How To Eat Your Own Tail----The Pathetic Story Of Sears Holdings

By Seeking Alpha

I think it is fairly safe to say that the retail transformation of Sears Holdings (NASDAQ:SHLD) is failing and that it would take a miracle to reverse its trajectory at this point. The comparable store sales decline worsened in 2015, resulting in greater declines than 2008. The cost cutting hasn't been able to keep up with the sales decline, resulting in adjusted EBITDA that was worse in 2015 than in 2014, which was already worse than in 2013. It is probable that Eddie Lampert would have been fired as CEO of Sears long ago if he wasn't the main owner.

Comparable Store Sales Decline Greater Than 2008

The retail transformation at Sears appears to be going as well as Ron Johnson's attempt to transform J.C. Penney. Comparable store sales at Sears Domestic and Kmart fell -11.1% and -7.3% respectively in 2015, continuing a near-uninterrupted string of declines (broken only by slightly positive comps at Kmart in 2010). Remarkably, the attempts to transform Sears have resulted in worse comps in 2015 than it did during the 2008 recession.

2008 2009 2010 2011 2012 2013 2014 2015
Sears Domestic -9.5% -8.7% -3.1% -3.0% -1.4% -4.1% -2.1% -11.1%
Kmart -6.1% -0.8% 0.8% -1.4% -3.7% -3.6% -1.4% -7.3%

The poor comparable store sales results have come despite closing hundreds of stores over the past few years and theoretically attempting to retain some of the sales through other channels.

Adjusted EBITDA Continuing To Become More Negative

One of the key ideas from closing stores was that negative EBITDA stores would be gone, while Sears could migrate a portion of those sales to more profitable channels. However, the rate of comparable store sales decline at Sears has been so fast that the cost cutting hasn't been able to keep up. Sears closes negative EBITDA stores and then the sales decline pushes other formerly positive EBITDA stores into the red.

Sears had negative $490 million in adjusted EBITDA in 2013, which declined to negative $647 million in 2014 and negative $703 million in 2015, according toSears' calculations. However, Sears excludes the rent that it pays to Seritage from these calculations for comparison reasons. Including the additional rent it now incurs would result in its adjusted EBITDA decreasing to negative $836 million in 2015.

$ Million 2013 2014 2015
Adjusted EBITDA (Defined By Sears) -$490 -$647 -$703
Adjusted EBITDA (Including Seritage Rent) -$490 -$647 -$836

A Look At 2016

Sears intends to close additional stores during 2016 and also mentions that it intends to reduce costs by $550 million to $650 million in 2016. However, it still needs to significantly improve its comparable store sales trajectory. If comparable store sales decrease by only 5% in 2016, then total revenues are likely going to be down by around $2.0 billion to $2.5 billion including the impact of store closures. This would result in a decrease in gross margin of approximately $500 million at 2015's gross margin rate, offsetting much of Sears' cost savings target. As well, Sears only paid Seritage rent for 2.5 quarters in 2015. Including the extra rent from 1.5 quarters would likely add another $75 million to Sears costs. Thus, if Sears reduces costs by $600 million and manages -5% comparable store sales in 2016, it would still have negative adjusted EBITDA of over $800 million in 2016 including the Seritage rent. As long as Sears' comparable store sales keeps declining significantly, it is hard to see how it can stem its cash burn from operations.

Conclusion

Sears has monetized a large amount of assets in the past few years, but the money generated from that is needed to fund its ever worsening retail operations. If Sears had managed to keep comparable store sales flat while cutting its store base, it may have been able to deliver a significant amount of value to shareholders. The retail failures have led to billions in cash being wasted though. I don't think that anyone can believe that the retail transformation at Sears is anything except a money pit at this point.

Sears does have the ability to continue for a while longer via a combination of debt and asset sales, but it is tough to envision there being much value left for shareholders in the end given how the retail operations are so much of a negative. Even if the real estate is worth more than I and others estimate, the sheer damage caused by the retail operations will quickly destroy that additional value. As well, the value of assets such as the KCD brands is declining in conjunction with the retail sales decline. I'm not shorting SHLD right now since it appears risky to short at $15 given how closely held it is. Holding it for the long term appears dangerous as well given the inability to stem the heavy retail bleeding.

Source: Sears Holdings: Can It Get Any Worse? - Seeking Alpha

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