After suffering its 20th consecutive quarterly decline, it's clear Sears Holdings (OTC:SHLDQ) is a zombie retailer that is dead but just doesn't know it yet. Because it does still have a relatively valuable real estate portfolio, it may be able to continue shambling along for some time, but it's clear to everyone except CEO Eddie Lampert that there is no hope that it will come back to life.
One foot in the grave
Sears' third-quarter earnings report was about as bad as you'd expect it to be. Revenue fell 12.5% to $5 billion as fewer Sears and Kmart stores are in operation, coupled with yet another quarter of falling same-store sales, widened losses to $748 million from $454 million last year. Although Lampert has tried to transform the retailer into a smaller, leaner, more digitally savvy business, it comes too late, and he probably brought too little dry powder to the battle to make a successful change.
Bankruptcy could be on the cards for Sears, both ratings agencies Fitch Ratings and Moody's have said they foresee Sears going out of business. And January is one of the most popular months for declaring bankruptcy, as companies are often flush with cash from the holiday season. However, with valuable assets such as Kenmore, Craftsman, and DieHard still in its portfolio, and a bevy of real estate it can still sell off, it's likely Sears will continue to exist for a while among the walking dead.
Ashes to ashes
Lampert, though, sounds as if he's still in the first stage of grief: denial. In the quarterly earnings announcement, the hedge-fund operator says he remains "fully committed to restoring profitability" to Sears and details actions such as closing retail locations, reducing square footage in stores it still operates, and no longer investing in categories that underperform for the company. Still under consideration are the sale, spinoff, or some other strategic arrangement with Kenmore, Craftsman, and DieHard (KCD) as well as Sears Home Services, and the real estate it still owns.
The problem is, all those actions will only serve to finance the retailer's day-to-day operations. It really has no cash left -- it reported just $258 million in the bank this quarter, down sharply from the summer of 2015, when it had more than $1.8 billion. Its access to financing is limited as well, and it needs to repeatedly turn to Lampert to keep it going, as it did in the second quarter, when he injected $300 million in short-term funding.
That move may have also been an effort to keep suppliers from bolting, as they've threatened to do on several occasions. The move was unsuccessful. Toymaker JAKKS Pacific (NASDAQ:JAKK) said it stopped shipping inventory to a major retailer experiencing financial difficulties, which was widely read as being Sears, and Business Insider reported that a half-dozen of its clients have "significantly" reduced their shipments to Sears because they fear it is going bankrupt -- and one has halted shipments altogether.
That may be one of the reasons Sears Hometown & Outlet Stores (NASDAQ:SHOS) suffered its own collapse, as revenues fell 10% on a 6% decline in comparable sales. In particular, it said apparel sales plunged 49% because of "the continuing impact of significantly reduced inventory availability from Sears Holdings, our sole source for this category." If Sears Holdings is having trouble getting inventory from its suppliers, it stands to reason it's going to be unable to supply anyone else.
Resurrecting the dead
Yet Lampert has proposed taking a bigger stake in Sears Hometown in exchange for having the retailer sell more KCD products in its stores. While making the products and appliances available to more consumers is a good idea, using Sears Hometown as the channel for that isn't likely to be a viable one, since consumers who are shopping at the Hometown stores are also probably shopping at Sears. It's not unreasonable to assume that they have the same customer base and the customers already made the decision not to buy.
It's clear there is just no way this story ends well for Sears. It faces falling sales, growing losses, a heavy pension burden, and a shrinking asset base that's losing value daily. That real estate, for example, might not be as valuable as believed, as retailers across the industry shrink their footprint.
Given enough time, the decay taking hold of Sears Holdings will one day soon cause it to succumb, unable to rise from the grave once more.