Why is Sears’ CEO still touting “progress,” even in SEC filings? Why not tell investors the truth, for once?
Sears Holdings — the storied and once dominant retailer turned into the biggest tragedy in US retail history — reported fourth quarter earnings today. The quarter, ended February 3, covered the crucial holiday sales period. Revenues plunged 27.7% year-over-year to 4.4 billion.
Over the same period, total retail sales across the US by all retailers, including online, rose 5.2%.
In fact, Sears’ revenues were so bad that in the crucial holiday quarter they were about flat with Q1 and Q2. In other words, Q4 was an unmitigated fiasco-disaster quarter.
In Q4 2012, Sears still had $12.3 billion in revenues.
The chart below shows just how miserably terrible revenues were in Q4, with no holiday pickup whatsoever, likely the first quarter in Sears’ post-World War II history where holiday revenues were about flat with Q1 and Q2 of the same year:
Taking the revenue trend-line of all Q4s going back to 2012 and extending that line as a projection of where revenues might be over the next few years, we discover that revenues will hit zero sometime in 2019 and drop below zero in 2020 – a numerical joke because Sears will be liquidated in bankruptcy court long before then:
For all of fiscal 2017, revenues plunged 24.6% to $22.1 billion
Sears is Dead Meat. There is no turnaround. There is nothing even slowing down the plunge. Instead, the plunge is accelerating. This is a free-fall.
Some of the media outlets put the net income figure into the headline – a profit in Q4 of $182 million. But it was due to an “income tax benefit” of $539 million. As Sears explained it, a “non-cash tax benefit.” Of that, $470 million was “related to tax reform.” So no additional cash. No reduction in income taxes either because Sears has been losing so much money for so long it hasn’t paid income taxes in years. So this is just a meaningless number.
In reality, the loss before the “income tax benefit” was $357 million. And this is a meaningful number: It occurred during the crucial holiday sales quarter when retailers must make a profit!
During the year, the number of stores – Sears, Kmart, and specialty – plunged by 30%, from 1,430 at the end of fiscal 2016, to 1,002 at the end of fiscal 2017. There were just 570 Sears stores open at the end of Q4. And they’re closing those as fast as they can get around to them.
Hedge-fund manager and CEO of Sears Holdings, Eddy Lampert, was quoted in the SEC filing as saying, “We made progress in 2017, with a return to positive Adjusted EBITDA and another quarter of year-over-year improvement in our financial results.”
“Adjusted” EBITDA is malicious fiction. There was no progress of any kind, other than toward a bankruptcy filing. And instead of “year-over-year improvement in our financial results,” there was a sharp deterioration. Why is Sears’ CEO still touting “progress” and “improvement” — even in SEC filings? Why not tell investors the truth, for once?
He’s now busy reshuffling debt and digging out the last few brooms in a closet somewhere to use as collateral. At the end of Q4, Sears obtained a new loan of $100 million from JPP, LLC and JPP II, LLC, which are solely owned by Lampert. This loan is secured “by certain real property interests” and by “substantially all of the unencumbered intellectual property of the Company and its subsidiaries….” When Sears is digging out its IP as collateral, it’s truly scraping the bottom of the barrel.
Prior loans by the same entities and by Lampert’s hedge fund ESL were secured by the part of real estate that hadn’t been sold off in sweetheart deals, many of them on a lease-back basis, to affiliated parties such as Seritage. Seritage, whose chairman is Lampert, was spun off via a rights offering from Sears Holdings in July 2015. Last year, Sears Holdings and Lampert settled a suit that aggrieved investors had filed over the deal for $40 million.
Via this process, Sears is being stripped of anything with any value. It will file for bankruptcy after there’s nothing left to strip. Shareholders will get nothing. Unsecured creditors will likely end up holding the bag too. And creditors who hold the real estate as collateral will end up with it. But they too will run into the brick-and-mortar meltdown that is slashing the value of many of these properties, and their once sweet dreams might not be so sweet anymore.
On the good news of this disaster-fiasco earnings release, Sears shares [SHLD] rose 8.7% in afterhours trading to $2.63, though that’s still down from another Lampert-hype induced 52-week high of $14 in April last year.
When the first major sell-off in two years came along in February – an unexpected event in a market that could only go up and where all models where optimized to reflect that simple fact – hedge funds that use artificial intelligence and machine learning ran into a surprise. Read… AI Hedge Funds Got Crushed the Worst Ever During Selloff: Machines Learned the Wrong Things in One-Way Market
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The only surprise here is how long this lingering corporate death is taking.
