Sears: “Worth more dead than alive?”

Shares at Sears have fallen into a perpetual slump in recent years. Data: Yahoo Finance; Chart by Yinmeng Liu/Medill News Service
Shares at Sears have fallen into a prolonged slump in recent years. Data: Yahoo Finance; Chart by Yinmeng Liu/Medill News Service

By Yinmeng Liu

The long-depressed shares of Sears Holdings Corp. briefly revitalized earlier this month, after the struggling retailer announced it is considering a plan to generate cash by selling a few hundred of its stores to a real estate investment trust it will create.

But the upswing was fleeting: after the early enthusiasm, shares of the company that was once an American icon soon gave back some of the gain. That’s the way it’s been going for the company in recent years, as its controlling shareholder tries one idea after another to revive the company’s flagging fortunes.

These attempts have yet to bear fruit. Since 2010, Sears has reported $6.4 billion in losses and it is expected to lose an additional $275 million to $325 million in the current quarter. Those losses aren’t sustainable, and have prompted some experts to question the viability of a company once celebrated as America’s king of retail.

Born in America’s Railway era, Sears was an innovator, the Amazon of its time. At a time when consumers could only buy from high-priced local stores on the prairie, Sears offered a huge range of goods – sewing machines, farm equipment, guns, bicycles and wigs — at lower prices, and delivered them by mail to rural customers.  In the 1950s and 1960s, as its earlier model began to fade, Sears built mammoth stores that were often attached to malls.

Only a handful customers were checking out the merchandises at a Sears' store in Chicago, Illinois on Saturday. Picure by Yinmeng Liu/Medill News Service
Only a handful customers were checking out the merchandises at a Sears’ store in Chicago, Illinois on Saturday. Picure by Yinmeng Liu/Medill News Service

But the once-mighty retailer has fallen on hard times, as Big Box retailers have pushed aside the Sears model of giant department stores filled with a variety of goods. And in recent years, shoppers increasingly look online for goods, further pinching Sears’ narrow income. Profits have nearly disappeared at the nearly 130-years-old multinational department store operator.

These days, some people think the land the company’s stores are sitting on might have higher value than the stores do.

“Sears is worth more dead than alive,” said Scott Fearon, president of the hedge fund Crown Capital Management.

For the last decade, Sears has been controlled by hedge fund manager Eddie Lampert. Lampert was the key engineer behind Sears’ 2005 merger with Kmart, another troubled department store chain. But in recent years, the CEO and leading stockholder has been masterminding a series of asset divestitures designed to provide the company with operating capital.

In October of 2012, Lampert, who is also Sears’ biggest shareholder, completed the spinoff of Sears Hometown and Outlet Businesses, generating $446.5 million in general proceeds.

In the beginning of this year, Lampert successfully spun off Land’s End, a clothing store line the company had acquired in 2002 for $1.9 billion. Sears was able to secure $500 million through that maneuver.

Last month, Lampert cut a deal to sell most of the company’s stake in Sears Canada to generate $380 million in proceeds. In the same month, Lampert announced a rights offering that allows shareholders to purchase approximately $625 million of senior unsecured notes due 2019. The company later said both of these offerings had been oversubscribed.

What’s more, the beleaguered retailer has been subleasing its own store spaces to fellows like Western Athletic Clubs and Gonzalez Grocery Store in exchange for finance. It is even considering selling its Auto Center for cash.

Sears said it is also considering alternate plan for its Auto Center business
Sears is also considering alternate plans for its Auto Center business. Picture by Yinmeng Liu/Medill News Service

The most recent strategy Sears contemplates came to public attention through a SEC filing, in which the department-store chain said it will probably sell 200-300 of stores to a REIT in a sales-leaseback to raise cash.

Sears’ shares jumped more than 20 percent when market opened on Nov. 7 after the REIT announcement, but doubters think that, like many of Lampert’s capital-raising efforts, the potential REIT deal will fail to turn the situation around. Sears shares remain higher than they were, but have given back some of their earlier gain.

Many people remain unconvinced. “Sears is in liquidation,” said Howard Davidowitz, retail consultant and the head of Davidowitz & Associates. “Their stock price doesn’t mean anything. Investors are betting on real estate, not the stock value.”

Sears’s cash-raising efforts aren’t a long-term solution, critics say. In his personal blog, Lampert has defended his business strategy, arguing the divestitures and store closings are “transformational plans” to match the changing habits of consumers today, many of whom have turned to e-commerce.

“Few in retail were trying to integrate their store and online channels before we did,” the billionaire wrote in his most recent blog. “But transformations are about innovations and iterations – new and often incremental versions of changes.”

In recent years, Sears’ has concentrated its efforts on programs like “Shop Your Way,” a membership reward and buying system that enables customers to purchase merchandises online.

In the most recent earnings conference call, Lampert touted the success of the program, arguing that 73 percent of Sears’ eligible sales in the second quarter came from Shop Your Way members.

Lampert also said the company is focusing on building a new business structure that is “less asset-intensive” and is committed to forming a more personalized relationship with customers.

But Lampert’s strategy is not immediately convincing to others. Fitch Ratings, a New York-based rating company, downgraded the long time issuer default rating for Sears from “CC” to a “CCC.”

“The magnitude of Sears’ decline in profitability and lack of visibility to turn operations around remains a significant concern. EBITDA for Sears Holdings Corporation is expected to be negative $1 billion in 2014 and potentially worsen in 2015, after turning negative $337 million in 2013,” wrote primary analyst Monica Aggarwal, who is also a senior director at Fitch Ratings Inc., in a research note.

“Sears needs $2 billion this year. They did that,” said Aggarwal in a phone interview. “Their cash flow will be similar next year.”

Nevertheless, Aggarwal wrote that “significant deterioration in Sears business and the lack of visibility on a turnaround” limits its ability to conduct real-estate transactions. Aggarwal predicts that the company will get through 2016 but the company remains at high risk for restructuring.

“Sears’ core business is dying. There’s no doubt about it,” said Crown Capital’s Fearon “But there is hidden value in the assets.”