Sears Will Be Bankrupt In Less Than 18 Months

I’ve followed the Sears (SHLD) company and stock for years. It has been one of my favorite stocks to short. Apparently, many others agree, with an outstanding short ratio of over 20%! This is ridiculously huge!!

Sears also owns K-Mart, another loser company. The performance of the two companies seems perfectly correlated, indicating a completely incompetent management team, given the commonality and correlation. Both companies are getting their lunch eaten by competition, both online and offline retailers such as Walmart, Dollar Store, Amazon, Best-Buy and more.

Sears was the original department store in America, with a history that spans over a hundred years. This is long by American standards. It went from icon to irrelevant over the span of many decades.

Financial Performance

Sears reported earnings last week. It was another typical horrendous quarter. They lost a staggering $395 million in only 3 months. Their cash balance stood at $276 million, after bleeding more significant losses, compared to $1.8 billion a year ago.

This cash balance is too low to operate the company. Keep in mind they are a retail company, and as such, they need a lot of working capital to purchase and carry inventory, and pay salaries for the employee intensive business. So the CEO, Eddie Lampert, who also runs an investment fund and is worth over $2 billion, recently loaned $300 million to Sears. He already owns over $700 million of the company’s huge dept pile. The ominous sign is that Sears was unable to find any other financiers, even using their extensive store real estate assets as collateral.

SHLD stock price is around $14 today. It’s down by about half in the past year. It will go to zero in less than 18 months, probably under 12. I recommend buying PUT options to short the stock instead of shorting it outright. You will risk less money, and have a much better risk/reward ratio.

Sears and K-Mart are stuck in an inescapable death spiral. To cut costs to stay alive, they continually reduce staff, hurting customer service. They close stores constantly to save money. The end result is ever dwindling customers.

They are so desperate that they are selling their prize assets, the Kenmore and Diehard internal brands, because they need to raise money. These were the only good and differentiating products they had!

The CEO, Eddie Lampert, is no fool. He will come out of this smelling like a rose. The employees and stockholders will lose everything. As it stands, the only way Eddie can recoup his full investment in Sears is to bankrupt the company. As a priority bond holder, he will retain the critical real estate assets and probably transfer them to his private equity fund.

Sears will no longer exist in 18 months or less, perhaps within 6-12 months. Even the brand name has zero value.

Goodbye to an old American icon.