The headline news last month that Sears Holdings (NASDAQOTH:SHLDQ) turned a quarterly profit for the first time in several years sent its stock soaring 20%, but as usual, the euphoria quickly wore off, and today its shares trade 22% below that high point. Ever the optimists, Sears investors grasp onto any hint of good news, only to be smacked upside the head by reality.
From spinoffs and sales of stores to financing and branding deals, Sears stock rallies on the news only for the hoped-for long-term gains to be revealed as ephemeral. No one wants to see Sears go under, and its investors likely hope each fresh development will be the one that marks the start of the retailer's revival, but that never turns out to be the case.
Operating on a non-recurring basis
There was good reason not to get too excited by Sears' first quarter. A quick read of the press release showed that its $244 million Q1 profit had nothing to do with its shoppers buying more clothes or household goods, since comparable-store sales tumbled 12.4% at Sears and 11.2% at Kmart. Rather, it was deals like the sale of its Craftsman tool business to Stanley Black & Decker (NYSE:SWK) that inflated its returns. If you backed them out, Sears actually had a loss of $230 million, worse than the $199 million loss it recorded a year before.
And so it has ever been with Sears since Chairman and CEO Eddie Lampert bolted together the ailing Kmart and Sears, Roebuck chains. Early on, it was the use of financial gimmicks such as total return swaps and stock buybacks that allowed Sears to keep up the appearance of improvement; later, it was spinoffs like those of Sears Hometown & Outlet Stores and Land's End.
Most recently, it has been the monetization of Sears' significant real estate holdings that has driven the gains, such as those realized after Lampert created the real estate investment trust Seritage Growth Properties (NYSE:SRG) and sold it several hundred stores, or dipping into his admittedly deep pockets to loan the retailer money. Unfortunately, all that has simply allowed Sears to keep the lights on.
Burning the furniture to heat the house
Analysts estimate Sears Holdings is burning through so much cash that it could run out within the next month. TheStreet.com quotes Iszo Capital financial analyst Brian Sheehy as saying Sears is burning through $189 million a month in cash, and because at the end of April it had just $70 million left on its credit revolver and $264 million in cash, the well should run dry in July. Unless, of course, it can come up with yet another one-time cash infusion.
The problem is that Sears is running out of gimmicks to deploy and assets to shed; it can't keep this up for much longer. But some speculate that a month longer is all the time Lampert really needs before he can allow Sears to go under.
According to Debtwire, a corporate debt intelligence service, because of Sears property sale to Seritage in 2015, July 8 would be the earliest the retailer could seek bankruptcy protection without worrying about being accused of violating laws on fraudulent conveyance. Under bankruptcy law, there is a two-year window where the courts can consider whether assets were improperly transferred.
The end is nigh
That was also one of the concerns surrounding the sale of Craftsman that Stanley acknowledged was a possibility. Although the toolmaker said it had shielded itself from Sears financial woes, it admitted a judge could unwind the deal if a judge determined Sears was bankrupt at the time of the deal or became bankrupt because of it.
Of course, Sears is not profitable, it has declared there is an imminent risk of bankruptcy (albeit the disclosure was largely boilerplate), and it has within the past week said it will be closing even more stores than it had previously announced and slashing dozens of corporate positions.
While Sears Holdings investors may be hoping for the best, at this point they should realize that whatever good news is delivered, bad news will probably be following close behind. The retailer has been described as a slow motion liquidation, and we may very well see the end of it next month.