Please ensure Javascript is enabled for purposes of website accessibility

Sears Reverts to Plan B for Canadian Business

By Rich Duprey – Oct 3, 2014 at 3:30PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Investors better hope Eddie Lampert has a Plan C, D, and E in place, too.

Having failed to find a buyer for its Canadian operations, Sears Holdings (SHLDQ) is reverting to Plan B: selling shares to existing investors. But if savvy institutional investors didn't want a stake in Sears Canada, why should small, retail investors be saddled with it?

This stock maneuver may indeed signal the final sale for Sears Canada.

Sears unveiled yesterday a plan to raise about $380 million for most of its 51% stake in the Canadian unit, offering for sale as many as 40 million shares in a bid to increase its liquidity. Yet underscoring the difficulty it apparently knows it faces in the task, Sears will once again be turning to chairman and CEO Eddie Lampert for the bulk of the money as he is expected to buy up half the shares offered.

Dipping into his pocket once more
It was just last month that Lampert apparently became the lender of last resort to the retailer, loaning the company on a short-term basis $400 million to get it through the Christmas season and quell any concerns vendors might have had that they wouldn't get paid. The retailer has seen revenues plummet and profits vanish as losses now grow wider.

Last year J.C. Penney (JCPN.Q) had to similarly spring into action to prevent an exodus of suppliers after it was suggested one of its lenders was no longer financing deliveries to its stores amid talks it might file for bankruptcy.

The sale might not be enough for Sears, though, as The Wall Street Journal reports that Euler Hermes, an insurer that protects vendors against nonpayment by customers, is cancelling Sears policies come Monday. No doubt that was the impetus behind the stock sale, as the Journal said vendors fears were allayed knowing that Lampert was ensuring cash would be on hand.

Once again, though, it's Lampert who is being forced to step up to the plate to keep the company afloat.

Treading water
Earlier this year he had put an end to his hedge fund's practice of loaning Sears money on a short-term basis, something he'd done since 2010. That action, however, was seen as him trying to extricate himself financially from the retailer and raised caution flags among analysts.

Even though Sears stock jumped 7% yesterday on the news that it is going to the Lampert well once more, the fact that he has to be there personally to get any cash into the business -- and that it comes so soon after injecting $400 million into the company -- should itself raise even more warning flags. It continues to amount to Lampert burning the furniture to heat the house: He's getting rid of anything of value Sears owns just to pay the bills.

Burning like a house a-fire. Photo: Flickr user Melissa

Sears Canada is failing. It suffered a 6.8% drop in same store sales that led it to contribute $140 million less revenue to its parent. Gross margins collapsed 230 basis points due to lower profits in its home, home appliances, footwear, and apparel units.

Even so, the value of the business somehow manages to continue growing. Despite falling revenues, tumbling margins, a dearth of customers, a string of store closures, and a CEO about to leave, Sears valuation of the Sears Canada business has increased from $620 million at the end of last December to $765 million in August.

Suffering from abandonment issues
While some might view the sale as a sign Lampert's ready to focus solely on Sears Holdings, investors up north are likely to see this as a case of abandonment. It's stock fell 1% yesterday on the Toronto exchange (Sears Canada will apply to trade on the Nasdaq exchange once the stock sale is completed).

The entrance of Wal-Mart (WMT 2.22%) and Target (TGT 2.58%) into the Canadian market heralded a new level of fierce competition and the resurgence of Hudson's Bay have left Sears unmoored and adrift. And as things deteriorated at home for its parent, Sears Canada, once a crown jewel of the company, faltered.

Maybe it was the same not-so-benign neglect that seeped into all aspects of Sears operations after Lampert took control, using financial gymnastics instead of marketing prowess to engineer quarterly results. Ultimately, it's now that same financial derring-do that's going to be needed to simply keep the whole ship afloat.

A third wind?
But don't think Lampert will be any more successful with this stock sale than he was with his other machinations. It seems a rather lofty goal to assume investors will buy up shares in this faltering business with the gusto, and Sears Holding may realize much less than the $380 million it's counting on.

Let's hope Lampert's got a Plan C waiting in the wings.

Rich Duprey 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

J. C. Penney Company, Inc. Stock Quote
J. C. Penney Company, Inc.
JCPN.Q
Walmart Stock Quote
Walmart
WMT
$132.58 (2.22%) $2.88
Target Corporation Stock Quote
Target Corporation
TGT
$152.22 (2.58%) $3.83
Sears Holdings Corporation Stock Quote
Sears Holdings Corporation
SHLDQ
Sears Canada Inc. Stock Quote
Sears Canada Inc.
SCC

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
326%
 
S&P 500 Returns
102%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/03/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.