Sears' stock has cratered to the tune of 30.3% over the past six months, about four times worse than the 7.4% drop in the Dow Jones Industrial Average. During that span, the stock has performed the worst among those department stores operating in malls across the country. Shares of J.C. Penney (JCP) have skyrocketed some 28% in six months time as investors have bought into its turnaround strategy, which includes revamped shoe and jewelry departments and better operational management under the leadership of a new CEO. On the other hand, Macy's (M) shares have fallen 8% due to sluggish demand for men's and women's apparel, which in part has prompted the announcement of up to 40 closures of under-performing stores in early 2016. Yet, even struggling Macy's has a stock price that has not lagged as much as Sears.
For Illinois-based Sears, its weak stock price is particularly troubling in light of measures execs have taken this year to raise badly needed cash and shutter under-performing locations.
On July 7, Sears closed on a deal to form a real estate investment trust called Seritage Growth Properties (SRG) . In the transaction, Sears sold 235 Sears and Kmart stores to Seritage along with Sears' 50% interests in separate joint ventures with Simon Property Group (SPG) , General Growth Properties (GGP) and The Macerich Company (MAC) , which together hold an additional 31 Sears Holdings properties. Sears received aggregate gross proceeds of $2.7 billion from the transaction, coming just in time to fund inventory purchases for the holiday season.
Nevertheless, the market may be dumping the stock due to some cold, hard truths related to Sears that may play out in the beginning of 2016. The first is the likelihood of Sears announcing a very disappointing holiday season, given little sales momentum so far this year. Sears notched yet another same-store sales drop in the second quarter, plunging 14%. The retailer saw alarming declines in almost every category it offers -- home appliances, apparel, lawn and garden, automotive, and consumer electronics. The story at value-oriented Kmart was better than at Sears, but still not very good: Same-store sales declined 7.3%. Sales declines were reported in consumer electronics, grocery and household goods, apparel and the pharmacy.
Pressured sales led to more worrying losses for Sears. Excluding one-time items, Sears reported a second quarter net loss of $256 million, just slightly improved from the $293 million adjusted loss from a year earlier.
And as a result of the prolonged stretch of losses, Sears' cash flow from operations continues to dwindle. That brings up the second cold, hard truth facing Sears: It may have to raise more cash from outside sources to fund its operations in 2016, with investors unsure today precisely where that cash would come from, given the company's weakened financial state.
For the 26-week period that ended Aug. 1, Sears' cash used in operations, which includes debt servicing, was $832 million, compared to $747 million a year earlier. According to a review of Sears' last three annual reports and its year-to-date cash flow statement, it has not produced cash flow from its operations in over four years.
That's a source of concern not lost on the company's execs. "We intend to continue taking significant actions to alter our capital structure, as circumstances allow, to position Sears Holdings for success and profitability, which could include further reductions in debt or changes in the composition of our debt," said Sears CFO Rob Schriesheim in an Aug. 20 statement.
The final cold, hard truth on Sears is that its financial troubles will likely trigger the closing of many more stores in 2016 in a bid to preserve cash. In turn, that could not only lead to asset impairment charges and severance payouts to workers, but also send a negative signal to the market that the company is in turmoil. Year to date, Sears has closed a total of about 168 stores, mostly weighted toward the Kmart brand (114).