Market Mad House

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

The Death Spiral

What Is Next for Sears?

It appears that Edward S. Lambert might be even dumber that we thought. Eddie apparently spent $858,613.63 to buy 33,817 shares of his own company, Sears Holdings (NASDAQ: SHLD), on September 18, 2015, according to this press release.
Lampert paid $25.39 a share for Sears on the 18th; a week later, on September 25, 2015, it was trading at $25.01 a share. That means he has already lost 38¢ a share, or $12,840.46, on the transaction. Okay, that’s a drop in the bucket for a hedge fund billionaire such as Lampert, but it sure calls his judgement into question.

This, of course, brings us to a more serious question: What is next for Sears? Last year at this time Lampert loaned Sears around $400 million to keep it afloat for the holiday season. That obviously did not help much, because as I pointed out elsewhere, Sears lost $600 million a month in revenue in the second quarter of 2015.


Sears Lost $7.36 Billion in Revenue over the Past Year

What’s worse is that Sears lost $7.36 billion in revenue between July 2014 and July 2015 despite all of Lampert’s real estate deals. For the record, Sears reported revenues of $34.76 billion in July 2014 and $27.4 billion in July 2015. If that keeps up, Sears’ revenue will be around $20 billion by next year or about the same size as that of Kohl’s (NYSE: KSS), which reported a TTM revenue of $19.10 billion on July 31, 2015.

Naturally, this cannot go on forever. Something is going to have to give at Sears, but what? No company can stay in business with a TTM revenue that is declining at a rate of 22.49%, a free cash flow of -$339 million and a net income of -$802 million.

It looks as if Sears is losing money every time the doors open. That, of course, begs the question, what is next for this great American institution?

What’s Next for Sears? A Few Predictions

Here are my predictions for Sears’ future, some of which are pure guesswork:

  1. Sears will continue to lose market share and money, so the losses will accelerate.


  1. We will see another round of store closings, particularly in the Midwest, where a significant decline in middle-class income is causing the customer base for department stores like Sears to shrink.


  1. Lampert might try to spin off assets to raise more cash. One potential tactic here would be to break Sears Holdings up and organize, the Sears retail stores, Kmart, Craftsman, Sears Auto (Diehard) and Kenmore into separate companies then either sell them or float IPOs to raise money as Lampert did with Seritage Growth Properties (NYSE: SRG), Sears Hometown & Outlet (NYSE: SHOS) and Land’s End (NASDAQ: LE). This strategy might work with, where sales are growing by around 10% a year, according to our friends at Elephant Analytics, and with brands like Kenmore and Craftsman that could find a market through other retail channels such as Lowe’s (NYSE: LOW) or Walmart Stores Inc. (NYSE: WMT). But what about Kmart, where sales are in freefall, or the Sears stores? One big problem that Lampert would face here is that the Sears brand is now so bad that it seems to drag down brands associated with it. Land’s End reported that its TTM revenue was falling at a rate of 10.02% on July 31, 2015.


  1. Lampert might try to dissociate some of the brands from Sears; for example, by selling Craftsman Tools, Land’s End clothes and Kenmore appliances through Lowe’s, Kroger (NYSE: K) Marketplaces or Home Depot (NYSE: HD). He might also try pulling some of those products from Sears completely and selling them through other retail channels like com (NASDAQ: AMZN) or home improvement stores.


  1. Lampert could simply sell off assets completely to entities such as private equity firms, hedge funds or other retailers. Lowe’s or Home Depot might be interested in Kenmore, and Craftsman could be a good fit for Walmart or even Amazon. One intriguing possibility is that Alibaba Holdings (NYSE: BABA) could purchase as a way to expand its footprint in the American market, although I imagine he would have a hard time finding buyers for the Sears stores or Kmart, which have turned into black holes into which cash disappears.


  1. Sears will have its worst holiday season ever. My guess is that Sears will report dismal holiday sales, which will drive its stock prices down fast. Shoppers will avoid Sears like the plague, and merchandise will go unsold, if Lampert bothers to order any.



  1. Sears’ stock prices will fall drastically, possibly to below $10 a share by sometime next year.


  1. Sears will report even greater revenue losses, which will prompt more store closings and drive more revenue losses.


  1. Expect some sort of wind down at Sears next year, possibly a shutdown of the brick and mortar retail operators with and the Craftsman, Kenmore and Sears Auto brands remaining in operation in some form.


  1. Sears itself could continue as a real estate investment trust, selling off or leasing out the remaining real estate holdings, if there are any.


It looks as if Sears is facing the end of the road. There simply is no way this great retailer can continue on its present course without a complete collapse. Sears is definitely in the death spiral, folks.

The blogger owns shares of Kroger (NYSE: KR); he would not touch Sears with a ten-foot pole.