Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

The Death Spiral

Is Dying Sears Trying to Hide Store Closings?

Eddie Lampert may have discovered a simple yet highly effective strategy for hiding the extent of Sears Holdings (NASDAQ: SHLD) problems: simply do not tell the media about store closings.

Sears is deliberately not sending out national press releases about store closings, our friends over at the Consumerist alleged. The blog noted that most retailers send the national media lists of stores that are closing, but Sears does not.

Instead, Sears makes individual announcements of Sears and Kmart closings to local or regional news outlets. That makes it sounds as if the closings are localized events and not an indication of companywide problems. For example, on January 15 a Sears spokesman told the LA Times that four Kmart locations in Southern California will shut down within the next few months but did not mention any closures in other regions.

Consumerist’s writers think the rationale behind this strategy is to discourage news coverage about Sears troubles. It is hard to tell if the media is being fooled, but Mr. Market certainly is not. On February 4, 2016, Sears’ shares were trading at $17.60. As recently as June 4, 2015, Sears was trading at $43.52 a share.


Sears’ Incredibly Shrinking Market Capitalization

Sears has lost nearly half of its market capitalization over the past year. On February 6, 2015, Sears had market capitalization of $3.529 billion; by February 4, 2016, that number had fallen to $1.878 billion. That means Sears’ shares lost $1.651 billion in value over the past year.

It is not just market capitalization that Sears has lost; it is the value of the entire company that is plummeting. On February 6, 2015, Sears Holdings had an enterprise value of $7.085 billion; by February 4, 2016, that number had fallen to $4.454 billion. Sears has lost $2.631 billion in enterprise value over the past year.


The cause of this drop in value is easy to see. Over the past five years Sears had a net income of -$1.514 billion; in other words, it lost $1.5 billion a year. Although, there has been a little improvement in this number in recent months; on October 31, 2015, Sears reported a net income of -$708 million.

Disturbingly, that’s a major improvement because Sears reported a net income of -$1.88 billion a year on October 31, 2014. That figure might not represent an actual improvement, because it is unclear how much of that income came from the sale of Sears’ real estate and not actual retail operations.

This suspicion is easy to make because Sears lost $8.75 billion in revenue between Third Quarter 2014 and Third Quarter 2015. Sears Holdings reported a TTM revenue of $33.69 billion in October 2014; by October 2015 that number had fallen to $25.94 billion.

Sears Losing Money by Opening the Doors

What’s truly frightening is that the revenue is not the scariest figure at Sears. The cash from operations number is.

Sears reported -$1.5 billion in cash from operations during the fourth quarter of 2015. That indicates Sears loses money by simply opening the doors. It is costing the company more money to keep stores open than by closing them.

This means we can expect a lot more store closings at Sears and Kmart in the near future. Closings of Kmart stores in particular seems to be accelerating if the numbers collected by Consumerist are accurate.

Is Kmart Shutting Down?

Consumerist has identified more than 30 Kmart and four Sears locations that will be closing in the next few months. These numbers are probably inaccurate because they were apparently taken from local news stories discovered through Google searches.


When I ran a Google news search for Sears closings on February 4, 2016, I discovered one Sears closing that was not on Consumerist’s list: the Popular-Perkins store in Memphis, Tennessee. I also spotted one Kmart closure not on the list: that in Omaha, Nebraska.

This raises the possibility that Lampert is considering a shutdown of the entire Kmart chain. Shuttering Kmart is well within the realm of possibility because the chain has fallen far down the death spiral.

Over the summer CNN Money estimated that Kmart’s revenue had dropped by 67% between 2000 and 2014. At the turn of the 21st century Kmart reported $37 billion in sales; by 2014 it reported just $12.1 billion in revenue. The number of Kmart stores has fallen from 2,165 in 2000 to around 950 in February 2016.

Even if Kmart does not close completely, its store count could fall below 900 by summer. That would mean yet another substantial revenue loss and push the chain closer to death.

My guess is that Lampert will either try to spin Kmart off or sell it sometime this year, although one has to wonder: Who will buy the worthless stock of such an ailing retailer?

How Close Is Sears to Death?

Naturally, these troubles raise the dramatic question: How close is Sears to death? That’s hard to say because some of the company’s assets, such as its website, perform well.


My guess is that a greatly reduced Sears will probably stick around for the next few years. Perhaps Sears might survive as an appliance retailer like its spinoff, Sears Hometown & Outlet (NSADAQ: SHOS), which operates franchised Sears-branded appliance and hardware stores and some corporate owned appliance outlets, mostly in small towns. Closing down Kmart would make it easier for Lampert to cut Sears back to a rump operation.

Even if it survives, Sears will be in very sorry shape. On February 4, 2016, Sears Hometown was trading at $6.35 a share. It reported an anemic market cap of $144.28 million and an enterprise value of $175 million on the same day. During the fourth quarter of 2015, Sears Hometown managed to achieve a net income of -$4.792 million and a profit margin of -.7%.

It looks as if Sears’ days are numbered and no amount of public relations tricks can hide the fact. Nobody except Mr. Lampert seems to be fooled by the tactic of refusing to release closing lists.