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The Life and Death of Sears, and How to Get Rich Saying Goodbye

The Sears Holdings Corp. (Nasdaq: SHLD) story isn't just the story of what's happening to two American icons of retail, or what's happening to bricks-and-mortar retail in the age of online shopping.

It's also the story of the pensioners who will suffer from the company's demise; it's the story of another 140,000 jobs about to be lost. It's a story about asset-stripping.

In short, Sears' downfall is the story of how hubris and financial engineering failed retired workers, current employees, customers, and investors.

And it could be your story, with a happy ending, when you know how to profit from Sears' death.

Here's the backstory, the upfront facts, and how to play the demise of Sears for a big payday.

Eddie Lampert's Destructive Debut

The backstory of this saga starts with Kmart.

Kmart, the original big-box retailing giant, was launched in 1962 as a discount division of S.S. Kresge, an early competitor of Woolworth's, which was founded in 1897 by S. S. Kresge himself.

At its peak in 2000, Kmart operated 2,171 stores.

But by January 2002, the company, known for its surprise in-store super-sale items illuminated by a mobile blue police light, ran into a serious cash shortage, a slump in holiday sales, and a failed price-cutting campaign. It sought bankruptcy protection to reorganize itself.

Enter the Dragon.

Edward Scott Lampert is the founder and owner of hedge fund ESL Investments. Lampert, the former Goldman Sachs protégé of Robert Rubin when the former U.S. Treasury Secretary ran Goldman's risk arbitrage desk, left Goldman in 1988.

With principal backing from famed Bass Brothers investing guru Richard Rainwater and $28 million in capital, Lampert launched ESL Investments.

ESL had a great track record. From 1988 through 2002, the fund boasted 29% annual returns.

In 2002, ESL began buying Kmart's distressed bonds (purportedly for the company's real estate), which Lampert recognized was an undervalued asset. By the time Kmart emerged from bankruptcy in 2003, Lampert had converted ESL's bonds into a 53% equity stake, giving Lampert control of Kmart.

In the summer of 2004, Kmart had pared down its huge inventory and sold 54 stores to Sears for $621 million. That was Lampert's introduction to Sears, the household-name retailer launched in 1886 as a catalog company by Richard Warren Sears and Alvah Curtis Roebuck, which was having its own difficulties but managing better than Kmart.

Lampert saw Sears' brands (Kenmore, Craftsman, and its Sears Auto Centers) as valuable property and dug deeper into the company's assets. There he found a treasure trove of real estate.

He wasn't the only one eyeing Sears. By November 2004, Vornado Realty Trust announced it had amassed a 4.3% stake in Sears. The announcement catapulted Sears' stock 18% higher.

Fearing Sears was about to be put into play, which would engender a potential bidding war, Lampert negotiated the sale of Sears to Kmart for $11 billion in the fall of 2004.

The deal closed in 2005, putting Sears, Roebuck & Co. in bed with Kmart under the covers of ESL's management.

With the combination, Lampert hoped to drive sales of Sears' brand-name products through Kmart and convert ailing Kmarts into Sears stores.

The Harsh Truth About Sears' Chance in the Retail Ice Age

As if managing a struggling Kmart wasn't enough, adding Sears to ESL's portfolio as online shopping was rearing its head amounted to doubling down on an untimely bet against insurmountable odds.

Sears and Kmart exist as separate stores, but now trade as a combined entity as Sears Holdings Corp. (Nasdaq: SHLD). Here's how they're doing:

  • Sears Holdings has lost $10.4 billion since 2011. Excluding "one-time charges" and "events," the loss is $4.57 billion.
  • Sales are down 44% since 2012.
  • The company just registered its 21st consecutive quarter of losses.
  • Same-store sales in the last quarter of 2016, which includes the holiday shopping season, were down 10.3%.
  • In the summer of 2015, SHLD had $1.8 billion in cash. By the end of 2016, it was down to $258 million.

All of the ailing company's short-term borrowings, which you can see from above it is in desperate need of, are coming from Lampert's ESL Investments and some from Eddie Lampert himself.

In September 2014, Sears Holdings borrowed $400 million from ESL. In August 2016, it borrowed another $300 million. The company's taken $200 million out of a $500 million revolving loan supplied by ESL. And it recently took a $321 million loan secured by 46 stores.

