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 Gets Stranger Again

The situation over at Sears Holdings (NASDAQ: SHLD) just took another strange turn. Fortune reported that Warren Buffett’s Berkshire Hathaway (NYSE: BRK.B) has purchased around 8% of the shares in Seritage Growth Properties (NYSE: SRG).

Seritage, for those of you who have not been paying attention, is the real estate investment trust (REIT) that Eddie Lampert set up to manage 235 Sears properties. Basically, the idea here is to give Mr. Lampert a means of making money from those properties if Sears goes out of business or shuts down stores.

Eddie has recently been talking about transferring more real estate to Seritage, which probably means he’s planning to close all or most of Sears’ brick-and-mortar retail operations—something that will not surprise most Sears observers or readers of this blog.


Why Did Buffett Buy Seritage?

Not surprisingly, a lot of investors will be wondering why Uncle Warren bought into Seritage and if it is a good business right now. Unfortunately, the financial numbers tell us very little about Seritage because it is so new that the company reports no revenue nor earnings per share numbers.

Here’s all we know about Seritage so far from the third quarter financial numbers:

  • It has a profit margin of -33.85%.
  • It had a market capitalization of $1.365 billion on December 15, 2015.
  • It had an enterprise value of $3.154 billion on the same day, which means that it is undervalued.
  • It had $51.51 million in the bank on September 30, 2015.
  • It had assets of $2.840 billion on the same day.
  • Its liabilities were $1.933 billion.
  • It was trading at $41.15 a share on December 15, 2015.

Okay, so what does Uncle Warren see in this company? The answer is simple: a lot of potentially valuable real estate that is being very badly used. This includes Sears stores in some very choice locations, including Denver’s posh Cherry Creek neighborhood, where a Sears closed in March.

Buffett could also be betting on a bad holiday season at Sears, which could force a lot more stores to close. Some analysts have even predicted a wind down for Sears, or at least its brick-and-mortar operations, in 2016. He might think that Seritage could soon end up with a lot more valuable real estate on its hands and be worth far more.


Such property could become even more valuable as retailers such as Whole Foods, Sprouts, Kroger and Walmart expand their operations in core cities where Sears and Kmart have many choice locations. Former Sears stores could be perfect locations for high-end markets like Sprouts, Whole Foods and Kroger’s high-end subsidiaries such as Mariano’s and Harris Teeter.

The Death Spiral Continues

The financial numbers definitely indicate that Sears is in deep trouble and headed further down the death spiral. The highlights of Sears Holdings’ agony from the October 31, 2015, financial numbers include the following:

  • A TTM revenue of $25.94 billion, down from $27.04 billion in July 2015, $29.20 billion April, $31.2 billion in January and $33.69 billion in October 2014. It looks as if Sears’ revenue is falling by around $2 billion a quarter. Sears revenue has shrunk by $7.75 billion in the past year.


  • A diluted EPS of -6.766


  • A net income of -$708 million


  • A profit margin of -7.9%


  • A free cash flow of -$1.288 million


  • A market capitalization of $2.243 billion


  • An enterprise value of $4.837 billion


  • Cash and short-term investments of $294 million, meaning Sears does not have enough in the bank to cover its losses
  • Assets of $12.77 billion


  • Liabilities of $14.07 billion, which exceed the assets


  • -$1.499 billion in cash from operations


As you can see, Sears is losing money every time it opens the doors. There’s no way a company can stay in business if it is losing $1.499 billion every quarter as the cash from operations figures indicates. Bankruptcy or total collapse is imminent here.

Is It the End for Sears?

If holiday sales are as weak as some analysts indicate, Sears is finished. Lampert will have to shut down sometime early in 2016 or make some other moves. My guess is that he will first spin off into a separate publicly traded company then try to sell or shut down all or most of Sears’ and Kmart’s brick-and-mortar operations.


This would be a sad end for a great retailer but a potentially lucrative outcome for Seritage investors. It could also point to more opportunities because there are many retailers and brands in a similar situation to Sears, including Office Depot, Office Max, Barnes & Noble, McDonald’s, JC Penney, Macy’s and potentially Kohl’s to name a few. These brands’ locations could actually be worth more than their actual operations, which shows what a sorry state American retail and our economy are in.