It looks like investors are finally waking up to the fact that simply because Sears Holdings (NASDAQ: SHLD) posts what appear to be positive results, they shouldn't run up the retailer's stock. The company reported a $182 million profit in the fourth quarter, and shares of Sears initially jumped on Mar. 15, but ended up closing the day about 6% lower.
For too long, traders would rush into Sears stock after some seemingly positive announcement only to realize shortly thereafter the situation had remained unchanged -- or had possibly become worse -- and they would bail once again. Last summer, after the troubled retailer reported its first quarterly profit in years, the market bid up shares 20% only to come to its senses that the gain was realized because the company sold its Craftsman tools brand to Stanley Black & Decker.
Image source: Sears Holdings.
This scenario played out again after its third-quarter earnings report showed Sears significantly narrowed its losses. The stock spiked, only to quickly return to earth (and then some) as investors realized sales were still in free fall with comparable-store sales plunging by mid-teen percentage rates.
Sure, these gains were probably due mostly to traders trying to profit quickly on the news. The latest quarterly earnings "surprise," however, couldn't get much of a reaction. And investors were right to ignore it.
The long goodbye
Crucially, Sears still isn't generating income from selling more merchandise. Rather, it's benefiting from external events that have nothing to do with the business. First, it still posted an operating loss of $207 million. While that's appreciably better than the $717 million loss recorded a year ago, it benefited from over $200 million worth of asset sales, and expenses and costs nearly $2.2 billion lower as a result of closing more than 400 stores over the past year.
The store closures also resulted in almost $1.7 billion in fewer sales being made, but that was helped along by comps plunging 15.6% for the fourth quarter, with Kmart comps down 12.2% and Sears comps tumbling 18.1%. The two retailers have reported falling same-store sales for six consecutive years.
Data source: Sears Holdings' quarterly SEC filings. Chart by author.
For the full year, Sears reported a net loss of only $383 million, but it's not worse only because of those same asset sales mentioned earlier. Its cash position, however, has deteriorated markedly, and is down to just $186 million. At the same time, it still has $2.2 billion in long-term debt. The cash is dwindling away because it made more than $500 million in interest payments, and CEO Eddie Lampert continues to funnel additional short-term loans its way to keep it afloat.
He secured another $100 million term loan on March 8 through his ESL Investments hedge fund and JPP, an ESL affiliate lender that is often involved in these transactions. Just after the Christmas holiday season, Sears had secured a $100 million loan from JPP when it said it would try to find another $200 million from other sources.
The end is nigh
The continuous rounds of lending serve not only to keep the lights on at the retailer, but to give some faint hope to vendors that they'll get paid if they keep shipping Sears merchandise. It has lost several vendors over the past few years, and others tried to jump ship early, but its operations still resemble a creaking machine held together with baling wire and twine. At some point the wheels are going to fall off this company.
As much as no one wants to see Sears Holdings collapse, it's clear there is little to no hope of it coming back. Perhaps it may be able to make its footprint small enough that it can be reliably profitable again, but it increasingly looks like the music will stop before Sears reaches that chair. Investors would do well to ignore any supposed happy news emanating from Sears.
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