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Is Sears Holdings Spiraling Out of Control?

By Adam Levine-Weinberg - May 17, 2017 at 8:35AM

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Sears CEO Eddie Lampert's recent efforts to project confidence in the retailer's future have completely backfired.

In the past week, Sears Holdings ( SHLDQ ) CEO Eddie Lampert has tried to calm investor fears that his company is teetering on the brink of bankruptcy. However, his comments have only served to fan the flames.

While Lampert has pointed to particular accomplishments at Sears Holdings, he has never really acknowledged just how bad the company's problems are. As a result, his remarks about Sears' progress just make him seem out of touch -- increasing investors' concerns that Sears doesn't have effective leadership.

Lampert goes off the rails

In a blog post released in conjunction with Sears Holdings' annual meeting last week, Lampert criticized the media for repeatedly predicting that the company was doomed. He stated: "While we are not asking to be spared from informed opinions about our business performance, for far too long, many commentators have rushed to conclusions about the future of our company. Not only have these predictions been off the mark and based on incomplete and selective information or biased sources, but they have also been harmful."

In particular, Lampert claims that the constant drumbeat of media speculation has made vendors and customers nervous about dealing with Sears. He says the fact that Sears is still around shows that speculation about its future has been misguided.

The exterior of a Sears store

Sears has posted losses for years on end, but it hasn't folded yet. Image source: Sears Holdings.

Around the same time, in a somewhat bizarre interview with the Chicago Tribune, Lampert argued that Sears is "ahead" of companies such as Macy's, J.C. Penney, and Target in terms of reacting to changing customer habits. Considering that Sears has significantly worse sales trends than any of those competitors, this claim is hard to swallow.

On Monday, Lampert lashed out again. This time, he stated in a blog post that One World -- a supplier that makes tools for Sears under the Craftsman brand -- was trying to exploit the negative headlines about Sears to extract unreasonable terms from the company.

Sears has filed a lawsuit against One World in an attempt to force it to honor its existing contract. It's not clear what Lampert hoped to achieve by publicizing this dispute. Its main effect has been to highlight vendors' growing reluctance to do business with Sears.

Does he have a point?

It's true that media outlets have been talking about a potential Sears bankruptcy for years, and so far the company has weathered the storm. Indeed, a combination of deep cost cuts, real estate sales, and the recent sale of the Craftsman tool brand should enable Sears to stave off bankruptcy again in 2017.

Lampert has also cited favorable trends in member numbers and engagement for its Shop Your Way rewards program. Sears has implemented a number of enhancements to the program recently, including partnerships with the likes of Citigroup and Uber.

Lastly, Lampert has noted that Sears still has a lot of valuable assets. Aside from controlling hundreds of properties -- many of them in top-performing malls -- it has the Kenmore and DieHard brands, as well as a growing home-services business.

The numbers don't lie

What Lampert doesn't seem to recognize is the strong possibility that none of Sears Holdings' supposed achievements really matter.

First of all, revenue continues to plunge. As of late April, the company was on pace to report a dreadful 11.9% comp sales decline for the first quarter. That's on top of the impact of a massive wave of store closures. As a result, Sears Holdings will report an even bigger adjusted loss this quarter than it did a year ago, despite all of its cost-cutting efforts.

Perhaps sales are rising among some small subset of customers. But the vast majority of Sears' customer base appears to be defecting to competitors in droves.

Meanwhile, it's true that Sears has been able to avoid bankruptcy so far -- but only because it has had billions of dollars of real estate to sell. Sears had hoped to use these asset sales to buy time for a turnaround. Instead, its profitability is as bad as it ever has been, and the company continues to burn $1.5 billion-$2.0 billion of cash annually.

Sears will probably have to sell or monetize most of its remaining valuable assets just to stay afloat for another two or three years. Furthermore, as it sells off key brands and high-value stores, it directly undermines its future profit potential.

Thus, barring an abrupt change in its sales and earnings trends -- and virtually all of the evidence suggests that such a turnaround is unlikely to occur -- Sears will be driven out of business once it runs out of assets to sell.

If Lampert had acknowledged the depth of Sears' problems and provided a timeline for when results should improve, he might have had a chance of convincing investors that there is still hope. Sears' financial results are reason enough to doubt that it will be able to survive for more than a few additional years. If the CEO is in denial about the extent of the company's problems, then the chances of a successful turnaround are even more remote. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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