Searsdog

Ackman's Sears Sale: An Expression of His Activism

The supposition that the inventory was worth 50% was in response to the math that 50% of the inventory was equal to the market cap. The bulls throw around stats like that all the time on this name and it's quite deceiving to the retail investors who have lost massive amounts on this name.

It's possible that the bulls are right and Sears assets + future cash flows will be sufficient to cover its $16.6bn in liabilities and another $4.5bn of equity market value. I'm very skeptical.

Sears is a worst of breed retailer that continues to lose market share at a rapid clip, and a hevily levered bet on the consumer, with Eddie Lampert who has levered up and spent billions on buying back shares running the show.

Assuming the Street is right and Sears only comps down 3% next year and can earn $1, then it will generate about $260M of FCF, not even enough to pay off their May maturity, let alone their $800M credit facility.

Perhaps where the bulls and the bears disagree is the timing of the next consumer boom and the appetite of creditors to fund uneconomic retailers. Should the revolving credit facility not want to renew, and Sears is not able to replace it with a new facility for LCs and working capital, Sears will go bankrupt-- it cannot withstand cash calls in the billions of dollars from trade creditors and banks. Many trade creditors will not do business with Sears without LCs. And the timing of this recovery needs to be within the next year. I'm perhaps significantly more bearish than the average SHLD investor, but I'm hard pressed to see a scenario where this is not the case. Consumers have little appetite for big ticket purchases such as appliances and creditors have no appetite for risk. Further the cash flow deterioration at Sears is accelerating and no lender will want to fund an operation that's so rapidly declining.

In terms of investments I can think of many other higher FCF yielding companies with relatively less debt that are asset rich and actually own their own real estate (TGT, HD, and LOW come to mind). I'm hard pressed to find a reason to buy this one at almost 30x earnings, especially since it doesn't even own the vast majority of its own real estate.