Sears Holding Corp (NASDAQ:SHLD) announced the “next phase of its strategic transformation” in a news release out Friday, and SHLD stock is soaring 30% higher in response.
A restructuring promises $1 billion in cost cuts, in part through the closure of 150 stores. Sears also is going to “more closely integrate our Sears and Kmart operations.” The company has raised cash just through the first six weeks of the year, and plans to sell another $1 billion in real estate this year.
It sounds good for Sears stock, to be sure — but it likely does little for SHLD in the long term. Sears Holdings still appears unlikely to be profitable in fiscal 2017 (ending January). In fact, Sears seems unlikely to be profitable ever.
This morning’s news squeezed the shorts, and the plans may buy Sears more time. But “more time” isn’t a reason to buy SHLD stock, and the fact remains that today’s announcements won’t save Sears as a company.
Sears Is U-G-L-Y
Sears is in such trouble that $1 billion savings and another billion in real estate proceeds probably isn’t enough. SHLD stock has been plummeting of late in part due to bankruptcy fears.
Those fears shouldn’t be assuaged by this morning’s news.
In the update, Sears Holdings gave preliminary figures for its fourth quarter. The company saw same-stores decline 10.3% in total, with Sears sales down 12%-plus and Kmart comps falling over 8%. Adjusted EBITDA was -$61 million. In other words, Sears Holdings lost money in the holiday quarter — the biggest quarter of the year for retailers — even discounting depreciation, one-time expenses, and interest.
For the year, then, SHLD will have posted a loss over $800 million. The closure of 150 stores — which themselves lost about $60 million — helps. So does the $1 billion in cost cuts. But FY17 EBITDA still would have been positive by only about $250 million. Yet Sears paid about $400 million in interest expense last year. It spent likely over $120 million on capital expenditures — which is likely far too little, given the condition of so many Sears and Kmart stores.
The Sears business — even with the cost-cutting and store closures — still would burn around $270 million in cash at least in FY17, if the business was stable. But, of course, the business isn’t stable. Same-store sales are collapsing.
There aren’t enough cost cuts in this world to offset that problem.
Asset Sales Don’t Offset Sears’ Debt
Sears already has announced a plan to sell the Craftsman brand for $775 million, including an upfront payment of $525 million. It plans to sell “at least” $1 billion in real estate. The DieHard and Kenmore brands are on the block as well.
SHLD said this morning it was targeting debt and pension obligations to come down by about $1.5 billion this year. The problem is that Sears has about $4.2 billion in debt and capital leases, and another $2 billion owed on its pension.
In other words, Sears only will get about a quarter of the way to getting out from under its obligations — and barely a third even ignoring the pension expense.
What’s left at this point? Most of the company’s properties that aren’t targeted for sale are backing some of that debt; after this year, there’s little left to sell. DieHard and Kenmore have been on the market since May, with little apparent interest.
The moves do buy some time for Sears stock, given that the company had $1.2 billion in borrowings due over the 12 twelve months after Q3.
But to what end?
A Narrow Path for SHLD Stock
Buying Sears more time is only a good thing if CEO Eddie Lampert has a plan for a turnaround, which is unlikely.
Cutting in-store investments hurts sales. Higher interest rates might ease the pension obligation, since the assets should (in theory) get a better return. But those rates also will increase borrowing costs for current debt (60% of Sears debt is variable-rate) and any future issues.
Lower debt will help interest expense — but declines in the business likely offset those lower payments in terms of cash flow. Even with cost cuts, Sears still seems to be a business that will burn several hundred million dollars in cash this year.
And real estate alone isn’t enough. SHLD stock has a negative book value — about -$6 billion as of the end of Q3. Even accepting that real estate may be worth more in the market than on the books, as often the case, the gap isn’t $6 billion. And at current prices, Sears still is worth about $750 million.
Sears Holdings’ plan for fiscal 2017 is nothing more than rearranging debt chairs on the Titanic. Or perhaps, more accurately, it’s plugging one hole of many.
But Sears just doesn’t have enough thumbs to save this ship.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.