Sears Holding Corp. (Nasdaq: SHLD) announced a $900 million deal to sell its iconic Craftsman brand to rival tool maker Stanley Black & Decker earlier this week, leading many investors to wonder if it’s time to pony up for a rebound or just hang on.
Sears is still the most dangerous stock on Wall Street, and if you own it, you’re gonna get hosed… if you haven’t been already.[ad#Google Adsense 336×280-IA]Don’t say I didn’t warn you.
Clicks and Mortar, Not Bricks and Mortar
On Jan. 23, 2015, I called Sears one of the “five scariest stocks on Wall Street” and urged you to give it a wide berth or short it outright.
It’s dropped more than 73.64% since I recommended shorting it and is trading at a stunning 5% of its stock price exactly 10 years ago.
I know Sears is an iconic brand, but these days that’s not enough.
The company is hemorrhaging red ink.
…sales are in decline and have been for years. Things are so bad that Sears lost $1.6 billion during the first three quarters of last year, which is triple the loss a year earlier in 2015. Gross margins have fallen another 2.5% even as operating expenses continue to rise. Comparable sales are plummeting.
…the company has closed more than 2,500 stores over the past six years and recently announced plans to shutter another 150 Kmart and Sears stores. As of November 2016, Sears had 550 stores with leases expiring within the next few years, according to CFO Jason Hollar in a Fortune interview. Every one of them is on the chopping block.
…Sears is dogged by persistent bankruptcy rumors, based on – among other things – a staggering $4.46 billion debt load.
It’s only a matter of time before Sears goes the “way of the dodo.”
The dodo’s last recognized sighting was in 1662, when it had been hunted literally to extinction. Fat, clumsy, and unable to fly, the only known remains are a head and some tissue brought to Europe in the early 17th century and dissected at the Oxford University Museum in the 19th century.
The reason I’m bringing this up is that Sears is a lot like the proverbial dodo.
The once iconic American retailer badly misjudged the shift to online shopping and away from traditional retailing that had been its domain almost exclusively since 1893, when it was founded by Richard Warren Sears and Alvah Curtis Roebuck in Chicago. Executives continued to believe that Sears was something special when, in fact, consumers gave up that notion years ago and viewed it as just another place to shop… and not a very good one at that.
CEO Eddie Lampert, a Wall Street financier once rumored to be the next Warren Buffett, took the helm at Sears in January 2013. He’s rumored to have lent the company at least $1 billion in successive attempts to resurrect the brand and turn it into an “asset-light company.”
No doubt he’s made some smart moves as of late. He’s sold off key Sears components including Lands’ End, Sears Canada, and Sears Hometown and Outlet Stores. He’s also created a publicly traded real estate holding company called Seritage Growth Properties (NYSE: SRG).
Yet, Sears is still coming unglued.
To paraphrase Warren Buffett’s 2005 remarks to University of Kansas students, it’s “not enough” to have smart people running your stores. He should know; Berkshire Hathaway bought a Baltimore department store named Hochschild Kohn’s in 1966 and couldn’t make it work before selling a few years later.
I couldn’t agree more strongly – retail, except under very specific circumstances, is a dying sector.
Have you been in a Sears lately?
I have. The parking lot was empty, the shelves in disarray, and the clerks (if you could find one) were clearly unimpressed by what’s happening. It was about as depressing a shopping experience as I’ve ever had.
A lot of people will tell you this is because of Lampert himself. That he’s run the company like a personal piggy bank for years and has been systematically stripping it of wealth in an attempt to create “shareholder value.”
In reality, Amazon.com Inc. (Nasdaq: AMZN) has almost singlehandedly killed Sears…. and Macy’s… and Kohls… and a dozen other once-proud retailers who simply could not make the jump from bricks and mortar to clicks and mortar. Lampert, for all his financial acumen, simply can’t keep up. But that’s a story for another time.
What matters now is that Sears is done, and even at $9.00 a share it’s not a bargain, let alone “on sale.”
So… what do you do if you own Sears, or think it’s a great turnaround play?
I think Lampert has his eye on a protracted liquidation. The moves he’s making remind me of fictional financier Gordon Gekko from Oliver Stone’s 1987 smash hit film, “Wall Street.” Gekko’s character, in case you never saw the movie, created the tag line “greed is good” even as he raided – then stripped – companies in the name of millions.
I suspect Lampert will want to unload as many shares as he can to unsuspecting investors under the guise of a turnaround based on undiscovered “shareholder value,” which is how he’s going to pitch his moves. Most of this will come from complicated sales like the Stanley Black & Decker transaction and those of his hedge fund ESL Investments, which pad his pockets but do very little for yours.
You’ll rarely hear me say that it’s time to “take the money and run,” but this is one of those times.
If you’ve shorted Sears like I advocated in January 2015, you’re sitting on profits of at least 75%, so cover your bets and laugh all the way to the bank. There’s only another $9 to the downside and the benefits of capturing the final few bucks as Sears implodes are overshadowed by the risks of a false rally that goes against you.
If you’ve held on all the way down, that’s another story.
At the risk of sounding like my grandmother, let this be a lesson in why you should always use trailing stops. Even an ultra-wide 25% would have carried you out of the trade at $27/share more than a year and a half ago in June 2015. Now, though, you’ve got losses that will require a 277% rally just to break even!
Take whatever your proceeds are from selling Sears and buy Amazon stock. Not only will you gain exposure to every retail buyer in America as opposed to a few hundred people in a mall (on a good day), but you’re going to get the latest growth in big data, artificial intelligence, and cloud computing, too.
And that’s what I call a bargain.
Until next time,
Source: Money Morning