears stock.
For a company that is losing money as if it were its religion, this looks like the kind of step that shareholders have waited years to see. Unfortunately, it’s going to take a lot more than a faux profit to fix what ails Sears.
The only reason SHLD will be able to post any sort of second-quarter profit at all is by virtue of the sale of several of its stores to real estate investment trust Seritage Growth Properties (SRG). The deal, completed in early July, transferred 235 stores to the newly developed REIT, for proceeds of about $2.7 billion. Of that, Sears Holdings will realize a profit of $1.4 billion, $510 million of which was booked in the second quarter.
Without the one-time gain, Sears would have lost between $305 million and $355 million in its second quarter, on an operational basis. For perspective, Sears Holdings lost $303 million in the first quarter of 2015, and $573 million in the Q2 2014.
Redefining the Meaning of “Improvement”
The news release regarding the company’s preliminary second-quarter guidance (posted on Monday) further noted continued improvement in Sears EBITDA. For the second quarter, the retailer now believes it will post an EBITDA loss of somewhere between $189 million and $249 million.
Still, it’s technically an improvement for Sears, which saw an EBITDA loss of $313 million in the comparable quarter of 2014. But for Sears, it’s hardly a matter of doing more profitable business, but rather a matter of shrinking its capacity to book losses.
On a same-store sales basis, the average Sears store open for at least a year posted a 10.6% dip in year-over-year revenue. The typical K-Mart saw a 6.9% decline in year-over-year sales in the second quarter. Those figures exclude stores that were outright closed in the meantime, which clearly saw a 100% plunge in sales.
As a percentage of total revenue, Sears’ EBITDA loss was less prominent in the first quarter than in the quarter before that. We may see the same metric rise again once Q2’s total sales figure is divulged.
Here We Go
With all of that being said, the EBITDA improvement or lack thereof for the second quarter may prove largely irrelevant to owners of Sears stock in the grand scheme of things, since the figure does not factor in a major new expense the company’s stores must shoulder — rent payments to Seritage.
It’s a detail from the sale of its properties to Seritage that’s been glossed over, but as part of that deal Sears Holdings must now pay rent to Seritage … rent that it wasn’t previously paying to anyone, since it owned the real estate in question.
What was unclear before the deal is the approximate amount of these lease payments. Now we have some clarity. Per the company’s preliminary figures posted on Monday morning, Q2’s estimated EBITDA excludes $26 million in rent expenses.
If the sale to Seritage Growth Properties was completed in early July, we can assume the $26 million figure was for one month’s rent. Extrapolating that figure out to a full year, Sears will now need to cough up an additional $300 million or so to fulfill its yearly lease obligations.
That’s not chump change to a struggling retailer like Sears, and it’s now a perpetual annual obligation.
Bottom Line for Sears Stock
The optimists holding onto Sears stock in blind faith can take solace in the $1.8 billion in cash the company says it will have as of the end of Q2. They’ll argue that’s the seed money CEO Eddie Lampert needs to finalize Sears’ turnaround.
But to be blunt, that’s just wishful thinking.
Reality: Lampert has been working on a turnaround (a “transformation,” in his words) since 2009, and none of his efforts have gain traction. In fact, Sears has lost $7.1 billion over the past four fiscal years, and there’s no assurance the $1.8 billion in the bank right now will be any better spent than any of the rest has been.
The fact that the highlight of the upcoming Sears earnings report will only be a slightly smaller EBITDA loss speaks volumes about how mortally wounded the retailer is.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.