There must be something else going on here like hedge fund owner Eddie Lampert, who controls (and lends money to) Sears, is gaining control of a voting majority of bonds to control distribution of liquidated assets.
Even so, to invest billions to achieve something like this is risky. if Eddie Lampert turns out to be another Bill Ackerman, goodbye fortune.
From what I understand Lampert-owned and controlled concerns such as Seritage and JPP are effectively elbowing out other creditors in the bankruptcy line.
The only asset worth talking about here is whatever real estate is left after years of nibbling away at Sears’ once formidable brick and mortar patrimony and that’s what Lampert has clearly in his aims.
The only issue is what he intends to do with it: real estate is only worth something if you can lease or sell it. Otherwise it’s just a burden.
I doubt somebody in the same league as Lampert just wants to auction off or lease former Sears properties on a case by case basis. He must have a well formed plan in mind already.
Whatever it will work that’s another matter completely.
I expect the big brick and mortar companies to rent out their huge stores as warehouses for Amazon, Alibaba and Ebay. Why build new when the buildings already exist with dead companies occupying warehouse space.
Right now the fight is to hold on to as much real estate as possible.
But those stores are attached to malls. Malls have a lot of strict rules, similar to a HOA I believe? I don’t know if you can just turn one into a warehouse unless it’s a dead mall.
Warehouse space is cheap space compared to retail.
to Ethan:
Some stores are attached, some failing ones are not. Like Toys R Us for example. But even if attached to a mall, I know a few malls that are pretty near empty and repurposed as technical schools already. Even crossfit and gyms are filling retail outlet spots in malls.
The e-commerce sector keeps growing, with that it needs warehouse space. Another group in need of warehouse space will be Cannabis, I am sure it is behind some of the Denver growth.
Another use could be industrial scale hydroponic. The way we produce produce in this country is very inefficient. Fish and food in abundance could be grown in these buildings.. We aren’t there yet but getting close. Global weather change, water shortages plus the continuing growth in population will force us in that direction if humans are to continue on our path of exponential growth.
The delay is NOT unexpected. Lampert needed five years to pass since his affiliated companies purchased the real estate from Sears before filing for bankruptcy. While this expired last year…at about the same time, the Supreme Court decided to hear a bankruptcy case challenging a looters use of the Safe Harbor provision which I speculate delayed Sear’s U.S. bankruptcy filing as the decision would have a big impact on the Sears creditors’ inevitable case against Lampert. The SCOTUS decision was handed down at the end of February (i.e. just two weeks ago) and was FAVORABLE to the creditors so my guess is that Lampert is going to try and string things out further to get an additional time cushion to be able to better argue that the clawback provision time has expired. I don’t think it will matter in the end as Sears creditors can credibly argue that Sears control over the timing of the bankruptcy filing (despite its inevitability) make Sears time expiration defense INEQUITABLE due to the circumstances and facts of the case.
Good catch – I had forgotten the 5-year rule
I’m stunned that they still brought in $4.4B in this last quarter.
The nearest Sears, in Shoreline, just north of Seattle, was a morgue when I went there to find a metal file last summer. It had vast empty spaces and a general smell of doom. It was just so sad to see.
Last November my neighbor and I were talking about appliances. She needed a new refrigerator and I needed a new range. We had both done our due diligence online and decided that we were probably going to go with Kenmore’s since they had good rated appliances at the lowest prices, but we had looked at other brands also. In January, my range finally died and Sears had a sale going at the time. To my surprise, even with their “sale”, the range I had initially planned to buy was priced much higher than the prices I had seen in November. Needless to say, that ticked me off so much that I didn’t buy the Kenmore. I found the range I wanted for $100 less at another store.
When my neighbor bought her refrigerator last week, I asked her why she didn’t buy the Kenmore she had planned to buy. Her story was similar to mine.
I don’t know if this was something our local store did or if this was Sears corporate policy, but if f Sears continues to mess with its customers this way, I doubt that they can even maintain that one part of their business that might have kept them going.
Major appliance sales is the one area that brick and mortar stores can count on because consumers want to see that major appliance first before it comes into our houses and because brick and mortar stores provide installation and haul-away services, something online stores don’t provide, but are absolutely necessary to homeowners like me.
Home Depot, Lowes, BestBuy, Walmart.
