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I Still Don’t Get Sears

Admittedly, one my dumbest investing calls of 2012 was a bearish outlook on Sears Holdings (NASDAQ:SHLD). I simply didn’t understand how the company could turn around. I mean, it’s projected to lose money through 2014 — and my guess is, the only reason it’s not projected to lose money longer than that is because that’s where the forecasts stop!

But Sears stock racked up a 30% gain in 2012 to beat the market, though it finished the year with a whimper. And now that chairman Eddie Lampert is going to jump into the CEO seat, I think it’s time to take another look at this company … and risk embarrassing myself again with another bearish call.

But to be honest, I just don’t see how Sears has any upside from here in 2013.

Here’s why:

No Leadership … Still: Lampert will be the fifth CEO since the Kmart merger in 2007. That’s bad enough. But considering his rather poor history of leadership, it’s even more disappointing. Consider his rambling 2009 letter to SHLD shareholders as one sign that he is not exactly executive material. Remember, Lampert is a Wall Street guy who has managed money but has no experience with brick-and-mortar retail beyond Sears … and let’s face it, his track record is ugly.

Neverending Sales Slide: Sears has suffered 18 consecutive quarters of declining sales. Eight-freakin’-teen! The company has tried everything to stem the tide, from testing “superstores” akin to Walmart (NYSE:WMT) to testing grocery delivery to an ill-advised e-commerce push with the Sears Marketplace. Nothing has worked.

Continued Losses Despite Cuts: As I mentioned, Sears is projecting operating losses through fiscal 2014. And with sales continuing to decline, you can understand why that dynamic is hard to change. Since 2005, Lampert has helped Sears shutter more than 170 stores and fire more than 40,000 workers, but it hasn’t resulted in a penny of profits.

Tarnished Brands: Once upon a time, Sears had the power of respected brands like Craftsman tools and Kenmore appliances. But many consumers don’t consider these brands elite anymore — and even if they do, they never have to enter a Sears store to buy them. ACE Hardware, Costco (NASDAQ:COST) and others carry the lines. If consumers complain about dirty, aging storefronts and don’t respect your product lines, that makes any turnaround dependent on refining your image as much as your business strategy.

Debt Doubts: Sears is dangerously close to “junk” debt designation, with a CCC+ rating from Standard & Poor’s. Granted, Sears got an upgrade last summer from “negative” to “stable,” but an analyst at debt-research firm Gimme Credit LLC wrote at the time, “While current liquidity, the ability to monetize assets, and support from Eddie Lampert buys the retailer time, we are skeptical about its longer-term prospects.” Longer-term, its notes due October 2018 yielded 6.625% a few months ago, according to Bloomberg. What will happen to Sears if it continues to bleed cash two or three years from now when interest rates rise and it has to pay much more to borrow? It seems clear Sears has benefited from the hunger for yield and the endless ability of investors to throw money at junk bonds … but it’s also clear that it’s unsustainable.

The Floor Is $16: Perhaps most disturbing of all, a Bloomberg analysis shows that Lampert’s hedge fund has a cost basis of around $16 a share for its SHLD stock. So what does he care if it moves sideways or even slumps to the mid-$20 range? Call me a cynic, but I find it hard to believe insiders will kill themselves to fix a failing brick-and-mortar retailer when they are already in the money.

So there you have it. I will not go so far as to advocate a short position in Sears, because anything can happen — including continued recovery in housing that could boost housewares or a bump in consumer spending that lifts all retailers.

But I’ll go on record again as saying I only see trouble ahead for Sears.

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Jeff Reeves is the editor of and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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