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 it’s Worse than We Thought

The death spiral at Sears Holdings (NASDAQ: SHLD) has taken on a rather dreary pattern of repetition. It seems to go something like this; Sears posts terrible financial numbers that indicate massive losses, news outlets run a spate of stories about how awful Sears is and Eddie Lampert’s propaganda team pumps out a spate of mind-numbing press release telling us how Sears is turning around.

Well it has happened again, Sears racked up even more terrible financial numbers leading to yet another spate of horror stories in the media. Those events led to another series of extremely stupid statements from Sears’ PR team.

The financial numbers at Sears just posted at ycharts are just so horrendous that they have to be seen to be believed. Here is the latest spate of bad news from Eddie Lampert’s house of horrors:

  • A net income of -$1.9 billion on July 31, 2016.


  • A profit margin of -6.98%.


  • A diluted earnings-per-share number of -17.81.


  • A free cash flow of $47 million at a company with revenues of $24.11 million.


  • -$1.975 billion in cash from operations.


  • Assets of $10.61 billion.


  • Liabilities of $13.31 billion.


  • $276 million in cash and short-term investments.


  • A share price of $11.96 on September 15, 2016.


  • A market capitalization of $1.279 billion on the same day. That’s right folks Sears’ losses exceed its market capitalization.


  • An enterprise value of $4.551 billion. That means Sears is worth less than JC Penney Company (NYSE: JCP) which had an enterprise value of $7.244billion on September 15, 2016.


Sears’ Incredibly Shrinking Revenues

The revenue shrinkage at Sears is incredible, if it keeps up the retail icon might soon be smaller than dollar stores and rival department store operators.


  • Sears’ revenues of $24.11 billion are now smaller than Macy’s (NYSE: M) revenues of $26.38 billion. As recently as January 2015, Sears’ revenues exceeded Macy’s by $3.09 billion. Back then Sears reported revenues of $31.2 billion and Macy’s reported revenues of $28.06 billion.


  • Sears’ revenues bell by $1.04 billion during the first six months of 2016, dropping from $25.15 billion in January to $24.11 billion in July.
Shoppers make their way past the Sears store at the Eaton Centre in Toronto on Thursday, December 26, 2013. THE CANADIAN PRESS/Chris Young
Shoppers make their way past the Sears store at the Eaton Centre in Toronto on Thursday, December 26, 2013. THE CANADIAN PRESS/Chris Young
  • Sears’ revenue fell by $3.29 billion between July 2015 and July 2016. Sears reported revenues of $27.4 billion for second quarter 2015 and $24.11 for Second Quarter 2016.


  • If the collapse continues; Sears revenues might be smaller than those of either Dollar Tree (NASDAQ: DLTR) or Dollar General (NYSE: DG) by January 2016. Dollar Tree reported revenues of $20.39 billion on July 30, 2016, and Dollar General reported revenues of $21.01 billion on the same day. Since both dollar stores are growing they will probably be bigger than Sears by next year.


  • Sears has lost an incredible amount of revenue since the turn of the 21st Sears’ sales dropped from $41 billion in 2000 to $15 billion in 2015, Business Insider reported. Sears’ subsidiary Kmart’s sales fell from $37 billion in 2000 to $10 billion in 2015. That means both companies revenues fell by $53 billion in 15 years. Sears and Kmart revenue is now less than a third what it was when Bill Clinton was in the White House.


Inside Eddie Lampert’s House of Horrors

Business Insider just published an eye opening expose on Eddie Lampert’s house of horrors from the perspective of some of its victims the customers. Once again we get to see how just how awful Sears has become.

Lifelong Sears’ customer Robert Hoke of Baltimore complained that he had to beg Sears’ associates to take his money. Hoke went to Sears to buy a lawn mower two months ago and could not find an associate to help; so he went to Home Depot (NYSE: HD) instead and took his money.

Sears’ customers all over the country complained they found no staff in the stores. Steve Hall of Baton Rouge, Louisiana, took 30 minutes to buy a weed eater. He noted that the cash register would not scan the UPC code and his gift card did not work.


Another customer Charles Tucker of New Hampshire actually cut up his new credit Sears card. Tucker complained about poor quality merchandise. Customer Samuel J. Ely compared Sears’ checkout process to Checkpoint Charlie (a border crossing on the Berlin Wall during the Cold War). Ely was annoyed all the information both the cashier and the card reader tried to pry out of him.

Ely complained that he was unable to get an accurate price on appliances he was trying to buy. He finally left Sears and went to Lowe’s (NYSE: LOW) and spent $8,000 on new appliances.

Employees at a  Kmart in Tinley Park, Illinois are using sheets and shower curtains to cover empty shelves, shopper Gary Hayslett charged. Many of the cash registers at that store are broken and covered with cardboard.

Sears’ spokesman Brian Hanover to Business Insider’s story with this brain dead statement:

“We constantly solicit feedback from our tens of millions of members and customers, as well as provide a variety of ways for them to provide it unsolicited and authentically back to us,” he said. “The feedback you described is not reflective of the vast majority of comments and scores we receive and does not depict a typical member experience.”


Hanover also claimed that customer satisfaction scores have improved for both Sears and Kmart. That might be true because there are simply fewer customers to complain about the stores.

How Investors can Take Advantage of Sears’ Collapse

Naturally, investors will be wondering what companies to buy to take advantage of Sears’ collapse. There are several good companies that are profiting from Sears’ death spiral they include:

  • Lowe’s (NYSE: LOW) – This fast growing hardware and appliance emporium is attracting a lot of former Sears shoppers. At $71.71 a share it was much cheaper than rival Home Depot which was trading at $127.74 on September 9, 2016. Lowe’s also rewarded investors with a dividend yield of 1.56% and a return on equity of 36.02%.


  • Walmart Stores Inc. (NYSE: WMT) – The world’s largest discounter is well placed to take advantage of Sears’ woes with its Supercenters, Neighborhood Markets and fast growing online operation that includes Walmart was underpriced at $70.3 on September 9, 2016. It also offered investors an 18.85% return on equity and a dividend yield of 2.83%. That’s a much better deal than which was trading at $760.14 a share on the same day and offered no dividend.


  • Target (NYSE: TGT) – This retailer is also well placed to capture Sears and Kmart customers. It is relatively cheap trading at $69 a share on September 9, 2016, yet offering buyers a dividend yield of 3.3% and a return on equity of 25.57%. Target has been reporting revenue losses lately but it is still making a lot of mone;, it had a net income of $3.287 billion on July 31, 2016.


  • JC Penney (NYSE: JCP) – Penney’s is actively going after Sears customers with creative marketing and a new appliance program. It’s well positioned to take advantage of Sears’ problems and Macy’s contraction with lots of mall locations. Penney’s has also stopped its revenue losses, even though it is still growing at a glacial pace. At $9.90 a share on September 9, 2016, Penney’s is also very cheap.


All of these retailers are well placed to take advantage of Sears’ epic decline. Many of them will see revenue and income growth in the next year as Sears enters the last stages of the death spiral.