Once an icon of American retail, Sears Holdings (OTC:SHLDQ) is now besieged by fierce competition that's led to declining sales, huge losses, and a quickly deteriorating balance sheet. In order to survive, Sears is aggressively reducing its footprint and selling off noncore assets. But will this be enough to stem the tide of losses? Or will the company join the growing list of failed retailers like Circuit City, Borders, and Radio Shack? Unfortunately for Sears Holdings and its shareholders, the road ahead looks paved with difficulty.
From bad to worse
2014 was a particularly brutal year for Sears; its stock plummeted 28% as the company lost $1.7 billion or $15.82 per share. And that's after the company lost $1.4 billion ($12.87 loss per share) in 2013.
Full year adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) also painted a bleak picture, falling to -$647 million from -$490 million in the prior year.
Those losses have taken a severe toll on Sears' balance sheet, and the struggling retailer ended its fiscal 2014 with only $250 million in cash, down from more than $1 billion at the end of fiscal 2013.
Aggressive steps at a turnaround
In order to fund its operations and improve its liquidity, Chairman and CEO Eddie Lampert has been aggressively spinning off and selling assets. In April, Sears spun off its apparel subsidiary Lands' End (NASDAQ:LE). And in October, the company sold the majority of its stake in Sears Canada via a rights offering, albeit at a price significantly below what the company believed the stake to be worth only months earlier, and with Lampert buying a significant portion of the shares.
Lampert and his team are even attempting to create a real estate investment trust (REIT) in order to facilitate more assets sales. CFO Rob Schriesheim stated in Sears' fourth-quarter press release that the company is currently targeting between 200 and 300 Sears stores to be sold to the REIT later this year -- a move that could raise more than $2 billion for Sears Holdings.
Signs of more trouble ahead
In addition to its plans to sell some of its locations, Sears Holdings is also slashing its store count. During 2014, the company closed 234 underperforming Kmart and Sears stores, most of which were Kmart stores. Yet the company still has more than 1,700 combined Sears and Kmart stores -- a number I expect to continue to decline going forward.
That's because, despite Lampert's liquidation of assets and creative financing arrangements, Sears Holdings' core retail operations continue to struggle. In the fourth quarter of 2014, Kmart's comparable store sales declined 2% and Sears' U.S. comps fell 7%.
Declining comparable store sales are often evidence of a weakening competitive position, and it appears that's the case with Sears today. Sears is being outmatched by stronger rivals such as Wal-Mart (NYSE:WMT), with its reputation for low prices, and Target (NYSE:TGT), known for a superior shopping experience. These discount chains also have the added advantage of their grocery businesses, which helps to drive traffic to their stores. Other rivals like Best Buy (NYSE:BBY) and Home Depot (NYSE:HD) have an edge in key areas such as electronics and home improvement, respectively. Best Buy has unique arrangements with major device makers such as its Samsung Experience Shops, where its customers can interact with Samsung's popular mobile products in dedicated in-store locations. And Home Depot appears to be winning consumer wallet share in the home improvement arena, evidenced by an impressive 8.9% surge in comparable sales for its U.S. stores in the fourth quarter.
Looking ahead, Sears' precarious competitive positioning shows few signs of improvement. In fact, Lampert himself hinted to as much in his recent Chairman's Letter when referring to the creation of the REIT, saying:
We would hope to maintain a long-term presence in each location while allowing Sears Holdings to still have the flexibility to make strategic business decisions should those locations prove unprofitable for Sears Holdings in the future. We believe that many locations can be repurposed with or without Sears Holdings as an anchor, which would give the REIT the potential for value creation as well as downside protection if Sears Holdings were unable to continue to operate certain stores profitably.
It seems to me that Sears' own Chairman and CEO is taking steps to prepare for continued weakness in Sears Holdings' core retail business.
Sears investors may wish to consider doing to the same.