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 Investors are about to get Burned…. again possibly by a Kmart REIT

Eddie Lampert seems to have a number of different talents. He’s made a lot of money in hedge funds, destroyed two of America’s great retailers and burned a lot of investors with some really lousy stocks.

Those investors are about to get burned again – big time. Sears Holdings (NASDAQ: SHLD) enjoyed a momentary boost last week because of some news stories. First Lampert stupidly, arranged a $500 million line of credit for Sears and raised another $525 million by selling Craftsman to Black & Decker/Stanley. That raised around $1.25 billion which is less than what Sears lost in cash from operations during third quarter 2016. For the record that amount was $1.51 billion.

Sears stock price increased by 10% on December 29, when Lampert’s letter of credit was announced, Bloomberg reported. It rose again when the news mentioned below was announced. Note that raised Sears’s stock price to a whopping $9.89 a share way to go Eddie.

Then Sears announced a big round store of closings (196 in two weeks) which raised expectations of a big real estate payday in some investors’ minds. The expectation being that Sears would be able to raise a few billion dollars with some sort of real estate deal. Lampert was able to raise $2.7 billion when he created and spun off the Seritage Growth Properties (NYSE: SRG) real estate investment trust (REIT) in 2015.

A strong possibility is that Lampert might try to create a REIT to sell off or lease out all those empty Kmart stores. If done correctly he might be able to squeeze two or three billion dollars out of such a venture.

Geography might doom a Kmart REIT

That big payday might never materialize because of reality. Several circumstances cast serious doubt upon the value of Sears’ real estate, and Lampert’s ability to raise large amounts of cash from it.

Geography and the American economic reality might doom a Kmart REIT by destroying the value of its properties. The same factors also cast serious doubt on Lampert’s ability to squeeze cash out of the remaining Sears assets.

A glance at the closing list reveals that most of the shuttered stores consist of Kmarts located throughout the Rust Belt and small town USA. The locations of the closing or closed Kmarts include such prosperous metropolises as Elkins, West Virginia, Coalinga, California, Craig, Colorado, La Porte, Indiana, Galliopolis, Ohio, Eire, Pennsylvania, Platteville, Wisconsin, and Phenix City, Alabama.

How much are empty, decaying and outdated discount stores in depressed small towns or cities really worth? Okay to be fair; there are a few potentially valuable locations on the list, such as the Kmart at 363 South Broadway in Denver. That’s next to a major intersection and one of the city’s busiest light rail stations. Walmart or some other retail will jump at that space.

But what about the Kmarts in Chesterton, Indiana, Leavenworth Kansas, Garden City, Michigan, or Gonzales, Louisiana? Or for that matter the Sears stores in Jonesboro, Arkansas, Florence, Alabama, Bridgeport, West Virginia, and Roswell, New Mexico? Who is going to buy those stores, and pay to remodel or demolish them?

Perhaps somebody should buy some of these investors a map. When one looks at the geography, Sears and Kmart’s store fleet does not look that valuable.

Can Lampert Really make Money at the Mall?

Nor is it just the geographic locations that might be a problem. The nature of some stores might pose an even greater predicament. A major problem facing Sears is who would be interested in all those mall department stores.

Macy’s (NYSE: M) is closing 100 stores, and JC Penney (NYSE: JCP) just reported dismal holiday sales. TJX Companies (NYSE: TJX); which owns TJ Maxx, might be interested in some of those locations – but America can only support so many low-end department stores. Many of the malls already have a TJ Maxx store -so one has to wonder who will rent the empty Sears.  It sounds as if Lampert is trying to figure out how to unload a lot of worthless real estate.

That also raises a very interesting question, how much would a Kmart REIT or another sale to Seritage really be worth? Has Lampert already scraped off the cream of the crop from the closing list? That is the valuable real estate in hot urban markets. Is he now trying to unload the dregs; the stores for which there might be no buyers, on investors?

Would a Kmart REIT be a Good Investment?

That also raises the question would a Kmart REIT be a good investment? Would it be possible to generate enough revenue from the good Kmart locations to cover the losses from the bad ones?

The most recent numbers I found for SRG; those from September 30 2016, cast serious doubt on that scenario. There has been slight revenue growth, when it public in June 2016 Seritage reported revenues of $238.44 million. That grew to $241.99 million in September 2016 – an increase of just $3.55 million.


Meanwhile Seritage also delivered an earnings per share (EPS) of -1.074, a negative net income of -$63.44 million, a free cash flow of $20.05 million and a negative profit margin of -36.63%. Investors were rewarded with a -7.33% return on equity that easily wiped out anything they made from the 25¢ dividend.

It appears that the REIT is not making money on properties that are presumably better those of Kmart. Although it might make money at some point in the future when the mess left by Sears is cleared away. The Kmart REIT would lose more money than Seritage, pay a lower dividend and cost investors even more money.

Investors need to say away from a potential Kmart REIT like anything Lampert touches it will lose money. It looks as if another group of investors are about to get burned by another lousy Lampert stock.