Credit Markets Overstate Sears Bankruptcy Risk

Credit markets estimate the probability of Sears Holdings (SHLD) going bankrupt at 26%, according to a December 22nd Credit Suisse research report entitled, “Retail Bankruptcies & Store Closures.” This compares to 18% for Saks (SKS), 18% for Dillard’s (DDS), 13% for Macy’s (M), and 5% for JCPenney (JCP). Target (TGT), Wal-Mart (WMT) and Costco (COST) are at 1%-2% each.

While Sears’s operating results have clearly deteriorated, pegging a Sears bankruptcy at anywhere north of 5% is unjustified. With Eddie Lampert at the helm, Sears will do whatever it takes to maximize value for shareholders. Lampert would not have increased Sears’s share repurchase authorization by $500 million on December 2nd if he had any liquidity concerns.

This may sound like a broken record by now, but Sears does have immense embedded value in the real estate. Even in the current market, Sears can monetize some of the real estate if necessary – and do so likely well above book value.

For the skeptics among you, the following are some estimates regarding real estate value at Sears Holdings. Our analysis supports the thesis that the company’s real estate value comfortably exceeds net debt under any reasonable assumption.

The Manual of Ideas Estimate of Value of SHLD Owned Retail Square Footage:

(1) Based on fiscal 2008 yearend store count.

(2) Average store square footage represents MOI estimate.

Additional real estate owned by Sears Holdings:

• †10 of 40 domestic supply chain distribution centers
• †Small minority of 573 domestic store warehouses, customer call centers and service facilities
• †200-acre headquarters site in Hoffman Estates, Illinois, consisting of six interconnected office buildings totaling two million gross square feet of office space
• †86,000 square foot office building in Troy, Michigan

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Comments

[not fooled:]

how much of their real estate can they unload if they needed to?
who is expanding?
Sears and K-Mart have been operating WITH SMOKE AND MIRRORS FOR A LONG TIME NOW.
They have not been viable retail operations for some time now.
This voodoo is why our country is in trouble, with the wheeler dealers like Lampert trying to pawn off a broken retail operartion like Sears/K-Mart as some kind of great real estate empire when no one can use that real estate.

2008 Dec 23 09:10 AM

[fcharlie:]

Nice to see an article that presents the asset and liquidity situation with facts instead of the typical article that picks and chooses specific metrics that do not directly affect solvency, such as same store sales, and the appearance of stores, etc...

It's worth mentioning that even as Same store sales declined every single quarter from 2005-2007, SHLD generated more free cash flow than it's current market cap. And it's also worth mentioning that SHLD has $10 billion of inventory, $7 billion of which is fully paid for and owned, which secures it's $4 billion dollar revolving credit line. To the extent that SHLD may have difficulty renewing or extending it's credit line in 2010, you would have to assume that Lampert has a backup plan already, and I don't see any reason why his own hedge fund couldn't extend a line of credit to SHLD. He will do whatever is necessary to insure the solvency of his company.

2008 Dec 23 09:26 AM

[Robert Stin...:]

Ok, I'm no stock expert and don't want to be. I don't own any stock outside of my 401k, though I am a self-described "Sears" and "Kmart" fan. Here is what I find amazing -- while all the so-called analysts are screaming how bad it is, that they can't make a buck, etc. Kmart and Sears have done darn good business this holiday season. Everytime I go into a Kmart there are a lot more people roaming the aisles than there were a few months ago. Same for Sears. Kmart and Sears brought back layaway which for us poor folks out there (me included) really helped.

I'll be so glad when they buy all the stock back and take this company private. Investors and their greed is what drove this economy to the brink of collapse. The rest of us out there -- you know us poor slobs who do actualy JOBS for a living instead of trading paper money -- are so sick of this entire mess and Wall St. determing who lives and who doesn't.

2008 Dec 23 05:45 PM

[Paul Price:]

That Lampert continues to buy back stock in this credit environment is astounding.

