Market Mad House

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

The Death Spiral

Sears Bankruptcy caused by Lack of Cash

A lack of cash caused the Sears bankruptcy. Frighteningly, many other retailers are suffering from the same disease.

For instance, Stockrow reports Sears (OTC: SHLD) reports Sears had an 3rd quarter operating cash flow of $114 million and a free cash flow of $254 million. In addition, Sears recorded cash and short-term investments of $441 million on 4 August 2018.

Yet Sears operated 687 stores on 15 October 2018, USA Today estimates. On the other hand, Nordstrom (NYSE: JWN) reported $1.343 billion in cash and short-term investments on the same day. Notably, Nordstrom operates 380 stores.

Sears Bankruptcy Lots of Stores No Cash

Moreover, Nordstrom recorded an operating cash flow of $622 million and a free cash flow of $482 million on 4 August 2018.

For the record, Nordstrom earned a gross profit of $1.478 billion on revenues of $4.067 billion for 3rd Quarter 2018. Additionally, Nordstrom recorded a net income of $162 million and an operating income of $246 million for the same period.

Meanwhile, Sears reported a gross profit of $702 million on revenues of $3.182 billion for 3rd Quarter 2018. However, Sears recorded an operating loss of $202 million and a net loss of $508 million for the same period.

Why the Sears Bankruptcy is happening

Therefore Sears’ bankruptcy results from the company’s inability to generate cash.

Obviously, Sears has many other problems but cash is at the root of its troubles. For example, the company has no money to repair, remodel, or replace decrepit or outmoded stores.

Furthermore, there is no money to build local stores, launch discount outlets, or construct fulfillment centers for e-commerce. Beyond that, Sears has few resources for borrowing money.

The Cruelty of Eddie Lampert caused the Sears Bankruptcy

My conclusion is that former CEO Eddie Lampert’s financial engineering is the only thing keeping Sears going.

Lampert kept Sears afloat with loans from his hedge fund; ESL Investments real estate schemes, asset sales, and deals. Lampert’s financial engineering was heroic but ultimately cruel.

I compare Lampert to an egotistical doctor that keeps half-dead patients alive with brilliant treatments. Instead, of humanely sending Sears to the hospice to die, Dr. Lampert keeps performing needless surgery.

Lampert’s efforts are cruel because they gave Sears’ investors and employees false hope. Worse, Sears and Kmart are occupying real estate that moneymaking retailers could use to create permanent jobs. Taxpayers and local governments feel the pinch because those locations could house stores that pay taxes.

Eddie Lampert’s Sick Scheme to save Sears with Bankruptcy

Worst of all, Lampert is cooking up another deal to “save” Sears. Reuters reports Lampert has a partner in bankruptcy that will help him “reorganize” Sears.

The unidentified partner is probably a hedge fund that will make high-interest loans to Lampert and Sears. The hedge fund will make a lot of money from those loans; on the other hand, Sears’ employees will need to find new jobs.

Lampert is like a bankrupt man who thinks he can solve his financial troubles by going to a loan shark. At the end of the day, all Sears gets is more debt it cannot pay.

In detail, Sears recorded $5.301 billion in total debt, $7.062 billion in total non-current liabilities, and $4.277 billion in current liabilities. Therefore, Sears’ total-noncurrent liabilities exceeded its assets of $6.927 billion on 4 August 2018.

Will Other Retailers Join Sears in Bankruptcy

It has stuck Sears in a cycle of borrowing money to maintain an illusion of operations for a long term. Instead, of generating cash Sears borrowed money to maintain unprofitable operations.

Disturbingly, other retailers face a similar lack of cash. For instance, Kroger (NYSE: KR); America’s largest standalone grocer, reported $361 million in cash and standalone investments on 18 August 2018.

Conversely, Kroger recorded $27.869 billion in revenues and a gross profit of $5.939 billion on the same day. For the record Kroger operated 2,769 stores in 2nd Quarter 2018.

For example, Dollar Tree Inc. (NASDAQ: DLTR) recorded $647 million in cash and short-term investments on 4 August 2018. However, Dollar Tree generated a gross profit of $1.664 billion on revenues of $5.525 billion on the same day. Dollar Tree supposedly operates 15,000 stores.

Sears Bankruptcy and the Retail Death Spiral

The obvious conclusion is that these retailers, like Sears, become overextended and one quarter away from the Death Spiral. To clarify, the retail Death Spiral occurs when a company cannot generate enough cash to pay its debts.

In today’s environment, however, credit is so cheap retailers can avoid the death spiral by borrowing. When the loans come due, the retailers borrow more.

Under those circumstances, there is no incentive for retailers to modernize, close money-losing locations, or change their inventories. Instead, they keep operating like it is still 1988 until they can longer pay their debts.

A classic example of that was The Bon-Ton Stores (OTC: BONTQ) a department store operator that died earlier in 2018. Markedly, Bon-Ton was hiring extra staff for Christmas season 2017, a few months before they liquidated it. Astoundingly, Bon-Ton is “poised for a comeback” under the direction of delusional management, USA Today claims.

Sears Bankruptcy a Symptom of a Dysfunctional Retail Economy

This creates the illusion of a retail economy with large stores filled with merchandise bought on credit.  Employees sit around drawing paychecks for pretending to serve nonexistent customers.

Thus the Sears’ Bankruptcy is a symptom of a dysfunctional retail economy. Large numbers of stores not making money yet somehow manage to keep the doors open.

To make matters worse, those dysfunctional retailers have to contend with an aggressive cash-rich competitor. Obviously that competitor is Amazon (NASDAQ: AMZN) reported $27.05 billion in cash and equivalents on 30 June 2018. In addition, Amazon recorded a gross profit of $22.254 billion on revenues of $52.886 billion on the same day.

Hence, Jeff Bezos is in a position to throw cash at a market until Amazon dominates it. Other retailers cannot compete because they lack the cash.

Why Walmart will Survive and Prosper

To make matters, another mega-retailer is starting generate cash on Amazon’s level. Walmart Stores Inc. (NYSE: WMT) reported $15.84 billion in cash and short-term investments on 31 July 2018. Therefore, Walmart is able to replicate a lot of Amazon’s success.

In this retail environment only monsters like Amazon and Walmart, niche players like Nordstrom, and bottom feeders like TJX (NYSE: TJX) will survive. Investors looking for a retail bargain should check out Walmart.

Meanwhile, I hope somebody finally puts Sears out of its misery. A company that trades at 24¢ a share (yes that was the Sears price on 27 October 2018) needs to die.

Today’s retail environment is brutal and many other brands will follow Sears into oblivion. Finally, most investors should stay far, far away, from retail because the sector is heading for catastrophe fast.


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