Over the past couple of days, shares of Sears Holdings (NASDAQOTH:SHLDQ) have been acting pretty funny. Last Tuesday, shares of the struggling retailer rose by 11.8% on news that it decided to engage in a series of initiatives to help turn itself around. However, the company's share price declined by 5.51% on Wednesday as part of a broader market downturn.
Lucrative sale and spin-off mania
The initial increase can be attributed to news that the company agreed to sell off five of its stores to Cadillac Fairview Corporation Limited, its lessee, for around $400 million. On top of this sale, Sears Holdings expects to spin off two portions of its company; its Sears Auto Center operations and its Lands' End operations, the latter of which the company acquired in 2002 for $2 billion.
Undoubtedly, this appears to be good news as the company has been on the decline for a number of years. For instance, between its 2009 and 2013 fiscal years revenue declined by 14.8% from $46.77 billion to $39.85 billion. Despite spin-offs and attempts at restructuring the company, sales have continued to decline throughout its current fiscal year. Sales were down an astonishing 6.3% to $8.87 billion as of its most recent fiscal quarter from about $9.47 billion during the same quarter a year ago.
Losses are mounting
In addition to declining sales, the company has had a good deal of difficulty maintaining profitability, which is demonstrated by the fact that, for the past two fiscal years, it has had an aggregate net loss of $4.07 billion. To make matters worse, net income has continued to decline. The company booked a net loss of $194 million as of its most recent fiscal quarter, compared to the $132 million loss it took in the same quarter a year ago.
Perhaps more important than sales is the company's cash on hand. Currently, Sears Holdings has around $671 million in cash and cash equivalents. Although this is a nice chunk of change to you and me, the fact of the matter is that it's far below the company's five-year average cash and cash equivalents of $1.12 billion.
"So, the company has around two-thirds of a billion dollars in cash on hand! What's the big deal?" is a question some of you might ask. Certainly, with so much cash, it shouldn't be out of the question for the company to cover anything that may come its way, right? Wrong! If we look at J.C. Penney (NYSE:JCP), we actually see that while its market capitalization is around a third the size of Sears Holdings, it actually has more than $1.5 billion in cash and cash equivalents.
At more than 2.2 times the amount of cash and cash equivalents, even J.C. Penney has had difficulty meeting its financial needs due to the holidays coming up, a time when cash is in very high demand for the purpose of acquiring inventory. The issue has been so significant for J.C. Penney that, in addition to taking on more debt over the past year, the company has had to issue 96.6 million shares. It effectively raised more than $800 million in cash so that it may (possibly, but not definitely) make it through the first half of next year.
When you thought news couldn't get any worse
As we can see, these transactions by Sears Holdings appear to be the only hope the company has remaining. If it keeps spinning off assets and fails to turn a profit, it can't last for much longer. But what about a turnaround in the company's prospects? Surely, that would benefit it and its shareholders immeasurably. I don't think I would hold my breath on that one to be perfectly honest with you.
The rationale behind this is that the company's situation looks to be getting worse. In a recent update published by management, the company stated that comparable-store sales have declined by 3.7% over the 12-week period ending Oct. 26, 2013. The largest decline came from the company's Sears domestic stores, which saw sales fall 4.8%, while sales at its Kmart stores fell by 2.6%.
This news was accompanied by an announcement by management that it expected adjusted EBITDA (earnings before interest and taxes, less depreciation and amortization) of between -$250 and -$300 million for the third quarter of 2013, nearly double the $156 million loss in the same quarter a year ago. Since EBITDA numbers are always more favorable than net income, this implies that investors should expect a significant net loss for the upcoming quarter.
Honestly, I don't know what will happen to Sears Holdings in the future. However, given its consistent downtrend in revenue, net income, and cash and cash equivalents, things don't look too pretty. As such, I cannot recommend buying shares in the company.
In the event of a turnaround, or in the event that the company sells off additional assets or spins off its operations in a way that creates shareholder value, then there is plenty of upside to be had. The question that you, the Foolish investor, must ask yourself is if you are comfortable enough with the risk of holding this declining retail giant that may cost you a lot while you wait for that turnaround.
Daniel Jones has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.