Seritage Will Not Help Sears Avoid Death Spiral

Eddie Lampert’s latest effort to “save” Sears Holdings (NASDAQ: SHLD) is not working despite having raised $1.6 billion. Lampert began selling shares of Seritage Growth Properties (NYSE: SRG), the real estate investment trust that owns 235 Sears stores and interests in 31 other properties, this week.

The REIT IPO was something of a success. The Wall Street Journal reported that it raised around $1.6 billion on July 6. Seritage’s shares went on sale at $37.10 apiece on Monday, went up slightly to $37.73 on Tuesday and fell to $36.99 by Wednesday, according to yCharts.

This does Sears little good for a very simple reason: The venerable retailer has been losing between $1 and $2 billion a quarter for the past two or three years. Sears reported a TTM revenue of $31.2 billion in January 2015 that fell to $29.2 billion on April 30, 2015. That’s a loss of $2 billion for the first quarter of 2015.
The cash raised by the initial sale of Seritage does not even cover the loss for the first quarter of 2015. Sears is still $400 million in the hole after the offering, if it even gets that money. There’s a good chance Eddie will use it to cover the losses he’s had from loaning money to Sears to keep it afloat.

What Are Seritage Investors Buying?

One also has to wonder what Seritage investors are actually buying. Seritage purchased the properties from Sears for $2.72 billion, yet it only raised $1.6 billion through the IPO. It is unclear how it will generate revenue because all but 11 of the properties it owns are leased back to Sears, a company that’s losing $2 billion a quarter. There’s no guarantee that Sears will be able to cover those lease payments.

What good are shares in a REIT that owns nothing but empty department stores in deserted malls? How long will it be before Seritage shares fall into the junk category? As I noted in a Seeking Alpha commentary, some mall operators are now paying Sears to leave the building.

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In April, Sears formed joint ventures with Simon Properties Group (NYSE: SPG) and General Growth Properties (NYSE: GGP) and sold the mall owners stores for cash. Under the agreements, the malls leased the stores back to Sears. The joint ventures also give the owners the right to reduce Sears’ footprint in the malls.

Who, I have to wonder, bought this stock? Perhaps Lampert unloaded Seritage shares on the same suckers that own Sears shares?

The only real value that Seritage might have is if Sears were to shut down so its stores could be sold or leased to other tenants. Those buying Seritage seem to be betting on a quick death for Sears, which is pretty sick.

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Is This the Beginning of the End at Sears?

There is one person who definitely does not believe Lampert can save Sears: our good buddy Mr. Market. Sears shares were trading at $23.80 on July 8, 2015; as recently as June 3, 2015, they had been trading at $43.65. Sears lost $20 in share value in a little over a month. One has to wonder if this is the beginning of the death spiral at Sears.

What happens when Sears’ share value falls below $20 or $10 a share? That could happen in the next few weeks if deals like this occur. I also have to wonder when Seritage will join Sears in the Wall Street junk heap?

The claims that the Seritage deal would drive Sears into insolvency and perhaps bankruptcy appear to be prophetic. Instead of a turnaround, we might be looking at the beginning of the end at Sears.

My prediction is that we will see Lampert try to sell or spin as much of Sears off as he can in the months ahead. Most likely he will try to sell Kmart, if he can find somebody stupid enough to buy it. That will be the only way he’ll be able to make any money off of this slow-moving catastrophe.