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There's No Cash Left in Sears' Cash Register

By Natalie O'Reilly – Mar 31, 2014 at 7:41AM

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Declining net sales and profitability in the face of competition from Macy’s has led to an uncomfortable situation for Sears.

Sears (SHLDQ), the troubled department-store retailer, has been attempting to turn its business around for years. While the company has been unable to stop customers from leaving for competitors Macy's (M 3.00%) and Dillard's (DDS 3.12%), investors have left the company's stock in droves.

However, current investors now have another reason to be concerned about being an owner of Sears -- the company's bank account. Years upon years of losses have put Sears in a bind that it might be unable to reverse.

Never-ending losses eventually lead to empty bank accounts
For those who have been following the Sears story, this latest turn of events should not come as a shock. Over the last few years, the earnings picture at Sears has not been good. Meanwhile, that's the opposite of what has been occurring over at major competitors Macy's and Dillard's.

The chart below features each retailer's net income for the last four fiscal years. You'll notice how dramatically different Dillard's and Macy's annual profit is when compared to Sears.

Company Name

FY 2013 Net Income

FY 2012 Net Income

FY 2011 Net Income

FY 2010 Net Income


$(1.37) billion

$(930) million

$(3.14) billion

$133 million


$335.6 million

$463.91 million

$179.62 million

$68.53 million


$1.49 billion

$1.34 billion

$1.26 billion

$847 million

Experiencing losses while a retailer attempts to turn its business around is one thing; what has been happening at Sears is another, and losses of more than $1 billion can be maintained only for so long.

A tight situation
Sears Holdings' balance sheet for fiscal years 2012 and 2013 tell an interesting story for investors who are considering an investment in the retailer.

Sears Holdings

FY 2013

FY 2012


$1.028 billion

$609 million


$7.034 billion

$7.558 billion

Short-Term Borrowings

$1.332 billion

$1.094 billion

Shareholders' Equity

$2.183 billion

$3.172 billion

It might appear that Sears is managing to keep its cash accounts at an adequate level to continue operations. However, upon closer inspection, two troubling facts emerge: first, short term borrowings -- liabilities that come due in a matter of months -- amount to more than $300 million greater than Sears' entire cash balance.

The other problem is that shareholder equity continues to drop by billions of dollars as the company continues to deal with annual losses. The problems Sears is having are troubling. And unfortunately for shareholders, we have seen this problem before.

Something we've seen before
Last September, J.C. Penney (JCPN.Q), another struggling department-store retailer, issued 84 million shares to raise enough capital to carry it through the holiday season. Many investors felt that this was unnecessary given its $1.5 billion cash and cash equivalents balance for the quarter ended in August. So why did J.C. Penney issue all these shares? Because some felt the company's losses had become too great, and that it might be on the verge of bankruptcy. Sears may not be there yet, but J.C. Penney's story leads one to wonder when its troubled peer may need to raise money.

Foolish takeaway
Sears Holdings has been trying to compete against better-performing retailer Macy's for some time. For years, Sears has attempted a retail turnaround at its flagship stores, and investors have given the company the benefit of the doubt.

Unfortunately, time is not on Sears Holdings' side, as its cash balance continues to decline along with shareholder equity. The situation is not improving, and Foolish investors should avoid Sears Holdings' stock until the company can find a way to strengthen its balance sheet.

Natalie O'Reilly has no position in any stocks mentioned. The Motley Fool owns shares of Dillard's. 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.

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