How Low can Sears Sink?

There is one certainty at Sears Holdings (NASDAQ: SHLD) – every time you think it cannot sink any lower it does. Sears is sinking to unbelievable depths and there seems to be no bottom in sight.

So how truly low can Sears sink? Well it had a market valuation of $877.57 million on March 23, 2017, that’s right less than $1 billion. That’s pathetic for a company that reported $22.14 billion in revenues on January 31, 2017.

In contrast Kohl’s (NYSE: KSS) which reported revenues of $18.69 billion; lower than Sears, reported a market cap of $6.451 billion March 21, 2017. That’s right Sears’ market cap was actually less than one sixth that of a smaller competitor earlier this week.

Sears’ Horrendous Earnings Report

It is also easy to see how Sears reached that sorry state when you look at its earnings report for January 31, 2017. The report is a litany of truly horrendous numbers such as:

  • A diluted earnings per share of -20.77.

  • A “net income” of -$2.221 billion.

 

  • A “profit margin” of -10.03%. If that’s correct Sears loses $1.10 for every $1 it spends.

 

  • A “free cash flow of -$808 million.

  • -$1.51 billion in cash from operations or an operating loss of -$1.531 billion.

 

  • $258 million in cash from short term investments.

  • $14.24 billion in liabilities.

 

  • $4.299 billion in long-term debt.

 

There was one sort of good figure, $1.363 billion in cash from financing. The problem with that is it probably came from borrowing against Sears’ properties. One has to wonder how the company is supposed to pay the loan back beyond selling real estate.

There were also $10.86 billion total assets, but that number was exceeded by $14.24 billion in liabilities. That means Eddie Lampert could sell off everything Sears owns and the company would still owe $3.38 billion.

Lampert might try selling the company but it had an enterprise value of $5.029 billion on January 31, 2017. One has to wonder who would bother buying it with all the liabilities.

How long can Sears Operate?

The big question to ask here is: how long can Sears operate. Theoretically it might be able to stay in business for around 21 quarters or another five years. This calculation is based on a -$1.521 billion operating loss every quarter. It would take about five years to eat through all of Sears’ revenue with a loss like that.

Or it might stay in business for 10 quarters which is about two and half years based on its negative income. That calculation is based on a loss of -$2.221 billion (the net income figure) a quarter, so it would take around 10 quarters; or two and half years, to burn through the revenues at that rate.

Either way Sears would not last beyond 2020 and that’s probably the best case scenario. These figures don’t calculate in black swan events, the cost of closing stores and outside factors such as lawsuits which are sure to occur.

Sears’ Incredibly Shrinking Revenues

Another massive problem at Sears is its incredible rate of revenue shrinkage. Over the past five years Sears’ revenues have fallen by $19.16 billion. Back in April 2012 Sears reported $41.3 billion in revenue, that figure shrunk to $21.14 billion on January 31, 2017.

The only consolation for Sears’ fans is that the rate of revenue shrinkage has slowed. During 2015, Sears’ revenues shrank by $6.06 billion, but during 2016, Sears’ revenues fell by $3.01 billion. For the record Sears reported $31.2 billion in revenue in January 2015, $25.15 billion in revenues in January 2016 and $22.14 billion in revenues in January 2017.

Even that number is pretty pathetic because losing $3.01 billion in revenues is an improvement at Sears. Unfortunately revenue losses might speed up again at Sears because of all the stores it is closing.

Sears Might Soon be smaller than Dollar General

Now for something truly pathetic Sears might soon be smaller than Dollar General (NYSE: DG). Dollar General reported $21.99 billion in revenues on January 31, 2017, almost equaling Sears. Those revenues are also growing Dollar General reported $20.37 billion in revenues in January 2016.

That means Dollar General’s revenues might exceed Sears’ revenues sometime next quarter. That’s truly pathetic and it’s made worse by the fact that Dollar General is now worth more than Sears.

Dollar General had an enterprise value of $22.8 billion on January 31 and a market cap of $19.21 billion on March 23, 2017, according to ycharts. It also reported assets of $11.67 billion on January 31, 2017.

That means Mr. Market thinks Dollar General is worth far more than Sears and has a far brighter future. It also indicates that many investors believe dollar stores and not department stores are the future of retail. Therefore America might have a pretty dismal future in which dollar stores will be profitable but department stores will not.

Naturally many people will wonder what’s next at Sears, my prediction is collapse followed by liquidation. The collapse might be sudden and total, or slow moving as Eddie quietly closes stores and sells real estate.

Either way it will be a miracle if Sears makes it to Christmas season 2019. This great American retailer might be at the end of the line.