Sears Holdings Is Even More Pathetic Than We Thought
Summary
- Sears Holdings is using its real estate equity to finance its operations.
- It looks as if mall operators like the Macerich Company are paying Sears to leave their properties.
- The only way Sears Holdings can generate cash is to sell or borrow against its real estate holdings.
The situation at Sears Holdings (NYSE: SHLD) has become so strange and desperate that it is hard to believe. The ailing retailer is now in such sorry shape that its landlords are effectively loaning it money to keep the retail legend in business.
The latest loan is a "joint venture," or JV, Sears entered into with mall operator The Macerich Company (NYSE: MAC) on April 30, 2015. Sears basically gave nine of its stores to Macerich in exchange for $150 million in cash. Macerich will now lease the stores back to Sears, which will operate the stores, a press release indicates. The deal will also free up some space currently occupied by Sears so Macerich can lease it to other tenants.
The Macerich arrangement is only the latest such venture that Sears has entered into with mall operators. News articles indicate that Sears CEO Eddie Lampert has formed a real estate investment trust called Seritage Growth Properties that has entered into similar agreements with General Growth Properties Inc. (NYSE: GGP) and Simon Property Group (NYSE: SPG).
Lampert apparently hopes to raise $2.5 billion from Sears' and Kmart's real estate holdings with his latest scheme. He also made this almost Orwellian statement in the press release: "We are pleased to be in a position to unlock substantial value for Sears Holdings shareholders and further facilitate the company's transformation."
Do you see what is wrong with this picture, folks? The only way Sears can make money is by selling or borrowing money against its real estate. The extra cash is coming from what amounts to mortgages and not from customers buying merchandise at the stores.
Are Malls Paying Sears to Leave?
What is worse is that it sounds as if some mall operators are essentially paying Sears to leave. That does not say much for a company that was once America's leading retailer. The press release about the Macerich arrangement actually states:
"The lease arrangements between Sears Holdings and the JV provide the JV with the ability to create additional value through recapturing certain space leased to Sears Holdings in the contributed properties and re-leasing that space to third-party tenants."
Is Sears now such a drag on mall foot traffic that owners are willing to pay to get it out of the building or at least reduce its footprint? That may not be what Mr. Lampert wants to admit, but it sure sounds like it.
It also sounds as if mall owners are so desperate for tenants that they are willing to finance stores to keep them in business. That does not bode well for a mall-based retailer like Sears Holdings.
Sears' Incredibly Shrinking Revenues
The reason Mr. Lampert is so anxious to enter into these joint ventures becomes clear when you take a look at Sears' year to year TTM revenue. On Jan. 31, 2015, Sears reported a revenue of $31.2 billion, down from $33.69 billion in October 2015. Sears' revenue shrank by $2.49 billion over the 2014 holiday season.
That made for a revenue growth rate of -23.54% at Sears in the fourth quarter of 2014. One has to wonder how long that can continue before Sears simply runs out of cash or burns through Mr. Lampert's cash. Observers will remember that Lampert effectively loaned Sears $400 million in September 2014 to keep it open through the holidays.
It looks as if Lampert is desperately searching for any source of cash he can tap to keep this retailer afloat. He is literally selling the store in order to keep the doors open at Sears; the problem is nobody seems to be coming in those doors.
The revenue indicates that nobody seems to be buying anything at Sears. It also seems to verify Forbes' blogger Panos Mourdoukoutas' observation that customers are the one thing absent from Sears' stores. Mourdoukoutas found that his local Sears store was empty when he visited it.
He also estimated that Sears currently has an operating margin of -4.59%. If that figure is true, Sears' stores are losing money every time they open the doors.
How Long Can Sears Stay Open?
One has to wonder how long Sears can stay in business when it has to turn to the equity in its real estate for operating capital. At the end of the day, that is what these "joint ventures" are all about. What happens when the real estate equity gets exhausted?
My prediction is that Lampert will be forced to either shut Sears' stores down or sell off all or most of its assets in the coming year. There is simply no way a retailer that cannot cover its operating costs can survive without selling assets.
Expect Sears to sell off all or most of its remaining assets, including real estate and brands, in the coming year before winding down sometime in 2016 or 2017. Most likely Lampert will try to sell or spin off Kmart or the Craftsman and Kenmore brands to raise cash as he did with Lands' End (NYSE: LE).
He may also try to spin the physical Sears stores off into a standalone company to protect the one successful aspect of Sears Holdings: its web operations. Sears.com was the fifth largest U.S. online retailer with around 14 million unique visitors a month in 2013, according to Thomson Reuters.
Perhaps the most astounding thing about Sears is that it has survived this long. One has to wonder how long a retailer that lost $2.49 billion in one quarter can keep its doors open.