Not Even a Buyout Can Save Sears Holdings Now

Is a buyout the only hope Sears Holdings (NASDAQ: SHLD  ) investors have left?

A brick facade may be all that's left of the once-venerable retailer.

The two once-great retailing concepts of Sears, Roebuck and Kmart have been reduced to empty shells of their former selves following nine straight quarters of losses; 30 consecutive quarters of falling sales; a reliance upon assets sales and spinoffs, like those of Lands' End (NASDAQ: LE  ) , Sears Hometown & Outlet Stores (NASDAQ: SHOS  ) , and Orchard Supply, to infuse its balance sheet with cash; and a just-announced need to close more stores than the 130 it had already planned for this year.

If Sears keeps this up, it will dwindle away to virtually nothing.

Unlike other department store chains like J.C. Penney (NYSE: JCP  ) and Kohl's (NYSE: KSS  ) that are also on wobbly financial legs, but still present a chance for investors to witness a turnaround, Sears investors have no such hope. Other than continuously stripping away anything of value and leaving behind the rubble of tired stores, falling sales, and everwidening losses, there doesn't appear to be any endgame to reverse the trajectory its on.

Of course, picking over the bones of carrion like Sears is often the specialty of private equity firms who revel in the opportunity to profit from stripping away the flesh, but chairman and CEO Eddie Lampert has already done that. All that's left are a couple of brands like Kenmore, Craftsman, and Sears Auto Center, meaning there's not much meat left for private equity to step in and use to engineer a resurrection.

Another flat tire. Sears Holdings is considering shedding the auto business too.

And Sears is also considering selling off the auto division and shedding its remaining 51% stake in Sears Canada suggesting that not even a retail rival like Wal-Mart (NYSE: WMT  )  would consider making an offer, even if it could be had on the cheap.

No one wants to throw good money at a store whose name is synonymous with decline.

One of Sears' problems is it lacks a brand identity. Where Wal-Mart is internationally recognized as the low-price leader and Penney, Kohl's, and Target (NYSE: TGT  ) are bastions of middle-market retailing, it's hard to define just where Sears places or what it means to its customer, assuming there is a "Sears' customer" anymore.

Data: Sears Holdings SEC filings.

In its just reported second quarter, revenues dropped $858 million to $8 billion, with 39% of the decline owing to the spinoff of Lands' End and another 29% coming from store closings. It lost another 17% from its Sears Canada operation, same store sales dropped another 6%, and 10% came from the "just because" category. Those were largely also the reasons behind its $444 million decline in gross margin, with net losses widening to $573 million, or $5.39 per share, from $194 million, or $1.83 per share last year.

Data: Sears Holdings SEC filings.

Even its much ballyhooed Shop Your Way member loyalty program seems to have topped out. Having risen steadily each quarter over the past year to account for nearly three quarters of its sales, the SYW program eased back to 73% of the total in the second quarter. Sure, it's fallen several times following its launch, and we'll need to keep an eye on whether the loyalty program has gone as far as it can, but the program continues to sap Sears margins because it continues to run dual promotional campaigns. It's discounting its way to the poorhouse.  

Bullish investors have long pointed to the value of its real estate holdings as a store of value, though as has unfortunately proved to be the case, it hasn't quite lived up to the hype and its value continues to diminish even as its reduces its physical footprint.

That could be because it's seen as a distressed seller needing to sever its prime properties to keep the cash flowing into its balance sheet. The net book value of the securitized real estate assets in the latest quarter was approximately $700 million, down from around $1 billion five years ago.

Now it says it may need to close even more stores, but shedding additional real estate won't give it a premium on the properties either. Sears talks about raising in excess of $1 billion in proceeds this fiscal year, but that's all just short-term infusions, which it continues to burn through at an alarming rate.

Admittedly some of the problems plaguing Sears Holdings are not of its own making. The recession hurt a lot of retailers and only the very best have bounced back better than before. For the mashup that was Sears, Roebuck and Kmart -- two broken brands even before they were joined together -- the effects have been only magnified.

Yet Lampert has done the company and its investors no favors either, preferring instead to use financial tricks like total return swaps to temporarily make quarterly numbers, until they eventually lost their effectiveness and were abandoned. He also eschewed investing in upgrading his stores, maintaining customers didn't want "decor and fixtures," so why waste money fixing things up? But they don't want to feel embattled when shopping there either, and that can partially explain why consumers have fled to more hospitable environs.

Sears has come a long way since the 1930's, but you're still transported back in time when you walk into many of its stores today. Photo: National Archives.

Shell-shocked would also sum up the feelings of investors who've watched shares of Sears Holdings plunge from their highs of nearly $200 a stub back in 2007 to under $35 a share today, a stunning 83% loss of value.

On the surface that's a distressed stock that ought to have buyers lining up to make an offer. But turn over the rock and all you'll find are bleached bones with little gristle worth gnawing on. If anyone's hoping some buyer will come in and save them from the carnage, there seems little chance of an offer being made.

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Read/Post Comments (12) | Recommend This Article (8)

Comments from our Foolish Readers

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  • Report this Comment On August 27, 2014, at 8:34 PM, hrldmsn wrote:

    Well I am not surprise that Sear is going under with declining sales. I purchased a washer and dryer from them in June 2011. The washer started to give me problems a year later and I called Sears to try to have them fix it. They kept stalling on the getting the washer repaired, so finally I threaten to report them to the better business bureau because I had purchased the extended warranty with both appliances. They finally decided to send a repairman out of Grants New Mexico to come fix my washer. The repairman asked me if I had any gas money and he told me that he would order the part. A week passed and there was no part or service man. It took the owner one month to come out and finally get my washer fix. He had told me several times he had the part and would come out to fix the washer. I had to report him into Sears and the better business bureau for him to come fix my washer. When he finally came to fix the washer he was very rude and told me I had no right to report him to the better business bureau. I told him yes I do because you kept lying to me and I had enough. I will never purchase another appliance from Sears again.

