As the slow, painful-to-watch decimation of Sears continues at the hands of Eddie Lampert, chairman of Sears Holdings (Nasdaq: SHLD), it seems investors have finally gotten the message that the company is not long for this world. After experiencing a high of $87.66 on March 16, the stock closed the week at $54.33 -- not great, but not as bad as its low of $28.89 on Jan. 5.
It's been a crazy ride, with investors bidding the stock up and down, sometimes for no apparent reason. Some things have changed recently, however, that make me think this downward spiral may be Sears' last.
Sears is being picked apart, one bit at a time
Sears must be dizzy with all the spinning off of its various parts that has occurred lately. Lampert sold 1,200 Sears stores just two months ago and recently closed the company's deal with General Growth Properties (NYSE: GGP) for 11 locations, including a prime Honolulu site, for $270 million. The mall in which the Honolulu Sears resides is one that brings in the big bucks -- $1 billion in yearly sales -- so the price that General Growth paid looks like a bargain. The extra cash hasn't helped Sears, though, which continues to flounder.
More recently Sears' Canadian holdings have been put on the chopping block, and its three stores were sold back to the original developer for $170 million. Sears is also selling Cantrex Group, which it bought out in 2005, though it will keep Corbiel Electrique, which was part of the original deal. Now, Land's End, the outdoor-apparel company that Sears purchased in 2002, looks as if it could also go up for sale. Less than a year ago, Sears Holdings CEO Louis D'Ambrosio identified Land's End as being a "priority" that would help save the company.
Land's End isn't the only brand from which Sears would like to squeeze additional profit. The company has hired a consultant to help it license the Kenmore, DieHard, and Craftsman names to other vendors in an effort to expand their horizons and, at the same time, bring in more cash for Sears. Not that there's anything wrong with that, but it does seem the company is looking to others to do what it's unable to do: market itself, and its brands, successfully.
Part of the licensing move could be interpreted as an attempt to stand firm against Home Depot (NYSE: HD) and Lowe's (NYSE: LOW), the two big-box retailers that Sears considers its greatest competition in the appliance business, which accounted for 16% of the company's 2011 revenues. Of course, the fact that both Home Depot and Lowe's have bright, clean, modern stores compared with Sears' neglected, shabby ones might have something to do with shoppers' reluctance to buy appliances at Sears. The hiring of Steve Haber, formerly of Sony, is meant to shake up the appliance sector, but his expertise seems misplaced, to say the least.
The real plan? Take the money and run
What is Lampert really up to? In my estimation, he's squeezing all the value out of Sears that he can, piece by piece. He understood the value of the company's real estate holdings early on and knows that selling off assets a little at a time will net him more than selling the whole ball of wax at once, intact.
Much of what Lampert says doesn't jibe with the actions he takes. For instance, many analysts see his parsing out of Sears' saleable parts as a bid for increased cash flow. By the same token, Land's End, for which Lampert paid nearly $1.9 billion, was responsible for $1.7 billion in revenues in 2011. Yet Lampert claims, in his most recent chairman's letter, that Sears has a profit problem, not one of liquidity. How, then, does it make fiscal sense to sell off the company's most profitable assets?
Taking a look at Sears' past five years' worth of financial statements is depressing, as it reflects a continuous downward march toward instability. The company's most recent annual report shows decreasing revenues each year since 2007, as well as decreasing assets. It certainly looks as if Lampert has been picking Sears' bones clean since he acquired the once vital retail giant.
It seems clear to me that Lampert is working toward liquidating the best parts of Sears and then tossing the rest to the wolves. Even the current plans to license the most marketable Sears brands makes sense in that light, since the better known and more profitable those names become, the more value will be wrung from them when the time comes to sell.
Expect Lampert to continue to sell off real estate, as the recent hiring of David Lukes to the company's real estate development arm is surely meant to expedite. After all, Lampert's letter claims that Sears still has more than $20 billion of assets, mentioning specifically real estate holdings and below-market lease contracts. It appears that Lampert still has a way to go before Sears is drained completely -- enough time, one hopes, that investors who are beginning to see the light can get out without being drained as well.
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