The death spiral at Sears Holdings (SHLD +0.00%) continues unabated. On Monday, the retailer said it lost $303 million in its fiscal first quarter, racking up its 15th loss in the last 16 quarters. The performance adds more reason for current and prospective investors to ask: Is Sears going bankrupt?
An apocalyptic performance
While businesses often take longer to deteriorate than most people tend to think, the answer to this question seems to be yes. I do not say that out of any desire to see Sears fail but because the evidence points to no other conclusion.
The numbers paint a grim picture. Over the past five years, Sears has lost a total of $5 billion, burned through $2.8 billion in free cash flow, and seen its tangible book value plummet into negative territory. If you exclude intangible assets such as goodwill, Sears is worth a negative $3.5 billion, according to its latest balance sheet.
To be fair, this is not the first time Sears has faced a seemingly existential crisis. As its CEO and biggest shareholder, Edward Lampert, wrote in the 2014 letter to shareholders:
Time and again, people have proclaimed our company all but dead. As I wrote in a blog post late last year, in 1988 our hometown business journal wrote a devastating 14,297-word eulogy for Sears. Virtually all of the companies that Sears was allegedly trailing back then are now gone and forgotten. Many others have merged or simply closed.
These old stories got it partially right. Had we not embarked on a course change; had we not, especially in recent years, started to creatively disrupt ourselves; Sears and Kmart would probably be no more than a treasured American memory.
Without the aggressive steps we have already taken to transform Sears Holdings from the predominantly brick-and-mortar retailer it once was to a best-in-class multi-channel integrated shopping experience for our members, we would be stuck on the same path that has claimed retailers like Circuit City, Borders, Radio Shack, and others.
But while Lampert makes a fair point, he cannot escape the facts. Sears' current market capitalization is a mere $4.6 billion, marking an 80% decline since the end of 2006. In the latest quarter, total sales at the department store chain fell a staggering 25% year-over-year, or $2 billion, to $5.9 billion. Approximately half of the decline stemmed from the sale of its Lands' End and Sears Canada operations, but the other half came from, among other disturbing trends, a 14.5% decline in same-store sales.
Past the point of no return
The issue now is that Sears has almost certainly passed the point of no return. It may be different if Sears focused on selling, say, clothes or tacos. However, most people have come to know (and for many years, to love) Sears for its wide variety of big ticket items such as lawnmowers and kitchen appliances. Speaking from personal experience, two of Sears' biggest draws were its customer-friendly return policy and its unusually adept maintenance and repair services.
But these advantages are now virtually gone. With confidence in the retailer dropping precipitously, one cannot help but wonder whether the company will be around to honor its service agreements, extended warranties, and, for that matter, gift cards. On top of this, thanks to its desire to preserve capital, Sears has dramatically throttled much-needed investments in existing stores. As my colleague Daniel Kline noted last year, this situation can often become a self-fulfilling prophecy.
"If you don't constantly evolve with new merchandise, new store design, and other innovations, then customers will shop in stores that do," Kline wrote. "Target and Wal-Mart both aggressively cycle in new merchandise, and both chains have invested heavily in new concepts over the past few years."
Lampert's latest effort to stabilize the company consists of spinning off 235 of its best properties to a real estate investment trust in exchange for an estimated $2.5 billion. Assuming Sears' board decides to retain the proceeds -- which, I believe, is highly unlikely -- then it will give the company the power to stock up on merchandise for the all-important holiday shopping season.
Beyond that, however, the capital injection is not likely to offer more than a temporary tonic. It will not change the fact that customers are abandoning Sears in droves. It will not change the fact that competition from the likes of Costco, Best Buy, and Amazon will only grow in intensity. And it will not change the fact that suppliers are beginning to view the company more as a liability than as a valuable distribution channel for their goods and services.
In short, while Sears might not go bankrupt tomorrow, the chances that it will do so within the next few years seems to be, at least in my opinion, a foregone conclusion.