Walmart for Chinese TVs- Sceptre- with no fancy spying devices/wifi evident. All online- all free shipping.
No point in buying any Sear’s appliances as Sear’s will not be around to back any warranty.
JC Penney is following Sears into the dustbin of history.
I was in JC Penny last week. They actually have really good prices on mens clothes and I bought quite a bit. I hate shopping, especially for clothes but the wife laid down the law and said no more vagabond Dave.
Anyway, she dragged me around forcefully to a few retailers to try on clothes. I was annoyed with the prices at all of them (as well as the process itself) until I got to JCP. I ended up trying on quite a few things (a minor miracle for me).
Dave I had similar experience about a dozen years ago…JCP was advertising tall sizes and good discounts so I went and spent few hundred dollars on golf shirts, khakis etc.
Shirts shrunk oddly (got shorter vertically and seemingly wider horizontally), buttons would not stay buttoned and pants had few–and oddly-placed–belt loops causing pants to hang like a shower curtain. They got me, but I’ve never set foot in JCP again. Difficult to comprehend how their profit strategy could be so short-sighted.
Hope your purchases work out better!
You get what you pay for in clothes. JCP is cheap and it shows in most of their merchandise. Quality clothes with any sense of style that wash well, are well made, and are fashionable cost money.
Yeah if you are some retired dude who trots around a golf course in cheap pleated khakis and Under Armour polyester polos by all means shop at JCP. There’s a reason why a Filson wool dress shirt costs $150 and a knockoff at JCP or Macy’s is $45.
“Some of the media outlets put the net income figure into the headline – a profit in Q4 of $182 million.”
But if I GOOGLE that, the result must be true b/c of their policies google would never work to mislead anyone or influence them into thinking they’re victims of some kind of bias, right?
But I do know of lots of people out there( including me) who have bought their appliances at the Sears smaller stores…maybe they should just sell that and forget about the big stores concept…
…and Sears is selling light-duty Craftsman power woodworking tools at firesale prices – guess where (quite an irony)?
https://www.amazon.com/s/ref=a9_asc_1?rh=i%3Aaps%2Ck%3Acraftsman+table+saws&keywords=craftsman+table+saws&ie=UTF8&qid=1521119609
RD,
FYI, Sears sold the Craftsman name brand to Black and Decker over a year ago. Another asset sold off already.
Craftsman was always just a name brand, manufactured by others.
Thanks, Gandalf – I’m not familiar with Craftsman’s manufacturing history, but I have some very old Craftsman tools, from back when Craftsman offered and performed as promised, an unlimited guarantee. Some of those tools are still serving me well.
One is a drill press my father bought circa 1935, for use building bicycles during the great depression.
Everything Sears sells is (was) a rebranded product, a strategy which served them well for many years. The beauty of Craftsman was that they could aggregate products which served the needs of DIY folks from many manufacturers, brand them with Craftsman, and make them available with a large selection to see, feel, and buy in an easily accessible retail location, and cover their warrantee in the same location. Same with Kenmore.
Sad to see it go to be replaced with the likes of Home Depot and Lowes
Media reporting Sears’ numbers like it was some triumphant victory. The reason we need a massive crash is because this system is so fraudulent, so deceptive, so rigged that it needs to go.
And I know the bankers have an even worse one planned, but things don’t always go as planned. And this will be one of those times, because after 2008, the public has zero tolerance for another one, and this will be worse.
Yes, they will orchestrate such a horror show that the public will beg for anything they offer and some will go along, but some won’t. It will not go as planned, mark my words.
I’m hopeful enough people remember just 10 years ago that there will be pitchforks in the streets. Hopefully everybody with a wiped out 401k will have a visceral response.
Didn’t get it Derek repeat please
When sears finally collapses, nobody will have enough votes to overrule Eddie, and his straw men.
Nobody but Eddie and his straw-men, will get paid, and the longer it takes to collapse, the longer the window between his asset stripping and the implosion.
Eddie cant loose the way this is set up, and time is on his side.
This is a legalised fraud, on a big scale.
Agree! Well said
The latest loan Eddie made to Sears is with 11% interest and called for additional collateral. This is due April 3rd.
By the way his old Yale room mate, Steve Mnuchin, was on the Sears board for 12 years and was well aware of the Pensions being underfunded which continued under his watch. Stevie is now one of 3 who sits on the Pension Benefit Guarantee Corporation.
Guess we just aren’t in the right club.
