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 is Dying Faster than We Thought

Sears Holdings Corp. (NASDQ: SHLD) has gone much farther down the death spiral than we thought. Seeking Alpha contributor Mitch Nolen just pointed out that 116 of the company’s locations are slated for closure in the next few months.

Nolen estimated that 64 Kmart stores, 30 Sears stores, and 31 Sears Auto Centers will close their doors in the next few months. Around 6,047 employees will lose their jobs when the stores shut down. Those closings are in addition to the 96 stores the retail giant closed in the first two quarters of 2014.

That means Sears could close over 200 stores by the end of the year. It only closed 96 stores last year, and if that isn’t a sign of the death spiral, I don’t know what is. For those of you unfamiliar with it, the death spiral occurs when a retailer’s sales cannot cover its operating expenses, so it has to start closing stores or selling assets to pay the bills.

Nolen’s findings support my contention that Sears has entered the death spiral. They also seem to verify my suspicion that Sears Holding CEO and hedge fund billionaire Eddie Lampert is basically liquidating the retail giant.

Sears x

As I noted, Sears will only be able to keep its shelves stocked with a $400 million loan from Lampert. The loan is secured by Sears’ real estate holdings. The loan is a sure sign that Sears is now completely out of cash. For those of you who don’t believe me, just check the charts. Sears reported a free cash flow of -$241 million on July 30, 2014.

How is a company with a negative free cash flow of -$241 million supposed to pay a $400 million loan? Probably by closing stores and selling off its real estate.

Sears Attacks Seeking Alpha

What’s truly pathetic is the way that Sears is trying to hide what’s really going on. The Consumerist blog noted that Sears’ public relations team has been trying to say that the reports of store closings were exaggerated. They even sent out a press release attacking Nolen and Seeking Alpha for revealing the true number of store closures.

Among other things, Sears tried to claim the list was inaccurate because Nolen got one of the locations wrong. As Nolen himself later noted, the only real inaccuracy in the list was that he didn’t put enough stores on it!

This isn’t the first attempt Sears has made to cover up the number of store closures. Laura Northrup of The Consumerist noted that the Sears public relations team no longer sends out lists of store closings to the media.

One has to wonder what these guys are trying to hide or who they’re going to fool. Everybody knows Sears is in trouble; we just didn’t realize the extent of the trouble.

My guess is that things are going to get a lot worse at Sears, and fast. As I noted in my Seeking Alpha piece, Sears probably won’t be able to make enough money from the holiday season to cover the cost of Mr. Lambert’s loan. The loan is due on Dec. 31, 2014, just in time for the dismal sales figures to become publicized.

Note: there’s a good chance that the loan will not be paid off because Sears’ free cash flow in January 2014 was $435 million. The cost of the Lambert loan is around $427 when you add the 5% to it.

That means the blood bath at Sears Holdings is only beginning. Expect things to get a hundred times worse in January. Bankruptcy is probably just around the corner, probably sometime in February; the loan can be extended until Feb. 28. Expect to see massive numbers of Sears stores closing and something truly desperate, such as a Kmart spinoff, sometime in January.


One has to wonder what nasty surprises will come out of Sears yet and just how ridiculous its public relations team will become. The death spiral continues, and there is no way that Sears can escape it.