Sears (SHLD) is in a very precarious place as it gears up for the holiday season.
The single biggest thing that stood out to me from the company's dreadful second-quarter results was the dangerously low cash balance. From a pure cash perspective, the company only has $116 million or so in the bank (excluding in-transit credit-card payments). Persistently huge net losses have caused the company to blow through most of the cash it has raised in the past year from spinning off real estate and debt financing.
The situation has clearly become alarming to Sears, which had to ask for a $300 million lifeline from CEO Eddie Lampert's ESL Investments this month. In all likelihood, Sears was concerned vendors would halt shipments for the holiday season, or tighten payment terms, due to its poor cash position so it reached out to secure some additional financial.
Either way one slices it, the external cash grab is an undeniable signal the company could be headed for a major negative financial event sometime in 2017.
But the cash levels were obviously not the only thing wrong with Sears second quarter. Here are the other major pain points:
Kmart struggles: Sears has more than 700 Kmart stores left open, and they remain in seriously poor shape from traffic and sales perspectives. The company had yet another weak quarter in groceries and household items as it likely continued to lose market share to Walmart (WMT) , Kroger (K) and Target (TGT) . Moreover, pharmacy operations continued to struggle.
These are businesses that should be driving traffic to Kmart, but they are consistently proving that customers no longer want to fill their scripts and buy their weekly groceries at the discounter for whatever reason. This is a major structural issue that is only likely to get worse (until the entire chain goes out of business) thanks to price investments in food by Walmart and Kroger and stepped-up pharmacy marketing for Target's CVS shops.
The bottom line is that Kmart is irrelevant.
Inventory cutbacks: Executives at Sears believe they are doing a great service to investors by slashing inventory in consumer electronics, food and other items. They are doing this for three reasons. First, less inventory means less transportation and employee costs. Second, less inventory means less risk of profit-busting markdowns. And finally, less inventory means less exposure to vendors that could slap higher fees on Sears due to its bleak financial outlook.
But the inventory cuts continue to starve the business of the items the company needs to grow sales in key businesses, notably appliances. The second quarter offered no indication Sears has plans to invest in inventory where it needs to, suggesting all sorts of missed sales and profit opportunities for the holiday season.
Turning hard assets into cash: Under Lampert, Sears has touted hard assets, such as land and well-known brands like Craftsman, as monetizable. However, the reality is that Sears has let these assets get to such a state of disrepair (thanks to years of under-investment) that it's having trouble finding buyers for the assets.
If you asked me 15 years ago how long it would take for a Home Depot (HD) to buy a brand like Craftsman if it was for sale, I would have said no time at all. Yet, Craftsman and DieHard continue to sit on the shopping block likely because Sears isn't being realistic about their values.
Meantime, Sears has quietly stopped talking about potential real estate deals, in large part, I believe, because Seritage Growth Properties (SRG) (its recent created publicly traded REIT) got so many of the best properties.
The end is likely nearing for Sears.
