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Sears is just a zombie in a retailer’s shell

February 14, 2017 10:44 AM
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(Bloomberg Gadfly)—Don't be fooled by Sears's latest stock surge: The retailer may have come back from the dead, but its pulse is long gone.

CEO Eddie Lampert on Friday promised to inject life into the decaying company, sending shares up 26%. But investors should think of Sears Holdings Corp. more like the zombies on AMC's series "The Walking Dead"—they may moan and meander like they're alive, but they are really rotting undead in search of their next fix.

As we laid out last year, Lampert has spent a fifth of his life promising Sears's rebirth since buying the once-storied retailer more than a decade ago. But anyone who has been to a Sears store lately can see— judging by the empty shelves, cracked floors, and frustrated employees—that Lampert is all talk. Friday's promises to restructure the business, cut $1 billion in costs and return to profitability are no different.

What was once America's largest retailer has lost $8 billion in the past five years. Another round of vows to "cut costs," reduce corporate overhead and improve merchandising isn't going to get people to suddenly shop at Sears again. Neither is under-investing in web sales, where the retailer has fallen woefully behind, despite vows to reinvent itself as a digital operator. Sears is No. 14 in the Internet Retailer 2016 Top 500 Guide with an estimated $3.5 billion 2015 web sales and a five-year compound annual growth rate of -3.28%, according to Top500Guide.com data.

Sears is bringing in half the revenue it notched in 2007, and sales declines are accelerating as Sears pulls back on even the most basic of store investments, such as fixing leaky ceilings. Revenue fell by a fifth in 2016 from the year before, and any additional cost cuts will just speed up that process.

Plus, the bones have already been picked dry at Sears: Its property, plant and equipment were worth $2.6 billion in 2016, down from $9 billion in 2007. It went from $500 million in capital expenditures in 2007 to $211 million in 2016, while reducing the number of its employees by 50% during that time period. (By contrast, Macy's Inc., No. 6 in the Top 500, recorded capital spending of $800 million last year.)

And Sears's debt is unwieldy: It has $4.6 billion of funded debt, as well as unfunded pension and other obligations of $2 billion.

To keep his zombie retailer going in spite of the deep losses, Lampert will continue to suck dry its assets, in what has turned into a decades-long garage sale. Sears needs to raise at least $2 billion in liquidity in 2017 to fund ongoing operations, ratings agency Fitch estimates. As long as Lampert can find the cash, Sears will keep feasting on carnage and staggering forward.

Sears still has billions of dollars' worth of items left to sell to keep cash coming in, including its Kenmore and DieHard brands, as well as its Home Services and Auto Centers. It will continue to close stores and sell off the 2,500 properties and vacant land it still owns, piece by piece.

After that, there's the trade name, intellectual property, website and anything else Lampert can monetize.

Lampert has also put more than $3 billion of his own money into keeping Sears shambling forward, estimates Bloomberg Intelligence analyst Noel Hebert. But even Lampert's funds, or his propensity to squander them on the dying retailer, have a limit.

One thing certain is that sales at Sears will continue their free fall, and at some point—when Lampert runs out of things to sell—Sears will have no choice but to cease retail operations or enter into bankruptcy or some kind of restructuring.

In recent weeks, credit rating agencies have warned investors about Sears's inability to raise money as fast as it is burning its cash. That caused credit default swap traders to price in odds of about 50% that Sears could go bankrupt before year-end, according to Bloomberg News.

While that bet subsided a bit on Friday, the picture remains the same. Sears may still be operating, but its days are numbered. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

 

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