Technically speaking, it was a “beat.” Sears Holdings Corp (NASDAQ:SHLD) did fare better than expected last quarter, in terms of operating earnings and revenue. In a more practical sense, however, it’s tough to see Sears stock as anything but doomed.
For its third fiscal quarter of 2016, Sears reported a GAAP loss of $6.99 per share, and an adjusted loss of $3.11 per share (worse than the year-ago period’s $2.86), on revenue of $5 billion (down from $5.75 billion).
Analysts — the few who still bother following it — were calling for am adjusted loss of $4.06 per share of SHLD stock and revenue of $4.95 billion.
The “not as bad as expected” mindset, however, will eventually give way to the notion that there’s not a glimmer of hope for the company.
Indeed, the initial, accelerating weakness from Sears stock this morning says the market is anything but impressed.
Another Sears Earnings Disaster
Sears stock holders were rightfully concerned going into the Q3 announcement. In late November, the retailer lost not one but two key executives, suspiciously right before what’s been considered by some to be a pivotal accounting period. Executive VP Jeffrey Balagna as well as President and Chief Member Officer Joelle Maher are now gone, leaving right in the middle of the all-important holiday shopping season.
While there’s no ideal time to leave a job, to leave a retailer in a lurch during the most important two-month stretch of the year is telling.
The fact that roughly a dozen Kmart and Sears stores are closing this month of all months is another red flag.
Sears’ woes go well beyond its most recent red flags, however. Indeed, Sears’ revenue and earnings peaked in 2007. The company is now in the midst of its tenth straight year of deteriorating revenue, and hasn’t turned a profit since 2012.
Some of the top line’s demise can be attributed to the fact that Sears has been lopping of pieces of itself to raise much-needed funds. In 2011, it spun off Orchard Supply Hardware. In 2012, it sold Sears Hometown and Outlet Stores Inc (NASDAQ:SHOS). In 2014, it let go of its Lands’ End, Inc. (NASDAQ:LE) division.
Still, although the plan was to shrink its way to success by investing those sale proceeds in the growth of the organization’s remaining pieces, CEO Eddie Lampert — hedge fund manager and major owner of Sears stock — has yet to offer any real evidence that a turnaround is taking hold. Same-store sales have fallen every quarter since the second quarter of 2010, that streak continuing through last quarter. Kmart’s same-store sales were down 4.4%, and Sears comparable-store sales were off by 10%.
None of this prevented Lampert from banging the success drum, however.
Case in point: For some relatively recent quarters, Lampert cheered the fact that the EBITDA loss was shrinking year-over-year. More critical analysis paints a less-optimistic picture, however.
As a percentage of total sales, the EBITDA loss has either been roughly flat, or even bigger year-over-year. Last quarter’s adjusted EBITDA loss was a negative $375 million versus a negative $332 million for the same quarter a year ago. Those EBITDA figures reflect rent payments the retailer makes to Seritage Growth Properties (NYSE:SRG) … rent payments that didn’t exist before the company sold a wide swath of its stores to the REIT. As a percent of revenue, the EBITDA loss expanded from 5.8% to 7.5%.
Sears isn’t making progress.
No, Really … It’s Bleeding Pretty Bad
For better or worse, Sears still has some remaining marketable assets it could sell to keep itself propped up. Fitch estimates there’s $2.4 billion worth of marketable real estate it could tap into, and CFO Jason M. Hollar even remarked:
“We will continue to take actions to generate liquidity, adjust our overall capital structure, and manage our business while meeting all of our financial obligations. Actions may include additional expense reductions, financing transactions and asset monetization including exploring alternatives for our Kenmore, Craftsman and DieHard brands, our Sears Home Services business and our real estate portfolio.”
Sears may well be forced into making that move. SHLD ended last quarter with $258 million in the bank (down from $294 million a year earlier), and a back-breaking total debt of $3.7 billion. It lost $333 million quarter to boot, and it’s unlikely the company will be able to offset any of its losses for the past three quarters with a strong fourth quarter showing. Even with the benefit of holiday spending, Sears lost $580 million in the fourth quarter of last year.
And the cash crunch is apt to get worse beginning in July. That’s when all of Sears’ secured loans and bonds will start to mature. They’ll all meet their maturity within three years after that. SHLD doesn’t have the cash it needs to service that debt, and creditors/lenders are increasingly hesitant to accommodate the failing retailer.
Along those same lines, some of the company’s vendors are also scaling back on the amount of inventory they’re allowing Sears to have, fearful they may not get paid for it.
Bottom Line for Sears Stock
None of this is new to investors who’ve kept close tabs on the saga of Sears stock of late. The stock, by the way, is down 40% for the past 12 months, and off more than 90% since its 2007 peak that coincided with the retailer’s sales peak.
On the other hand, what is new is how the end may finally be in sight.
Marc Wagman, Arthur J. Gallagher & Co. Executive Vice President of Trade Credit and Political Risk, recently commented that its suppliers’ concerns about the retailer’s financial health have “really accelerated in the last 6 to 12 months.” The observation jibes with Fitch’s assessment that the risk of a Sears bankruptcy will be high for the next one to two years.
That’s a generous assessment.
Owning Sears stock remains little more than a bet on a generous buyout offer materializing in the near future. But even that is a bad bet.
Most would-be suitors are likely waiting for a bankruptcy filing to take shape, so they can buy what’s left of Sears for a song.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.