Sears (SHLD) is one of those stocks that pundits love to kick around. But in this case, the pundits are right.
Sears stock is barely flat during the past 12 months, and SHLD has lost about 10% since New Year’s Day. And based on recent earnings trends and management decisions, it’s a pretty safe bet to assume more declines are ahead for SHLD stock in 2014.
When you look at the ways Sears is run, it’s very difficult to imagine this once-dominant retailer doing anything other than drifting lower.
It’s not just the fact that Sears hasn’t turned an annual profit in four full years, or that revenue continues to fall every single quarter.
It’s not just the fact that Sears’ debt is now larger than its market capitalization, or that total liabilities are more than three times that.
It’s that Sears has no strategy for growth. It only has a strategy to slash and burn itself into oblivion.
Sears Starving Its Stores
Brian Sozzi, CEO & chief equities strategist of Belus Capital Advisors and a contributor to TheStreet.com, recent sparked a bit of a scuffle over his visit to a Sears location and the rather disappointing appearance of the store.
I’ll agree with SHLD management insofar that one store can’t be taken as wholly representative of the brand.
But every Sears and Kmart location I have ever visited or that I have known someone to visit is a crumbling wasteland.
And there’s a reason for this — Sears and its CEO Eddie Lampert refuse to invest in their stores at all.
In fiscal 2012 (which actually follows calendar year 2011, just to confuse you), SHLD stock reports show $432 million in capital expenditures. For FY2013, it was $378 million. And for FY 2014, which just wrapped up, we are tracking less than $300 million, according to spending across the first three quarters of the year.
Now, keep in mind that SHLD has about 2,500 full-line and specialty retail stores. That evens out to $120,000 per location for the year! Considering the size of these stores, that’s barely enough to replace broken shelves and keep the registers functional.
By contrast, Target has about 1,800 locations and spent $3.2 billion last year — 10 times what SHLD dished out! It’s spend per location works out to about $1.78 million, plenty of cash to keep stores tidy and appealing.
Oh and by the way, TGT has increased its capex roughly 50% from $2.1 billion in 2011 while Sears has been cutting back.
There’s no way around the harsh reality that SHLD is simply starving its stores. And customers are noticing.
SHLD and Lampert Are Toxic
Those are the numbers regarding capex travails at Sears … But anyone who has followed Sears stock should know that this is just one descriptive example of the Eddie Lampert era.
BusinessWeek wrote a cutting profile of the exec this summer that illustrated how he splintered Sears from within and created a company that is now “ravaged by infighting as its divisions battle over fewer resources.”
Lampert’s goal is obvious: to apply classic hedge fund techniques where some businesses are broken out while they’re still reasonably attractive, like the planned Land’s End spinoff and the Sears Hometown and Outlet (SHOS) spinoff from 2013.
And the others? Well, bleed them dry, then throw away the carcass.
I won’t moralize over the mind-set of this kind of management style, employed by many private equity companies to “maximize value” or sometimes even to save a troubled company from disappearing altogether.
But I will state unequivocally that this technique is not working for Sears shareholders.
SHLD is down roughly 80% since its 2007 peak, revenue is down about 40% in about the same span, and Sears is short on cash and up to its eyeballs in debt just to make payroll and pay for new inventory.
There is no light at the end of the tunnel for Sears. Even if spinoffs and cutbacks can paper over some big issues for a short time, the continued decline of SHLD stock is all but guaranteed.
The downward slope is clearly defined, and with no will or capital to change course, Sears shareholders can only expect more pain from Eddie Lampert & Co.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at firstname.lastname@example.org or follow him on Twitter at@JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.