Sears’ Death Spiral Nears Its End

In February of 2015, I wrote an article titled “Stock Buybacks and Sears’ Death Spiral.” In this article, I was critical of Sears Holdings Corporation’s stock buybacks, totaling $6.011 billion, from 2005 through 2011. In the final paragraph of my article, I stated:

When a company has little cash, negative working capital, and a negative net worth, it is painfully insolvent. I also predict that when Sears declares bankruptcy, the talking heads on CNBC and Bloomberg TV will not call Eddie Lampert onto the carpet and question Sears’ reckless stock buyback program running from 2005 to 2011. How did flushing away over $6 billion, for share repurchases, enhance shareholder value for Sears’ stockholders? This is not a question that will be posed by our lapdog media; yet the answer will be obvious when Sears’ shares hit $0.

What has surprised me is that Sears and Kmart stores remain open nearly three years later. Watching a company’s death spiral, into bankruptcy, can take longer than expected.

It came as no surprise that Sears’ management announced the closing of 64 Kmart stores and 39 Sears stores on January 4, 2018. The following was conveyed in this announcement:

Sears Holdings continues its strategic assessment of the productivity of our Kmart and Sears store base and will continue to right size our store footprint in number and size. In the process, as previously announced we will continue to close some unprofitable stores as we transform our business model so that our physical store footprint and our digital capabilities match the needs and preferences of our members.

To transform a business model, for a company as large as Sears, would take a great deal of time and capital. Unfortunately, Sears does not have the money to execute such a transformation. As of the third quarter ending October 28, 2017, Sears’ cash position was a paltry $200 million. Oh, and it gets worse. At the end of this latest quarter, Sears’ working capital position was deficit $1.1 billion while its net worth was negative $4 billion (total assets were $8.2 billion while total liabilities were $12.2 billion). Sears is insolvent and any talk of a business transformation is nothing more than wishful thinking.

To be sure, stock buybacks alone cannot be pinpointed as the proximate cause of Sears’ demise. One must look at the intense competition from other brick-and-mortar retailers and, of course, online retailers such as Amazon.com. Nonetheless, what if Sears didn’t spend $6 billion on stock buybacks and instead used this money to transform its physical store footprint and its digital capabilities? Could it have been one of the survivors of the unfolding brick-and-mortar retail apocalypse?

Upon closing these 103 stores, Sears will have 1,001 full-line and specialty stores still open for business. With such a profoundly impaired balance sheet, I fully expect Sears to declare bankruptcy and close its remaining stores. As Americans see a mounting number of empty storefronts, the realization may hit that America’s economy isn’t so awesome after all. Perhaps Sears’ bankruptcy will be the tipping point where Americans start to believe their eyes instead of the false narratives emanating from the Federal Reserve, Wall Street, and Washington, D.C.

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