Sears Holdings (SHLDQ) has been a roller-coaster ride for investors. Shares remain down over 30% from their 52-week high. Its short interest remains over 20%--clearly a large part of the market that is betting against the company. Short sellers got another boost of confidence after the company announced fiscal first quarter results last week, as did former employee Steve Dennis.
Dennis' reasoning
Dennis has written on his blog that Sears should liquidate itself. Among Dennis' five reasons for an outright liquidation of Sears is that the retailer has lost relevance. It has lost market share to competitors because it has not invested enough in its brick-and-mortar stores. He calls CEO Eddie Lampert "either a liar or delusional." He then concludes that Sears has no chance of becoming a viable retailer.
Sears is looking into various strategic alternatives for its 51% stake in Sears Canada, which might include a sale of its own interest. The company is hiring an investment bank to further the process, and the Sears Canada Board of Directors has announced that it will be cooperating fully with Sears to maximize the value for its shareholders.
Meanwhile, Sears Canada posted a much higher first-quarter loss due to rough winter weather. The company closed several stores as part of a turnaround effort and saw revenue drop 11%, while same-store-sales fell by 7.6%. For the U.S., Sears saw comparable-store sales up 0.2%, with Kmart seeing a 2.2% fall. Gross margin also fell across all of its brands, due to the company increasing its promotions.
After the asset sales, Sears Canada was left with 14 owned department stores, 96 leased stores, some distribution centers, and approximately $5 a share in cash. Unfortunately, placing a value on the real estate could be difficult because the prime locations are already sold. Target (TGT 1.62%) could have been a possible buyer earlier, but has had its own problems with expanding in Canada.
Is Sears on the road to bankruptcy?
Sears has been selling assets without any objections from creditors. As it continues to sell its more valuable assets, the risk of bankruptcy increases. The downward spiral has been noticeable for some time and 2013 offered a negative EBITDA of $337 million.
Lands' End (LE 1.64%) was contributing a positive EBITDA of $150 million annually, but Sears was allowed to spin it off for a dividend benefit of $500 million. This means, that for Sears, the negative EBITDA of $337 million in 2013 would have been $487 million without the contribution of Lands' End. In effect, Sears has managed to pay dividends out of asset sales.
A realistic assessment
In hindsight, the move that probably doomed Sears was the decision to merge with Kmart, in a 2005 deal worth $11 billion. Both Target and Wal-Mart have invested heavily in stores that sell groceries and have continued to deliver an experience to customers, which they expect.
With earnings being negative, Sears trades at an incalculable P/E ratio and a P/S ratio of only 0.11. Sears debt load of $4.13 billion is more than its $4 billion market capitalization. Meanwhile, Target trades at a P/S ratio of 0.5, and its debt load is less than half its market cap. As far as P/E goes, Target trades at a P/E under 13 based on next year's earnings estimates. The Sears' spinoff, Lands' End, trades at a P/S ratio of 0.55 and has no debt.
Bottom line
Sears needs to continue raising cash, and while asset sales may buy it time, it does not seem to have a viable strategy. Many believe that the parts may be worth more than the whole, and it looks as if Sears is capitalizing on this as it is quietly goes out of business. For investors looking to gain exposure to the brick-and-mortar retail industry, there are better places to park your cash.
