The retail industry is in a difficult transition period in which consumers are turning more toward e-commerce and away from traditional brick-and-mortar stores. While the majority of the old-school U.S. retailers are working to cope with the new trend, one store has been so badly beaten down that there appears to be no way to salvage the business.
Sears Holdings Corp (NASDAQ:SHLD) is on its last legs despite CEO Eddie Lampert’s best efforts to keep the company afloat.
Even though Lampert’s rhetoric suggests that he still believes there is some potential there, the survival of SHLD stock looks very unlikely. It got a pop this week on news it would be selling appliances on Amazon.com, Inc. (NASDAQ:AMZN), but that won’t be enough. In fact, I’d be surprised to see Sears stock stay afloat for longer than a year.
Lampert’s Delusions About Sears
It’s difficult to figure out what exactly is going on in Sears CEO Eddie Lampert’s mind. On one hand, it should be encouraging for traders to see a CEO stand so firmly behind his company.
However, much of his confidence appears to be unfounded, and when you dig a little bit deeper, his financial tie-ups with SHLD make it look like an impending bankruptcy would actually be in his best interest.
Eddie Lampert is in an unusual position in that he is one of SHLD’s largest secured creditors. Together with his hedgefund, Lampert owns almost half of Sears’ secured debt. The issue with this is that Lampert will be one of the first in line to collect should the company go under, something that should make shareholders wary.
Not only that, but Lampert also bought up a great deal of SHLD stock’s real estate in order to create a real estate investment trust called Seritage Growth Properties (NYSE:SRG). U.S. bankruptcy law says that such a purchase could be considered a conflict of interest if Sears were to file for bankruptcy within two years.
Since that purchase happened over two years ago, Lampert is in a pretty good position if the company does decide to pack up shop.
Smaller Format, Smaller Footprint for SHLD Stock
If you aren’t suspicious of Lampert’s business dealings when it comes to a Sears bankruptcy, then you might be encouraged by the Amazon deal. Alternately, you may be looking at the firm’s recent decision to downsize and sell off some of its less-profitable stores as a positive.
While it’s true that the closures will bring in a bit of much-needed cash and help reduce operating costs, those benefits are unlikely to do more than drag out the company’s inevitable demise a little bit longer. Without a catalyst for future growth, SHLD stock is doomed no matter what.
Lambert has been pointing to SHLD’s latest “small format” store initiative as a lifeline for the future, but I’d say that’s an overly optimistic viewpoint. It’s really too late for SHLD to turn things around. Small-format stores that focus on more profitable categories would have been a good idea a few years ago when the firm started to slip into the danger zone, but at this point it appears to be a case of too little too late.
Surviving Against the Odds
Sears has been limping forward over the past year despite the fact that most investors agree that bankruptcy is an inevitable outcome. I believe that a big part of Sears’ forward momentum has been due to Lampert’s real estate transaction, and with that issue now out of the way, a Chapter 11 filing looks more likely.
SHLD’s most recent store closures will probably keep the company afloat through the rest of the year, but not much longer. There’s only so much Lampert can do to keep the company ticking forward without turning a profit.
A bankruptcy is coming. It’s impossible to be certain about exactly when the filing will come, but I don’t think it’s unreasonable to expect it sometime in the next 12 months. Investors should steer clear of SHLD stock, unless they want to get burned.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.
