Sears Holdings Corporation (SHLD +0.00%) has had quite a fall from grace. Sears was once the biggest retailer in the United States by sales, and its flagship catalog could be found in nearly every household across the country. Now, it's a shell of its former self. Sears' stock price has fallen 60% in the past five years, during which time the S&P 500 Index is up 80%.
Sears has become notorious for run-down stores and poor customer service. Customers have voted with their feet, and Sears' sales and profit have collapsed in the past several years, along with its share price.
SHLD Revenue (Annual), data by YCharts.
Management's turnaround plan for Sears is to cut costs to the bone, primarily by closing a lot of stores, as well as spinning off some of its real estate assets into a REIT (real estate investment trust) structure. While these initiatives will raise cash, they won't fix the core, underlying problem at the heart of Sears' woes, which is that sales are still falling -- because shoppers simply don't go to Sears and Kmart.
Unless management comes up with a plan to get shoppers back into the stores, there's simply no reason for investors to gamble on Sears' questionable turnaround prospects.
Turnaround hopes are REIT-based
It seems that Sears' best hope for a turnaround is based on its looming REIT conversion, and not on an actual improvement in its core business. Sears closed 234 underperforming Kmart and Sears full-line stores in 2014, leaving it with about 1,700 stores in the United States. In addition, Sears spun off the Lands End brand and lowered its stake in Sears Canada, all in an effort to raise cash.
The other major initiative to raise cash is the pending REIT conversion. Late last year, Sears announced it would sell 200 to 300 stores to a real estate investment trust (REIT). Recently, Sears revealed it expects to raise about $2 billion from this move.
These measures are increasing Sears' liquidity, which is a positive, but the job isn't done there. The bigger problem remains, which is that the company doesn't yet have a plan to grow. There's only so much that can be cut, and returning shareholders' own money back to them isn't a viable long-term solution.
Total revenue fell 23% in the fourth quarter, which included the critical holiday shopping season in the United States. Comparable-store sales, which measure sales at stores open for at least one year, fell 4% last quarter, and the company lost $159 million in the period. To be sure, this was an improvement from the $358 million loss in the same quarter a year earlier, but unless sales start to grow again, this is not a moment for celebration.
Investors may be enticed by the amount of cash being raised, which is based largely on the value of Sears' real estate assets. But put differently, if sales don't improve, the value of Sears' real estate will be worth less over time.
No need to gamble on Sears
With so many profitable retailers to choose from, there's virtually no need to gamble on Sears. Its turnaround hopes are far from guaranteed. There are plenty of retail stocks that are highly profitable and reward their shareholders with rising dividends each year. Target and Wal-Mart Stores are just two examples.
By comparison, Sears stock is in a multi-year tailspin, the company continues to rack up losses, and it pays no dividend. There's simply no reason for Fools to buy Sears until its sales begin to improve.