While living off borrowed money and on borrowed time, Lambert's been selling assets… including Craftsman tools for $900 million. To make that deal work, Sears was willing to only get $525 million upfront from buyer Black & Decker and agreed to be paid the remainder in three years, some of it as a royalty fee on Black & Decker's sale of Craftsman products.

But the company got to juggle its books to show a $900 million sale.

It's just the tip of the iceberg when it comes to the financial engineering moves Lampert has used to strip the company of anything valuable to pay itself back the money he's loaned the company, and to juggle its books to keep it alive long enough to squeeze the last drops of blood from this dying behemoth.

And about that real estate… Lampert spun that out into a real estate investment trust, which he controls and which sold shares to the public, in turn enriching ESL and reimbursing him.

What's left, besides the death knell?

In January 2017 filings, Sears Holdings disclosed it had 735 Kmart stores averaging 95,000 square feet each, 670 Sears stores averaging a whopping 139,000 square feet each, and 588 Sears Auto Centers.

Oh, and a pension plan, meant to support 200,000 retired workers and some of the 140,000 workers still on Sears Holdings payrolls, with a combined asset value of $3.2 billion and current obligations of $5.3 billion.

But that's a joke, and a disgusting one at that. The pension plan's been raided and robbed every which way by the company. There will never be enough money in it to meet its liabilities, never. The external financial engineering took money out of the plan and steered money that should have gone into it elsewhere. The net result is it looks like it's in better shape.

The reality is the pension plan has accumulated losses of $8.3 billion since 2011.

Of course, the financial engineering to benefit ESL continues.

But, in reality, this is a dead man walking.

Almost everything's been stripped out. There are some assets remaining that I wouldn't doubt are being packaged up as I write this. After they're out the door, it will be closed and the company flushed down the drain.

As horrible as that is for all the company's retirees, current employees, customers, and the investors who believed a turnaround was possible… It's good news for you.

In my trading service, we're all over SHLD, and we're going to pile on more trades to ride this pig into the black hole it's dug for itself.

You should, too.

It's a smart bet to sell short SHLD right here around $10.25. If it goes to $11, short more. If it goes to $12, short more. If it goes to $13 and $14, short a lot more. The stock was "engineered" up to $14 recently, but its true colors are coming out again.

Another way to play the end of Sears Holdings is to buy out-of-the money puts that expire in late 2017 – or, better yet, 2018 – to give yourself time in case the company pulls more rabbits out of its hat.

After all, when a company says, "Our historical operating results indicate substantial doubt exists related to the company's ability to continue," (which Sears said in its annual filing with the SEC), it's time to kiss this sadly stripped, failed turnaround goodbye.

Must See: This Great Depression-Era “Secret” Helped Transform Two Teachers into Millionaires. Read more…

The post The Life and Death of Sears, and How to Get Rich Saying Goodbye appeared first on Wall Street Insights & Indictments.

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About the Author

Shah Gilani is the Event Trading Specialist for Money Map Press. He provides specific trading recommendations in Capital Wave Forecast, where he predicts gigantic "waves" of money forming and shows you how to play them for the biggest gains. In Zenith Trading Circle Shah reveals the worst companies in the markets - right from his coveted Bankruptcy Almanac - and how readers can trade them over and over again for huge gains. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.

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  1. Disagree Full Stop | May 4, 2017

    Unfortunately, you have a rather limited understanding of not only how a holding company operates, where the debt lies within that structure and the assets remaining, but you also make no mention of the cost to take on a short position… 87% borrowing interest as of this writing, a cost which is also reflected in the high premium on put options.

  2. Voice of Reason | May 8, 2017

    Hey Sears "Bull" – It seem your bankruptcy remote/non-guarantor subsidiaries are in the "holding company", they have been essentially deriving all of their funds (rent,royalties and insurance premiums) from the operations of the retail business. Furthermore, you have a controlling shareholder/CEO that is arranging much of the company's financing with his other entities and determining the terms and collateral pledged. I think lawyers for disgruntled creditors (maybe other shareholders) would certainly raise strong conflict of interests and fraudulent conveyance arguments.

    I bet there has never been a situation where a public company been so intertwined with a shareholder/CEO like this. I doubt the courts will be very sympathetic to his side. BTW, ask the GM creditors how bankruptcy "always" works.

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