As Alibaba (NYSE: BABA) enjoyed sales of over $7 billion on Monday, its iconic retail antithesis in the United States edged closer to its demise.
On Friday, November 7, Sears Holdings Corp. (Nasdaq: SHLD) stock jumped by 31% to $42.81 per share after the company announced that it was considering selling 200 to 300 of its 712 company-owned stores to a real estate investment trust (REIT).
Lest you think that's great news, consider that Sears is down nearly 50% over the past five years, and nearly 60% over the past ten years.
This was the Big Bank announcement many investors have been waiting for since hedge fund billionaire Edward Lampert took over the company a decade ago and combined it with another troubled retailer, Kmart.
As it became increasingly obvious that Sears' retail business was failing, supporters of the company assured doubters that its vast real estate holdings would vindicate Mr. Lampert. After all, he bought back huge amounts of stock at prices as high as $190 per share, a massive paper loss to this point.
But the REIT announcement should be seen as the death knell for the company. Sale of its last remaining valuable assets moves Sears one day closer to being put out of its misery.
It's a sad tale for what was once an iconic American retailer, and investors need to know how this endgame will play out.
It won't be pretty...
Sears' "Black Hole" of Liquidity Spells Its End of Days
The announcement came on the day that the company announced another quarter of losses - an EBITDA loss of at least $275 million and a net loss of $560 to $630 million. This will bring cumulative losses since early 2011 to $6.4 billion.
Indeed, the company is a financial and operational shambles. At the end of the third quarter, it had $6.3 billion of debt, including pension and retirement obligations of $1.3 billion. For the quarter ended August 2, 2014, it reported a loss of $1.02 billion and has been liquidating a variety of assets to fund its mounting losses.
Cash levels are running dangerously low and have been replenished by a series of cannibalistic transactions. As of November 1, cash-on-hand had dropped to $330 million while borrowing availability had dropped to $234 million. This combined $564 million of liquidity comes after the company raised $568 million mostly from Mr. Lampert's hedge fund during the quarter by way of a loan and the sale of some of its stake in Sears Canada.
There is another $625 million on the way from a pending debt offering, most of which will likely be taken up again by Mr. Lampert, although large shareholder Bruce Berkowitz may participate as well.
Another $212 million may be added from the sale of additional shares of Sears Canada. But the company is clearly devouring itself as these asset sales are barely plugging the gaping hole created by mounting cash losses.
The company continues to try to reassure its most important constituencies - vendors who stock its stores, customers who shop its stores, and investors who finance its business - that it remains a viable enterprise. But other than Mr. Lampert himself, there are fewer and fewer takers for the company's debt.
Mr. Berkowitz is no longer participating in every deal Mr. Lampert floats to keep the company going. Hermes Group SA, which insures suppliers against non-payments from retailers, recently withdrew coverage from Sears last month and vendors have been tightening terms.
Mr. Lampert's privately held ESL Investments Inc. owns 48.5% of the company while 24% is controlled by Mr. Berkowitz, proof positive that even smart investors sometimes make mistakes.
The question now is whether the REIT plan will solve Sears' long-term problem, and the simple answer is that it won't come close.
The question then is, what to do next?
Follow the Single Road Away from Sears
Analysts at Evercore ISI estimate that the plan may raise about $1.4 billion for the company, but that would only fund operating losses for another year. Even worse, the REIT would load another $150 million of operating expenses on Sears, further increasing its future losses.
Frankly, one has to question why investors would entertain an investment in a REIT whose largest occupant is headed for the boneyard. Overall, such a transaction is more likely to put an end to fantasies that Sears is going to be a profitable real estate play and demonstrate once and for all that the entire company is an empty shell both as an operating business and an asset play.
The sad truth is that time has passed the company by and Mr. Lampert wasted too much time trying to be a retail magnate. At this point, Sears has become an enormous roach motel for his hedge fund.
Investors in Sears stock and bonds should avoid the same fate and unload all their exposure to Sears stock - and go shopping somewhere else for the holidays, too.
About the Author
Prominent money manager. Has built top-ranked credit and hedge funds, managed billions for institutional and high-net-worth clients. 29-year career.