Investors who’ve been following the slow and strange demise of Sears Holdings Corp. (NASDAQ:SHLD) over the past couple of years might have noticed how oddly — almost eerily — quiet the financial media’s coverage of Sears stock has been since December.
It’s not a lack of interest behind the lull. Most realistically, it’s recognition from both sides of the table that there’s nothing left to be said.
There are only a few seconds left on the game clock, so to speak, and either Eddie Lampert is going to be able to coach his company through a turnaround, or he’s clearly not going to be able to do so.
The buzzer is going to sound on Thursday, when the market gets the Sears earnings report for the final quarter of last year.
Sears Earnings Expectations
While the sports analogy is cliche, it’s still a meaningful assessment of the Sears Holdings meltdown and the psychology of those who’ve patiently remained fans (owners) of Sears stock.
After two years of increasing losses and nearly a decade of deteriorating sales, time is working against the company and CEO Eddie Lampert. Investors were almost ready to accept defeat and leave the stadium early in the third quarter, but the company managed to put just enough points on the board to keep fans in their seats a little longer.
That glimmer of hope was a shrinking EBITDA loss and a 0.5% uptick in same-store sales. Though the EBITDA loss actually grew as a percentage of total company revenue — from 3.7% in the same quarter a year earlier to 4.1% this time around — it was enough evidence to convince enough shareholders to look past the decline in year-over-year revenue and the wider net loss, from $534 in the third quarter of the prior year to a loss of $548 million in the third quarter of 2014 (fiscal 2015).
Still, it’s unrealistic to think owners of Sears stock are going to accept anything less than more discernible progress when the Sears earnings numbers for Q4 are unveiled on Thursday. Indeed, they’ll likely expect even more and better evidence that the long-touted turnaround is finally taking hold.
As of the latest look, Sears Holdings is expected to report revenue of $8.3 billion for the fourth quarter of calendar 2014, down 21.6% from the year ago figure of $10.6 billion. On a per-share basis, analysts collectively expect the company to report a loss of $1.89 versus a loss of $1.13 per share of Sears stock in the final quarter from a year earlier.
Meeting or topping those targets would still be a hollow victory, however, unless same-store sales and EBITDA move in a positive direction again. And even then, there’s no guarantee the market will see the glass as half full.
Three Things for SHLD Owners to Mull
While the numbers illustrate the past clearly enough, handicapping the future has been particularly difficult with SHLD. The constant shedding of assets (Sears Canada and Lands’ End, most recently) along with an increasingly difficult liquidity/debt shell game obscure the discernible picture.
With that in mind, shareholders may want to look closely at three details:
Total debt: While Eddie Lampert has been quick to point out Sears Holdings has access to plenty of liquidity, it’s not as if the company is generating liquidity via cash flow. He’s borrowing liquidity and/or selling off revenue-bearing pieces of the company to come up with short-term cash. As of the end of last quarter, SHLD was carrying $2.1 billion in short-term debt and $2.8 billion in long-term liabilities. Total debt continues to grow, albeit modestly, rather than shrink.
The possible formation of a REIT: In November of last year, Eddie Lampert brought up the idea of raising cash by converting some of the company’s real estate into a REIT. Current owners of Sears stock would be allowed to purchase a proportional stake in the REIT, and then collect a portion of the lease payments the retailer would be paying to its “new” landlord. Aside from the slightly offensive idea of asking shareholders to buy what they technically already own, it’s an idea tainted by one glaring reality few seem willing to acknowledge: SHLD is insolvent. Not only has the retailer failed to turn a net profit in the past eight quarters, it hasn’t even turned an operating profit for the past two years. Adding to its quarterly expense burden will only further strain the operation. Somewhere, someone in the proverbial chain isn’t going to get paid unless Sears can turn things around pronto, or borrow (burn) even more money.
Plausibility of profits ever again: Eddie Lampert generally does a good job of framing the conversation in a way that avoids the only question that really matters: Is Sears Holdings actually drawing more people into its stores and inducing them to buy merchandise at prices that are profitable? All the chatter about the Shop Your Way rewards program and liquidity deflect from this much more important premise that, if executed properly, would solve the company’s core problem.
Bottom Line for Sears Stock
It’s do or die time for Sears. Investors who have been holding their Sears stock on hopes the ballyhooed turnaround is taking hold are near the end of their mental rope. The Sears earnings news due on Thursday will either force them to abandon ship for good, or after last quarter’s “progress,” will convince them the turnaround is finally taking hold.
There’s not much room left for anything in between.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
