For those who’ve been following the saga/demise of Sears Holdings (SHLD) for any length of time at all, today’s report of last quarter’s results isn’t the least bit surprising … year-over-year sales fell (again), and the struggling retailer posted another loss.
CEO and hedge-fund manager — not to mention major SHLD shareholder — Eddie Lampert put his usual positive spin on the matter, of course, touting the fact that Sears Holdings has “made meaningful progress in our transformation and reported a fifth consecutive quarter of improved year-over-year results.”
Once again, though, Lampert raises questions as to his definition of the words “meaningful,” “progress”, and “improved.”
The reality it, Sears is still endeavoring to shrink its way to success, and owners of Sears stock are paying the price for the fatal execution of the strategy. The end is nearing.
Sears Holdings Q3 Results
In its third fiscal quarter of the year, Sears posted a loss of $454 million — or $2.86 per share of SHLD — on sales of $5.75 billion.
Technically speaking, the total loss was smaller than the $548 million the iconic retailer lost in the third quarter of the prior year. On a per-share basis, last quarter’s loss was better than the operating loss of $2.71 booked in the comparable quarter from a year earlier. The top line even rolled in better than the expected $5.51 billion.
That’s where the upside ends, however.
While sales topped estimates, total revenue was down a stunning 20% from year-ago levels. A decent-sized chunk of that lull can be chalked up to the 38 stores the company has closed since its fiscal year began in February. It doesn’t account for all of the of the $1.4 billion decline in overall revenue, though, nor does it excuse miserable same-store sales results. Same-store sales fell 7.5% for Kmart, and were off by 9.6% for Sears stores.
Sears Holdings finished the quarter with $294 million in cash, down from the $1.8 billion it had in the bank at the end of the second quarter; much of that cash was used to remove approximately $2 billion worth of pension liabilities from the books.
Reality Check for Owners of SHLD
Broadly speaking, Eddie Lampert’s “transformation” plans aren’t working. They haven’t been working for a long while, but with each passing quarter that reality becomes clearer. The previous quarter’s results were no exception to that trend.
Yes, as Lampert pointed out to SHLD shareholders in his comments that accompanied the Q3 results, EBITDA improved for a fifth straight quarter, reaching a loss of only $280 million. That compares favorably to the EBITDA loss of $296 million logged for the third quarter a year earlier. The catch: The EBITDA loss should be shrinking, as the retailer’s capacity to create EBITDA loss is shrinking.
For perspective, last quarter’s EBITDA loss as a percentage of sales was 4.9%. In the second quarter of this year, the EBITDA loss was 3.2% of sales. In the third quarter of the prior fiscal year, the EBITDA loss totaled 4.1% of sales.
It’s a trend that’s pointed in the wrong direction, raising one enormous question … what’s the end game? Based on its current trajectory, EBITDA will never turn positive as long as revenue is shrinking. As long as the company is selling stores, though, revenue will never rise.
That’s a vicious catch-22 for SHLD owners.
Bottom Line for Sears Stock
Sadly, none of this is new “news” for investors. It just hammers home the reality Sears may be beyond salvaging, particularly now that it’s getting low on cash.
It does have $963 million worth of liquidity it can tap into, if need be. That’s enough to get it through about two more quarters — maybe three — at its current burn rate. After that it will have to tap investors and/or creditors again, and/or sell more real estate.
It’s unlikely lenders and investors will be lining up to fork over good money after bad … at least not in palatable terms. More asset sales could work, but that has hardly proven beneficial yet. If anything, it undermines its ability to drive much-needed revenue or a much-needed positive EBITDA. It would simply move liabilities around, postponing the inevitable end to this dance, be it bankruptcy or buyout.
SHLD shares aren’t apt to become investment-worthy in the meantime.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.