Sears Already Liquidating?

 |  About: Sears Holdings Corporation (SHLD)
by: Paulo Santos

With today's news that Sears (SHLD) is contemplating the sale of Lands End, added together with the past news of Sears selling profitable stores both in the U.S. and Canada, one thing has become obvious.

Sears is already liquidating. To understand this, one needs to know what liquidation is. Here's the definition (source: Merriam-Webster):

1 a (1): to determine by agreement or by litigation the precise amount of (indebtedness, damages, or accounts) (2): to determine the liabilities and apportion assets toward discharging the indebtedness of b: to settle (a debt) by payment or other settlement

2 archaic: to make clear

3 : to do away with

4 : to convert (assets) into cash

There is little doubt that Sears is converting assets into cash, and obviously, the assets that are easier to convert are the ones which have value, and the assets that have value, are the ones that are profitable. It is thus not a surprise that Sears, in this process of liquidation, is selling its profitable assets.

If Sears was instead trying to turn the business around, it would be much more likely for it to keep the profitable operations and try to get rid of the unprofitable. By and large, this is not what seems to be happening.

Given that SHLD in the aggregate is already deeply unprofitable, but still has operations - both stores and businesses - that are profitable, what will happen after this liquidation? It will have more cash, less assets and, unsurprisingly, it will produce even deeper losses, since in the meantime it has sold some of the operations that were still mitigating the losses.

This process of selling the profitable businesses has two consequences regarding SHLD's future:

  1. It makes bankruptcy more likely, because the remaining businesses bleed faster;
  2. It delays bankruptcy, because the cash from selling the profitable businesses allows Sears to bleed for longer.

Is there an alternative?

The only way for Sears to survive is to increase revenues on its existing operations. If revenues don't increase, its fate is sealed. Selling profitable businesses only delays the inevitable while making it more likely.

So, an investment in Sears really boils down to a belief on whether the company can increase revenues, in spite of those same revenues having been on an incredibly consistent downward path for more than five years.

My take? If Sears was able to turn things around, it would have done so already. The most likely outcome is thus not favorable for Sears.

Disclosure: I am short SHLD.