In 2011, Sears Holdings (SHLD) reported a loss of $500 million. It was the first time in at least thirty years that Sears had reported a loss. At the time, management and investment analysts reported the problem as “short term” and “fixable.” The analyst consensus called for a return to $200 million in annual profitability by 2014.
Then 2012 came and Sears reported a smaller $200 loss. This news encouraged analysts, and they raised 2014 guidance for a $275 million profit.
By the end of 2013, Sears reported its worst year ever at the time with a $700 million loss. Analysts pushed back their profitability projections to 2016, and tempered them back down to $200 million.
When 2014 arrived? Sears lost $830 million.
2015? Sears lost $950 million.
This year? Sears is going to lose somewhere between $800 and $850 million.
And guess what? Analysts are calling for $200 million in profit by 2020.
About $3.5 billion has been lost while analysts have been predicting a return to profitability at Sears. The balance sheet, which seven years ago consisted of $1.7 billion in cash against $1.6 billion in debt, now consists of $3.5 billion in debt and only $250 million in cash.
This is a great time to talk about biases. Now, I know the trend of the day is to note a bias and engage in an extended bout of self-flagellation over it. I have no desire to do that; I prefer to take the lesson from something and move on.
Here, the lesson is that nobody wants to hear anything bad about “their” stocks. Managements have a natural incentive to glorify their work and lay out the pathwork for rosy days ahead. Analysts have bosses that have cozy social relationships with the companies they cover or fear a restriction of access to management if they reach any conclusion that is too negative. And too often, investors fuse part of their identity into their business holdings and regard any bad business news about a company they own as a personal attack.
In the past five years, Sears shareholders encountered the following publicly available facts:
- Sears management stopped disclosing online sales figures after reporting disappointing results.
- Polls were released in 2013 that indicated 84% of Americans thought that the product quality of the once legendary Craftsman brand had deteriorated.
- Between 2011 and 2014, mall traffic in the United States declined by almost 20%.
- Between 2010 and 2014, Sears took on billions of dollars in debt to transform its balance sheet from strong to “meh.”
- Sears had divested Lands End, giving it no further brands to spin off to shareholders like Allstate, Morgan Stanley, and Discover Card.
- Sears stopped funding its pension, letting obligations balloon towards $6 billion while pension assets remain in the $3 million range.
- Sears was locked into $600 million in rental contracts through 2021, giving it little contractual flexibility to be nimble with the changing mall shopping demographics.
- Same-store sales had an decline rate of 8%.
This is why, last September when the stock was at $24 per share, I wrote the article “Sears Stock Will End Up At $0” and argued:
Although the company could theoretically squeeze out another spinoff like the Power Tools division, the retail giant has now reached the point where I believe prospective investors will eventually see their investment shrivel towards $0 with a final ending in bankruptcy…It has been a large fall for Sears, which traded at $190 per share as recently as 2007, and now finds its stock price in the mid $20s. This isn’t ‘a sale.’ The book value of the stock is only $5, meaning the current price is almost five times book value. The pension is deeply underfunded, the annual leases and rentals are high, the interest payments alone are a third of a billion, the debt is over 10x the recent best year’s cash flow, the mobile growth is a pipe dream, the same-store sales are declining by double-digits even with double-digit price cuts, and massive share dilution or continued high-debt overleveraging awaits the immediate future. If I owned it, I would sell it and put it in Johnson & Johnson or Hershey at current prices. If I were contemplating it as a prospective investment, I would quickly move on to the next issue.
You know what I find crazy? The same nonsense of 2012, 2013, and 2014 still exists today. You still see management talking up the stock. You still see analysts talking about $200 million profits that are a few years in the offing. And you still hear shareholders talking about this stock trading at deep value and offering a heck of deal.
No, no, no. The world economy has prospered during these past few years, and Sears has continued to rack up enormous losses. What happens if we have a recession in 2018? What happens if no new creditors are willing to lend Sears money? What happens if Sears has to issue new shares at $8 each as part of a massive dilution because it can’t secure traditional bank lending?
Perhaps it is always a natural tendency to think the future for a particular investment will be brighter than the actual reality that will come, but the current gap between the “hope-ium” that Sears investors have in their pipes and the actual fundamentals of the business is one of the greatest I’ve seen in real time.