Sears Holdings (SHLDQ) has been in a highly public struggle for survival.
The chain has closed stores, sold its Craftsman brand, and gotten much smaller as it tries to remain relevant in an increasingly digital world. While the company and its CEO Edward Lampert will tell you that the plan to turn the company around will work, results show otherwise.
Negative trends continued in Q2 2017 when Sears reported total revenues of $4.4 billion, down from $5.7 billion in the prior year quarter. Much of that (about $770 million) came due to store closures, but open stores saw comparable sales fall 11.5% compared to Q2 2016.
Those results are typical for what the company has experienced over the last few years. It's also part of an overall retail trend that has caused a number of bankruptcies and store closures.
If you believe in Lampert's plan for Sears, then it makes sense to buy shares. If you don't believe the chain will turn around, don't buy just because of the following reasons.
Image source: YCharts.
1. The dead cat bounce
While Sears stock has been on a steady downward slide, it has had little recoveries a few times over the past few years. On many occasions this has happened after a statement from Lampert where he expresses optimism. For example, when the chain reported its Q2 results on Aug. 24, its CEO made the following upbeat statement.
We are making progress on the strategic priorities we outlined earlier this year and remain focused on returning our company to profitability. 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.
That sounds really encouraging and after that release came out, shares rose as much as 12.4%. That gain was short-lived however with the stock closing down for the day at $8.55, after it opened at $9.06 and climbed as high as $9.63.
Optimism has tended to send Sears shares higher. That's perhaps a tribute to Lampert's persuasiveness, but there's no guarantee that will happen next time. In reality, share performance always reverts back to the underlying success of the brand. If sales keep dropping and stores keep closing, then any stock gains are not going to stick.
Sears has been closing stores and losing money. Image source: Sears Holdings.
2. You expect a buyout
Sometimes when a chain struggles with its stock price, it still has a fundamentally sound business. That's arguably the case with Nordstrom (NYSE: JWN), a chain that has seen its shares suffer even while it is still making money. That makes it a logical candidate to go private and no longer be judged by comparable store sales growth and the other metrics investors look for.
Sears, however, is not Nordstrom. The chain has been steadily losing money and its only positive quarters over the last five years have come from sales of assets like Craftsman.
It's possible that Sears gets bought in a fire sale, but it won't be taken private at a premium over the current share price. The company's assets roughly equal its debts and there are no signs losses will turn around any time soon.
Buy what you believe in
While I have no faith that Sears will find a bottom or that its digital strategy will work, there are some people who disagree. In the case of any stock, it's important to purchase based on the long-term prospects for the business.
If Sears stabilizes, its share price will rebound. If it doesn't -- and it likely won't -- the end will come eventually. Buying shares based for a gimmick reason is more like buying a lottery ticket than investing.
