Sears Earnings: A Textbook Example of a Company in Freefall

If you have a macabre interest in watching a company struggle against an accelerating and almost certain demise, then you might find it satisfying to tune into the unraveling of Sears Holding Corporation  (NASDAQ: SHLD  ) . While I get no pleasure from saying that, as I've long been a satisfied customer of the 120-year-old company, there's no sense in denying the inevitable.

Sears' latest quarterly results, which were released by the company on Thursday, offer proof of Warren Buffett's admonition that "turnarounds seldom turn." For the three months ended Aug. 2, the retailer lost $573 million, burned through $313 million in cash (as measured by EBITDA), and saw its book value fall by 67% on a year-over-year basis. It was, for all intents and purposes, a bloodbath.

To be clear, Sears isn't giving up without a fight. During the first half of the company's fiscal year, the retailer generated $665 million in additional liquidity -- though most of it, $500 million to be precise, came from the spinoff of its Lands' End subsidiary earlier in the year. It's also continuing to "explore strategic alternatives" for its 51% interest in Sears Canada, a thus-far unfruitful endeavor that began almost a year ago.

Finally, the Chicago-based company isn't relenting in its efforts to "optimize" its store network -- that is, shuttering underperforming stores. During the last six months, it's announced the closure of approximately 130 locations, and said on Thursday that it "may close additional stores during the remainder of the year."

While it probably goes without saying, it seems increasingly clear that the question is no longer whether Sears will survive, but instead, when will it be forced to follow in the footsteps of Circuit City, Borders Group, and Linens 'n Things, among other now-defunct brick-and-mortar retailers, by seeking the so-called "protection" of the bankruptcy courts, a description I've never completely understood.

Sears' most acute problem is liquidity -- as is typically the case with a company in its position. It finished the quarter with $829 million in cash and equivalents. On top of this, it has $240 million remaining on a revolving credit facility, and is technically free to raise an additional $760 million in second-lien debt, though it's far from certain that creditors will be forthcoming with the latter in the event the funds are urgently needed.

Meanwhile, Sears has burned through upwards of $300 million in cash every quarter since the middle of last year. If it continues at this pace, in turn, it will have no choice but to try its luck in the credit markets at some point during the next few quarters. And it will be at that point, if not sooner, that investors will get a tangible sense of Sears' near-term ability to survive.

In sum, if it isn't already clear, Sears' stock has long since come within the exclusive province of speculators. Long-term, fundamentals-based investors need not apply.

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  • Report this Comment On August 21, 2014, at 10:49 PM, SkepikI wrote:

    John- thanks for that, another seminal article on the pitfalls of fighting trends with liquidity disaster in progress.... as I suspected this is a "current example" of your liquidity thesis to watch with all the fascination of slomo train wrecks.

    "Fast Eddie" Lampert has tried every trick in the book and a few that aren't, with sickening outside curve skid continuing.

    I have no position one way or the other with Sears, but I have to wonder if Fast Eddie doesn't deserve some short pile on from me....

  • Report this Comment On August 22, 2014, at 4:02 PM, esxokm wrote:

    That's a good question...is the Sears thesis telling us we should go short? If Disney is the perfect stock -- as many people consider it is -- for new investors, is Sears the perfect short for those who have never shorted a stock before? What about buying put options?

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