  • Report this Comment On August 27, 2014, at 9:11 PM, notyouagain wrote:

    Sad. Soon all that will be left is wonderful memories of Sears in its heyday... for those of us that are old enough.

    In the sixties and seventies, going to Sears was like going to the mall would be like later.

    It was the first superstore. Sad to see it die.

  • Report this Comment On August 27, 2014, at 11:24 PM, flomop wrote:

    @not you again&hridman: Agreed on both. I have tried to support Sears where I can, they used to be reliable, affordable, and known for quality. I've had the tools, the appliances, and yes, the out-of-date clothes(still love them). My last experience was such a negative, trying to purchase a hot water heater, that I can no longer be bothered with making the effort.

    It sounds as though my sporadic loyalty was akin to chartity; and it was.

    How a major supplier can't review specifications for an appliance before selling it, and then make excuses on why it will be a week before it can be installed, leaves little mystery to how they could've driven themselves into irrelevance.

    I ended up buying it locally, installed in a day, and 15% less than Sears.

    Sad.

  • Report this Comment On August 28, 2014, at 3:20 AM, sonnysboy57 wrote:

    My wife has worked at Kmart for 36 years. I have been advising her to file for her retirement papers before they come and put the "chains" on the doors. She has finally seen the light. I can't help but wonder why some of those Sears Stock Holders have not had enough of Mr. Lambert's foolish spending and booted him out. He reminds me of a fella that lives in a big "WHITE" house, knows everything and can't be learned nothing! Mr. Lambert if you read this, DO THESE TWO FINE COMPANIES A GREAT SERVICE, STEP DOWN AND LET SOMEONE WHO KNOWS THE RETAIL BUSINESS RUN THINGS? Before you put a lot of good people out on the street.

  • Report this Comment On August 28, 2014, at 12:12 PM, youstink wrote:

    I believe the formula for success lies in management. But when management operates their employees on a rotating schedule out the door, to claim that upper management needs them to replace the employees they've just zeroed out in terms of hours, then the level of success never achieves. Look at K- Mart in Big Bear, California.

  • Report this Comment On August 28, 2014, at 1:10 PM, BigDipper3 wrote:

    Sears was terrible with Customer Service...I should expected issues from the start when the CSR that took and processed my lawnmower for service took over a half an hour to do so. After service was complete, I couldn't call the local store directly; I would call the 800# and be re-routed 10x's and even hung-up on. Once I finally reached a manager and made a point of contact, he became useless, too. The employees did not have access to the World Wide Web to help research the issue I had. Delay after delay, excuse after excuse, I finally found and purchased the part myself and NEVER contacted Sears again b/c of such poor service. I'm surprised Sears hasn't gone out long ago, much like Montgomery Wards. Too bad.

  • Report this Comment On August 28, 2014, at 4:53 PM, shomemaker wrote:

    I used to be a department manager at Kmart. I resigned after one year due to lack of repairs done to display cases, cutting managers hours back, unable to clear the main aisles so handicapped people could at least get through the store to shop, old merchandise not marked down fast enough to clear out for new merchandise to come in, lack of merchandise to cover advertisements for the week, lack of good help to cover shifts. I could go on and on about what needed to be changed. None of the superiors ever listened to customers needs and acted on their suggestions. When asked by headquarters what could they do to help us increase sales, deaf ears were turned on us after ideas were suggested. In other words-the department managers were warm bodies performing a job and good luck with trying to get a raise. Sears could be resurrected, but only if someone with previous retail experience is in charge.

  • Report this Comment On August 28, 2014, at 4:54 PM, plange01 wrote:

    sears,radio shack ,hertz,jc penny and the disgrace gm! all on their way to the DUMPSTER!

  • Report this Comment On August 29, 2014, at 7:44 AM, truthbtld wrote:

    Eddie Lampert....the man who killed Sears.

  • Report this Comment On August 29, 2014, at 11:01 AM, helptome wrote:

    I work at Sears. I see the issues day in and day out. We strive for great customer service in or store. The 800# well not so much at times. We too experience trouble. Please don't forget that I am human and only trying to help.. I don't want to see the 1000's of people lose their jobs if we go down. The American people have had way too many jobs taken away. So if we can be patient and help the stores it would be greatly appreciated!

  • Report this Comment On August 29, 2014, at 2:05 PM, Tacolover wrote:

    No surprise here. At 59-years old and been on my own since 17 I have always shopped Sears. That is until about 5-years ago, most everything I owned was from Sears. Sear "Blue Crew" was not only days late on a Kenmore refrigerator repair losing everything in my refrigerator freezer but extremely rude also. Now Craftsman tools are cheap Chinese made, stores carry no common parts to their lawn equipment etc etc. Heck I call the store and automated answering directs me to the wrong department every time. Gets so old the Sears Rep says "I'll just go over to that Dept. and get somebody here to help you" and put on hold for eternity. Good Riddance Sears, if you cannot compete then just fold and go away...

  • Report this Comment On September 03, 2014, at 2:33 PM, snommis69 wrote:

    Pretty sure the only value left in this heap is the Craftsman brand... and even that is somewhat tarnished these days. Maybe someone like Stanley Black and Decker buys those remnants...

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