Nope Wrong club No doubt about it
And the pensioners?
Not so fast! It was around 10 years ago and I was sitting in my car eating lunch at a mall and I noticed the old escalators from the Sears store had been removed and sat behind some yellow tape in the mall parking lot. I thought of all the crowds from Christmas past and that dropped coins would have made their way up to the escalator ‘landings’ and disappeared forever as the stairs turned and made their way back to the bottom.
I got out of my car and went over to look. I was right. Amidst the grime and dirt of years of traffic were numerous coins some pre 1964 silver coins. As I dug them out and put them in a plastic bag a mall security guard ordered me away from my ‘buried treasure’.
Given the number of stores Sears has closed in recent years and the number of escalators in each store Sears may have a large stock of rare coins hidden in these old escalators as well as other ‘collectibles’ concealed in the nooks and crannies of its defunct stores.
The mall I grew up with has been empty for years. Ironically, the detached Sears hung on longer than anyone else, but it’s now closed too. Now the township can’t give the land away. No one is going to make money on that bit of real estate. The only way to make money that I can see is to sell those Sears that are attached to still successful malls. But even mall anchor stores aren’t making money like they used to, so good luck finding a buyer.
I still remember a financial analyst saying that Sears would be dead in a year. That was around 2014. Life support can go on a long time.
This was a Sears on Black Friday 2017:
https://youtu.be/_5UIVBMz07w?t=16m
Judge for yourself.
I am not sure why they don’t concentrate on their old catalog store business. There was a big change in the way Americans live (anyone out there own a rototiller?) Maybe those days are coming back?
We own three: A heavy-duty rear tine one, a mediun-duty gas powered one and an electric light- duty “weedcutter”.
They didn’t “come back”; they never left.
I am old enough to remember Sears as a very dominant and very successful American retailer that had been established in the late 1800s. I thought of it as part of the bedrock of American retail business and I believed it would surely outlive me. But change occurs very rapidly in this economy.
In my current neighborhood Sears used to be a large 2 story mall anchor store. About 5 years ago it was obvious the store was failing. The merchandise for sale was crap and the foot traffic more and more consisted of people taking shortcuts to other destinations. Two years ago most of its 1st floor space was rented to Whole Foods. In the fall of 2017, three months before XMAS Sears vacated the remainder of its space and the mall walled it off and locked its doors. Sears’ business died long before 2017. Its apparently being operated now for the sole purpose of maximizing the salvage value.
I do not blame Sears for its downfall. I do not blame the internet or online sellers. I blame the change that has occurred in American economic, business and legal values that has transformed the nature of capitalism. Not too long ago the US Government enforced the Clayton Act as requiring mergers and acquisitions to be limited in a manner that provides all firms in an industry with a fair opportunity to compete and prevents predatory corporate activity. Brown Shoe Co., Inc. v. United States, 370 U.S. 294 (1962). Today there appears to be no limit on corporate predators.
Sears has been failing since the very early 1990s when Walmart became the biggest retailer.
Watching Sears linger is weird, but I don’t see it as predation; rather, scavengers have moved in to clean the carcass and it’s just taking a lot longer than usual (25-30 years…and counting). It’s not like nasty predators took down a top competitor- Sears management killed this beast with sheer incompetence: Sears is 3-generations of retail behind – they’ve lost to Walmart, Amazon and Dollar Stores.
I will agree with the statement that “Adjusted EBIDTA is a malicious fiction”; it can mean whatever the speaker or writer wants it to mean. And for someone as challenged with economics truth-speak as Eddie Lampert appears to be, it calls every assertion he makes into question and doubt.
I also have one positive note for long-time suffering holders of Sears Holdings: It has defied gravity for over 15 years. But at this point, I see almost nothing there that an outside shareholder would want. You can be certain that whatever value there is will be looted by ESL Investments before the bankruptcy filing, so this may be the last bell warning you to get out.
Just don’t call me and ask me to buy your shares.
It (SHLD) hasn’t really “defied gravity.” It has plunged from $134 in April 2007 to $2.32 on Friday. That’s a 98% drop. It just hasn’t hit zero yet :-]
When I went into the two Sears stores in northern Virginia, a rather prosperous area, I noticed there were more employees than customers, bare shelves, lots of open spaces due to a lack of inventory, etc. They had the look of stores that have already declared bankruptcy and plan to close within a couple of weeks, and in the meantime they’re selling off what’s left. Very depressing.