The future looks so bleak for Sears Holdings (NASDAQ:SHLD) that all but one Wall Street analyst has stopped covering it, and that one thinks it's only a matter of time before it goes under.
The analyst is not alone in being concerned about the outlook for the department store operator. Famed billionaire investor Bruce Berkowitz, whose Fairholme Capital Management owns more than 25% of Sears stock, is apparently worried enough about his investment that he's taking a much more hands-on approach to salvaging the retailer. He joined the board in late February. It's not the first time he's had to step forward to keep Sears afloat, but even his hand on the tiller may not be enough to keep it from sinking this time.
Berkowitz has been an investor in Sears since CEO Eddie Lampert first merged the retailer with ailing rival Kmart a decade ago. While Berkowitz never thought much of Sears as a retail operation -- he once said it would be "icing on the cake" if Sears ever became a real retailer -- it was the value of the brands it owned, the value of its real estate, its ability to generate $50 billion in revenues annually, and produce significant free cash flow that caused him to think he was buying the company above its liquidation value.
Over the ensuing years, though, Lampert has calved off most everything of value, including Land's End (NASDAQ:LE) and Sears Canada (TSX:SCC), while the value of Sears' remaining assets has diminished.
Kenmore appliances, for example, one of the leading brands when Berkowitz first bought into Sears and one of the marquee names he used to justify his investment, owned 40% of the market back in 2002. Now it accounts for a little bit more than 25%, and the industry watchers at TraQline say it's fallen well behind both Whirlpool (NYSE:WHR) and GE (NYSE:GE) in terms of consumer dollars spent.
Much of that vaunted $50 billion in annual revenues has evaporated, too, as customers fled and Lampert sold off stores. Sears Holdings reported it produced just $25.1 billion in 2015. And it hasn't produced free cash flow in years. Lampert also sold off hundreds of properties to the real estate investment trust Seritage Growth Properties (NYSE:SRG) -- though, as one might expect, Fairholme is a big investor in the REIT, too.
All things considered, investors might wonder why Berkowitz didn't act sooner. He had to have gotten antsy back in 2014 when he had to step in to help arrange financing for Lampert to loan Sears $400 million so it could make it through the Christmas season. He had tried to get real estate firm St. Joe Company to loan Lampert's hedge fund, ESL Investors, $100 million, but it balked, forcing Berkowitz to negotiate with others to lend him the money.
While the loan was eventually made and the retailer survived through the holidays, it seems to have merely delayed the inevitable. Sears just had to secure a new $750 million loan that, although it extends the retailer's debt maturity further into the future, means we're likely to see even more store closures and asset sales.
In December, Berkowitz announced he was taking a more active role in Sears future, with plans to call up management and give advice on the direction it was taking. More recently, he was put onto the retailer's board of directors, giving him even more influence over the retailer's future, but the fact he felt the need to become an active participant after so many years in a passive role suggests he's worried about his investment.
It also means if you weren't concerned before about Sears Holdings survival, maybe now you should be.