He should be holding all the cash the company can in this, the worst retail environment in decades.

Bankruptcy is a real possibility. The old K-Mart had lots of 'valuable' real estate on its books and its old shareholders were wiped out 100%.

2008 Dec 25 08:54 AM

[Jim Not C:]

You need cash to play in this economy.

Take your toys and go home.

2008 Dec 25 11:44 AM

[marva66:]

The Kmart I used to work at is at a loss of over 1.5 million for this year alone. The average store is down near 20% for the year and that is not taking into account the declining years previous losses. From a view from inside, this company needs an intense audit because I think their numbers in many areas are worse than what reported. I also hate to see where this company has taken Sears. It is far from the same store my family used to frequent. Whether they go bankrupt or not they will not remain the size they are because it is unsustainable.

And as for layaway, many are returned to stock for insufficent payment or cancellation when the customer finds something somewhere else cheaper. The numbers were not good for December and stores in my area and even ones based in the companies back yard were slashing hours for employees left and right because of declining sales.

I also would not advise buying into this stock. Their leader , Lampert, is not a retailer. Their executives are short sighted and have been leaving in droves. The inability of middle management or store management to execute and perform is obvious from the numbers. Kmart is a discounter and should be performing better than some of the retailers. Sears used to to be the place to go for things for your home. The declining results say more about what is happening than any stock report. They are failing to do what they should be doing and that is performing as a merchant.

2008 Dec 29 11:47 AM

[Newswatcher5:]

Why is it worth mentioning that Sears has $10 billion in excess inventory of which it owns $7 billion's worth? That much inventory is NEVER a good thing in retail because it means you're being inundated with merchandise THAT YOU COULDN'T SELL IN YOUR STORES. Do you think it's going to somehow be worth that much more at the fire sale at liquidation time than it was to your customers? Again, that much inventory is a liability, not an asset.

Sooner or later you guys are just going to have to let go and admit that the "Golden Boy of retail" and the "Next Warren Buffet" is neither of those things but merely someone who managed to get his hands on a few bucks of someone else's money during a time when anyone with a few million could find all the low hanging fruit he wanted just waiting to be picked.

The low hanging fruit is all gone now and if Eddie Lampert were as brilliant as some of you think he is, Sears wouldn't be in the toilet and he wouldn't have lost 5 billion bucks.


On Dec 23 09:26 AM fcharlie wrote:

> Nice to see an article that presents the asset and liquidity situation
> with facts instead of the typical article that picks and chooses
> specific metrics that do not directly affect solvency, such as same
> store sales, and the appearance of stores, etc...
>
> It's worth mentioning that even as Same store sales declined every
> single quarter from 2005-2007, SHLD generated more free cash flow
> than it's current market cap. And it's also worth mentioning that
> SHLD has $10 billion of inventory, $7 billion of which is fully paid
> for and owned, which secures it's $4 billion dollar revolving credit
> line. To the extent that SHLD may have difficulty renewing or extending
> it's credit line in 2010, you would have to assume that Lampert has
> a backup plan already, and I don't see any reason why his own hedge
> fund couldn't extend a line of credit to SHLD. He will do whatever
> is necessary to insure the solvency of his company.

2008 Dec 29 01:18 PM

[The Retired...:]

Sears has lost it's reputation for customer care itr's full of tempory college students if your lucky, thay know the company doesn';t care for anyone of them it's just like a job at mickey D's
plus they treat their retired employees like dog doo.

Jan 23 09:12 AM

[KCTrio:]

Got it. Sears is kept from bankruptcy by selling real estate. Are you people insane? Short-term creditors are paid with working capital and profits (i.e., cash), not from capital. And it is their creditors who will throw them into bankruptcy court. And sorry, but inventory does nothing but lose value.

The retard who wrote gets an F.

Feb 11 04:06 PM

[steveua101:]

Is hhgreg stores putting a hurt on sears?

Mar 06 08:18 PM