After reading Sears Holdings (NASDAQ: SHLD) financial report I only had one question: how is this retailer staying in business? Anybody who looks at the numbers will have the same question.
The following numbers from November 31, 2016, show the extent of the disaster at Sears and explain why the retailer cannot survive. The highlights or lowlights of Sears’ third quarter earnings report as relayed by ycharts include:
- A negative net income of -$2.194 billion.
- A profit margin of -14.87%.
- A negative diluted earnings per share number of -20.54.
- A free cash flow of -$808 million.
- A loss of -$1.521 billion in cash from operations.
- Revenues that fell by $720 million during third quarter to a new low of $23.39 billion.
- Assets that were worth nearly $2 billion ($1.9 billion) less in October 2016 than in October 2015. Sears reported $12.77 billion in assets in October 2015 and $10.87 billion a year later.
- A market capitalization of $1.277 billion on December 9, 2016.
- An enterprise value of $5.32 billion on Halloween Day 2016.
The numbers indicate that Sears is losing money by simply staying open. They also indicate that the only way Eddie Lampert will be able to make money out of Sears is to shut it down and sell off its assets. If the assets are really worth $10.87 billion, they are worth what twice what the enterprise value is.
Since those assets consist of real estate which Lampert is slowly selling off, this would not be much of a sacrifice. Unfortunately Lampert seems to have no such plan, instead he’s talking about his “secret survival plan. “
That plan is apparently to loan Sears more of his own money, which is pretty dumb. Lampert’s hedge fund loaned Sears $300 million in August according to Motley Fool contributor Daniel B. Kline.
Although Jason Hollar; who has the thankless job of Chief Finance Officer (CFO) at Sears, outlined some plans during the last earnings call. Hollar said the company is trying to refinance debt, and take advantage of its portfolio of assets. That probably means selling off house brands Kenmore, Diehard and Craftsman.
There are also plans to finds to find tenants to lease closed Sears and Kmart stores. Finding tenants might be tough because news reports indicate that a lot of those stores have serious maintenance issues like leaky roofs and worn out wiring. Another problem is that Lampert has transferred many of the best Sears’ locations to his Seritage Growth Properties (NYSE: SRG) real estate investment trust (REIT) possibly to protect them from Sears’ creditors.
Sears Facing Eviction from Mall
Another crisis facing Sears is its relationship with mall operators and other landlords. David Morton; the owner of the Holly Hill Mall in Burlington, North Carolina, has filed a notice of eviction against Sears, The Times-News reported.
The mall owner wants Sears out of the building because it violated its lease by not submitting monthly sales reports, court documents indicate. Under the terms of its lease Sears had to pay the mall operator 2.5% of the store’s net sales.
Sears failed to provide the sales reports for several months; which constituted a breach of contract, a federal lawsuit filed by Morton states. To make matters worse Morton is alleging that Sears did nothing to promote its business at the mall, which is another breach of contract.
One obvious reason why Sears failed to provide the sales data was to hide the extent of its losses in Burlington. So far there’s no indication such shenanigans are going on elsewhere but they might be.
A Sears’ spokesman called the lawsuit without merit and claimed the company paid its rent. Note: the store did not pay rent at the mall, instead it had a profit-sharing agreement but there was no profit to share. One has to wonder how many other Sears’ stores are in a similar position.
Kmart Store not on Closing List is closing
Some Kmart stores not on the company’s closing list are also shutting down. A Kmart in Burlington, North Carolina, that was not on Sears Holdings’ closing list shut down this fall, The Times-News reported. The store was added to the list right before the closing was announced.
More closings are planned, Hollar said. He promised to accelerate the closing of underperforming stores. One has to what Sears’ idea of an underperforming store is.
Sears stores suffered a 7% drop in sales during the third quarter of 2016. Disturbingly Hollar’s statement indicated that there might be Sears’ stores suffering greater losses.
A massive wave of closings is probably imminent because leases on 750 Sears and Kmart stores will expire in the next five years, reported Business Insider. That number does not include all the Sears and Kmart stores that will close because landlords try to evict them or buy out the lease to get the retailer out of the building.
Key Sears Executives Leave
Two top executives; Chief Information Officer Jeffrey Balagna and President and Chief Member Officer Joelle Maher have quit, Fortune reported. Maher was in charge of the Shop Your Way loyalty program, on which Lampert has pinned Sears’ hopes of survival.
It looks as if executives are fleeing ahead of the inevitable holiday disaster at Sears. One has to wonder if Sears will be around for the 2017 holiday season. Since it only as a credit line of $174 million, the end might be beginning for this retail icon.
Sears stockholders had better sell off fast because the final round of the Sears death spiral seems to be beginning. It’ll be a miracle if Sears survives 2017 without bankruptcy or liquidation.