Whether you die slowly or quickly, at the end, you're still dead.
Since 2011, Sears Holdings (SHLD +0.00%) has had only three profitable quarters. In fact, over the last five years the chain has lost $7.2 billion in sales and it remains on track for a loss of over $1 billion through normal operations this year. The numbers are actually worse than they appear because Sears has generated cash through one-time events like selling real estate, and its Craftsman Tools brand, slowly trimming its assets while its long-term debt rises.
The company has also been getting steadily smaller as its revenues have shrunk each year both through a loss of sales and through closing locations. The trends have continued into 2017.
Sears made $244 million in the first quarter of this year, but that was due to asset sales including the Craftsman deal. When you back those numbers out, the company that includes both Sears and Kmart actually lost $230 million in Q1, worse than the $199 million loss it reported the previous year. Normal patterns returned in Q2, reported Thursday, when the chain lost $251 million. Comparable-store sales fell 11.5% in Q2 compared to 11.9% in Q1.
The company has cut its losses and lowered its expenses, but that merely slows its likely doom. CEO Eddie Lampert wants investors to believe a turnaround is coming, but so far he has only extended the company's life, not gotten rid of the risk.
Steady decline
Check out this multiyear chart showing a worsening financial condition.
| Year | 2012 | 2013 | 2014 | 2015 | 2016 |
|---|---|---|---|---|---|
| Loss | $930 million | $1.36 billion | $1.68 billion | $1.1 billion | $2.22 billion |
| Revenue | $39.85 billion | $36.18 billion | $31.19 billion | $25.14 billion | $22.13 billion |
| Comps | (2.5%) | (3.8%) | (1.8%) | (9.2%) | (7.4%) |
| Total assets | $19.32 billion | $18.23 billion | $13.18 billion | $11.3 billion | $9.3 billion |
| Long-term debt | $1.5 billion | $2.5 billion | $2.8 billion | $1.9 billion | $3.4 billion |
|
Store count | 2,548 | 2,429 | 1,725 | 1,672 |
1,430 |
Data source: Sears Holdings.
It's worse than it looks
Sears' long-term debt does not tell the entire story. As of July 30, 2017, the company had total debt of $9.07 billion (about the same as its total assets). The debt is actually $2.1 billion lower than a year ago, but assets fell by about that much as well.
Sears has cut its losses by lowering expenses while it sheds assets, but to survive it needs to make money, not lose less. Lampert has remained aggressively optimistic that his company will turn the corner and has already begun its recovery. His remarks in the Q2 earnings release echo his comments in nearly every quarter: a positive spin on continued losses.
The comprehensive restructuring of our operations is delivering cost efficiencies and helping drive improvements to our operating performance. While the third quarter has historically been our most difficult quarter over the past several years, we are working toward making meaningful improvement in our performance this year as a result of the restructuring actions we have put in place, and our continued focus on the expansion of our Shop Your Way ecosystem.
Shop Your Way (SYW) is an online platform Lampert has made a strong part of his plans to keep the brand viable with a much smaller store base. The company does not provide detailed numbers for the platform, but in a March letter to shareholders, Lampert said it had "tens of millions of members."
That could eventually be an asset if the company can leverage data to sell more goods. For now, however, SYW simply operates as a discount program, perhaps driving some sales, but also lowering margin.
Sears has been steadily closing locations. Image source: Sears.
What's next for Sears Holdings?
The company plans to close another 28 Kmart stores and continues to look for ways to save money in order to preserve cash. In addition, the company has worked with its lenders to buy it more runway and Lampert has loaned the chain money from hedge funds he controls.
The problem for the chain is that all of these moves assume that a quarter will come when bottom has been hit, and all of these measures produce a profit. There have been very few signs that will happen. Sears has lost customers and they don't seem likely to come back. Lampert is putting up an inspired fight, but it's hard to see how any of his efforts change the outcome.
