Sears: The Good, The Bad, The Ugly

| About: Sears Holdings (SHLD)
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Sears actually had something good to say. Same-store sales improved dramatically.

But these came at the cost of lower margins.

And Sears is burning cash dramatically as well. Sears is still on track for an ugly outcome.

Sears (NASDAQ:SHLD) has just reported Q1 2014 earnings. There are several observations to be made.

The good

Amazingly, there's some good to be seen in this earnings report. The good is probably the reason why insider Tisch Thomas bought nearly $16 million in Sears stock.

So what's the good part? Well, Sears has managed to improve same-store sales. Indeed, at Sears Domestic, same-store sales were actually positive by 0.2%, whereas on the whole, domestic same-store sales fell by 1%, which is significantly better than the previous quarter's massive 6.4% drop.

This actually leads me to think there might have been a favorable effect from... unfavorable weather. Could malls somehow have been favored by it? J. C. Penney (NYSE:JCP) also seemed to have been favored.

The bad

Unfortunately, part of the reason same-store sales improved was due to a drop in gross margins. Sears is clearly lowering prices, and it has a consequence. Overall gross margins dropped by 230 bps in the quarter, from 25.5% of sales to 23.2% of sales. This is even worse than the 210 bps drop in Q4 2013.

Also, as a consequence of the Lands' End spin-off, the continued erosion in revenues and the drop in gross margins, EBITDA turned significantly red in the quarter, at a $221 million loss representing -2.9% of revenues.

This leads us to the ugly...

The ugly

The ugly is that Sears got a $500 million dividend from Lands' End. Plus, it reduced inventory in the quarter by a full $300 million (part of it due to LE's spin-off, of course). So what does Sears have to show for this $800 million source of funds?

Well, it did reduce short-term borrowings by $100 million... but at the same time, cash in the balance sheet dropped by $200 million!

This cash burning is now massive, and it doesn't bode well.


While the improvement in same store sales is notable, there's the chance that it is somewhat one-off, and having significant margin to boot.

On the other hand, at the level of cash burn and negative EBITDA Sears is operating at, it seems difficult for it to survive much longer than a couple of years. Lampert has been very creative in devising new sources of funds, but the money is being burnt just to keep the doors open. At this point, equity is already down to $1.46 billion ($13.8 per share), and tangible equity is now negative by $1.1 billion. It remains to be seen for how much longer Sears is allowed to operate while building higher and higher risk for the entities financing it.

Disclosure: I am short SHLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.