Sears – Grim Tidings

Retail Holiday Sales Go Ka-Ching” was the headline on the Wall St. Journal’s lead story on the front page on December 26, 2017.  The Journal, using data from Mastercard Inc., reported that retail sales rose at their best pace in six years.

E-commerce naturally continued to be the biggest driver of gains, with a strong annual increase of over 18%.  Nevertheless, unexpectedly strong consumer spending brought tidings of comfort and joy throughout the retail sector, even for mall-bound brick and mortar retailers.

For example, shares of Macy’s, Dillard’s and Gap are up 24%, 21% and 18% respectively, since Thanksgiving.

Meanwhile, shares of Sears Holding Corp. remain mired at about $3.80, their approximate value on Thanksgiving morning.

The Sears-Kmart merger engineered by Eddie Lampert in 2004 was ill-fated almost from the start.  At the time, Sears seemed primarily determined to impose the cost efficiency of Walmart onto Sears’ plodding middle-brow department store infrastructure.  This at a time when we know now that the retail industry was inexorably moving toward the internet.

Not only was Sears fighting the wrong battle, it did so in a manner that was badly managed and internally destructive. The company adopted a bizarre structure of many divisions that competed with each other for resources and spoils.  The result was a failing company rife with unproductive infighting.

The news coming out of the company for the last eight years or so has been a drumbeat of store closings, lay-offs and dismal corporate finance news.  The company has come to have an image of disliking its own employees and by extension its customers.  Sears and Kmart stores have developed a reputation for being unkept and unclean by retail standards and consistently ranking very low on customer service.

The news this past year from Sears has been increasingly discouraging.  In October, Bruce Berkowitz, head of Fairholme Capital Management, the second largest shareholder in the company, resigned from the Sears’ board of directors.  Berkowitz had been current management’s most visible and vocal supporter for several years.

Also in October, Sears Canada, which had been spun-off a few years ago, went into complete liquidation, resulting in the closing of over 70 stores, some of which had been in operation for over 50 years.

On November 16, 2017, Moody’s Investors Service downgraded Sears Holdings Corp.’s credit rating to Caa3 from Caa2, with a negative outlook.  Moody’s stated that the downgrade reflected Sears’ continued weak sales performance and negative operating cash flow despite significant store closures and significant debts coming due on the horizon.  “Sears has meaningful upcoming maturities in fiscal 2018 which must be met as its unencumbered asset base continues to decline as its business turnaround remains elusive. … Debt maturities in the upcoming year amount to over $1.7 billion as cash used in operations is expected to approach $1.8 billion this year.”

On a more hopeful note, soon after the Moody’s downgrade, on December 13, Sears announced it had extended the terms of one critical $400 million loan for an additional year and also is planning to secure additional borrowing to cover upcoming pension payments.

So, Sears management again appears to have bought itself a bit more time to run the company.

However, a turnaround of the company’s retail operations seems increasingly unlikely under current management. They simply do not seem to have the talent to pull it off.  The red ink that they have produced speaks for itself (see below).  Further, the company’s indebtedness makes it an unlikely takeover prospect.  It is hard to be optimistic about Sears’ prospects for the new year.

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