The strange world of Sears Holdings, under the corporate leadership of its CEO and largest shareholder, Eddie Lampert, is strongly hinting that it may have to disappear in order to survive, according to a report yesterday by The Street. In its latest earning report, Sears Holdings almost seem to be celebrating its 2014 fourth quarter loss of only “$159 million.” In that report, Sears Holding reported a cash position of a paltry $250 million, a very small amount for an organization of this size. To soften that blow, in the same sentence said that it has a credit facility of $800 million, presumably money it can immediately access. Cash burn is a serious problem. Just last year in the second quarter of 2014, Sears burned through $747 million in cash.
More about the Eddie Lampert disappearing act. In November, Sears Holding said that it wants to form a Real Estate Investment Trust (REIT) by May or June, to buy and then manage between 200 and 300 Sears and Kmart properties, with proceeds to Sears of around $2 billion. The Street said that Sears CEO Lampert “revealed that some of those locations could even cease operating as Sears or Kmart stores if better tenants could be found.”
“We believe that many locations can be re-purposed with or without Sears Holdings as an anchor, which would give the REIT the potential for value creation, as well as downside protection if Sears Holdings were unable to continue to operate certain stores profitably,” Lampert said on a pre-recorded earnings call Thursday, in which reporters and analysts were not allowed to ask questions as is customary in these calls.
The REIT formation would give Sears a badly needed capital injection of approximately $2 billion, that would allow it to fund holiday inventory purchases and basic capital expenditures through at least the end of 2015. The future of stores not selected for the REIT, presumably would be shut down and liquidated. Just last year, Sears shuttered 234 underperforming Sears and Kmart locations (mostly Kmart), which helped to raise cash through inventory liquidation sales while also reducing costs. That move significantly reduced gross sales too, weakening Sears and its buying power with vendors.
The Street also said that “Although Sears did not disclose its store closure plans for 2015 on Thursday, more are likely lurking in the wings as the retailer seeks to preserve the cash that will eventually arrive from the formation of the REIT.”
There is one Sears bull out there, Don Ingham, Portfolio Manager, Tenth Avenue Holdings Core Fund. Ingham says that Sears “has an impressive real estate portfolio and a strong e-commerce platform.” Ingham added “Sears has already gone through the pain of store closings and financial restructuring so it has upside potential.”
Meanwhile, retailers like Best Buy (BBY) and Home Depot (HD) and Lowes (LOW) are positioning themselves to snatch a larger percentage of the major home appliance business from Sears Holdings.