Eddie Lampert and the entire Sears Holdings Corp (NASDAQ:SHLD) turnaround reminds me of the kid in school who blamed the dog for eating his or her homework instead of admitting that it didn’t get done.
Lampert’s May 10 interview with Chicago Tribune reporter Lauren Zumbach is a must-read for anyone long SHLD stock. It’s as if the Sears CEO is channeling the Donald Trump administration’s penchant for plausible deniability.
Retail is undergoing significant change at the moment and department stores of all price points, not just Sears, are having a tough time adapting to the new playing field. Fair enough.
Is Lampert Out of Touch?
In the Chicago Tribune article, Lampert oddly is about as conciliatory as he’s ever been, but he still comes off sounding like a spoiled child.
When asked by Zumbach if Sears was having troubles dealing with supplies, according to the article:
“We’re fighting like hell to change the way people do business with us,” Lampert responded. “And my view is, we’re the customer. If you’re a vendor, and want to do business with us, then you have to treat us like a customer, you don’t treat us like a pariah.”
Any investor reading that last sentence ought to run away from SHLD stock as fast as they possibly can. These are not the words of a man fully in control of the situation.
InvestorPlace contributor Richard Saintvilus suggested in early May that Sears stock was rising primarily as a result of shorts covering their positions, not anything positive on the turnaround front. He advised investors to stay away until Sears delivers a clearer growth strategy.
At the time of Saintvilus’s article, SHLD stock was trading at $10.43. It closed May 17 at $7.96, a 23.7% decline in just nine days of market activity.
Good call, Richard.
Now let me save you some trouble, not to mention financial loss.
Eddie Lampert is never going to deliver a growth strategy that gets Sears out of this hole.
The Truth Hurts for SHLD Stock
More store closures result in lower revenue down the road. Reports suggest that the rate of stores closing in 2017 will be higher than the 150 just completed. That might not be so bad if the stores left open were growing.
Unfortunately, Sears’ Q1 2017 same-store sales declined 11.9%, suggesting it doesn’t matter how many stores it closes or cuts it makes, there isn’t a way out of this downward spiral.
So, if you’re crazy enough to bet on Eddie Lampert, at least have the wisdom to do it through Seritage Growth Properties (NYSE:SRG), Sears’ real estate spinoff.
Seritage Is Better Off Without Sears
By converting former Sears stores to third-party tenants — Seritage can approximately triple the rent per square foot renting to anyone other than Sears — it puts itself in a better position to thrive as an independent real estate investment trust.
Unfortunately, it still relies on Sears for 60% of its base rent, which means it’s not generating as much revenue as it could be with third-party tenants in place.
Also, short interest in SRG stock has risen in recent months as investors bet a Sears bankruptcy will leave Seritage in a precarious financial position where it’s not generating enough revenue to keep the lights on.
“Even including all signed not open leases, [Seritage] would have a $12 million shortfall if Sears stopped paying rent,” Floris van Dijkum, managing director at investment bank Boenning and Scattergood, wrote in a note to clients. “Thus, an imminent bankruptcy could leave the company owned by bondholders with equity holders potentially wiped out.”
Warren Buffett owns 2,000,000 shares of Seritage, making him one of its largest shareholders. It’s possible that Buffett could make some additional equity investment to keep Seritage liquid until it can convert more of the Sears stores to third-party tenants.
However, that’s only speculation on my part. Suffice to say, both SRG and SHLD come with their own particular risk factors.
Bottom Line on SHLD Stock
I wouldn’t touch Sears stock with a ten-foot pole.
Seritage, on the other hand, is trading near a 52-week low of $38.49. If you can afford to lose your entire investment, this is as good an entry point as you’re going to get, short of the stock collapsing due to Sears going bankrupt.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.