Sears Holdings: Thoughts For ESL And The Board

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About: Sears Holdings Corporation (SHLDQ)
by: Stobal Capital
Summary

The current proposal is a suitable balance sheet plan, but is not sufficient.

It is time for a description of what "post transformation" means.

Show stakeholders it can work, or wind it down.we don't need the courts for either.

Several weeks ago I posted an open letter on Seeking Alpha to Sears Holdings special committee of the Board of Directors. Considering the lack of accessibility of the management team and the Board, this public forum seems as good a forum as any to communicate. I was actually encouraged that ESL’s recent proposal did seem to incorporate some of the things I suggested. I’m not by any means saying it was due to my posting, but it was the correct thing for ESL to do.

ESL’s proposal does an excellent job of dealing with repairing the balance sheet of Sears Holdings. And I agree that it is in the best interest of all stakeholders to accomplish such repair as a going concern. But the glaring omission of the proposal is any sort of pro-forma income statement or plan of operations going forward. It is clear that “more of the same” is not the answer. ESL has talked at length about extending the runway to complete the transformation. The transformation is described with buzz words galore: “asset light, integrated retail, member focused, best stores, best categories, best members…blah, blah, blah”.

If this were a court supervised bankruptcy, we would need to see a plan of reorganization and assess whether or not it was viable. ESL’s proposal contained no such plan. The reality is that we are faced with a situation of approval of a go forward plan or liquidating the business. Neither of which really need to happen in the context of bankruptcy protection. Investors just need to see the options in more detail.

What do I mean by this? While ESL’s proposal is suitable from a balance sheet perspective, we need to see a description of what the business looks like “post-transformation” and what it is going to cost to get there. What businesses will be retained? What are the economics of the businesses? How many, if any, stores are profitable? What are the financials of the assets contemplated for sale (Kenmore, Sears Home Services including parts direct, SHIP)? What are the projected wind down costs for stores or businesses SHLD is exiting? It is time for management to provide suitable disclosure in order to get stakeholder support. Enough with the games.

Alternatively, if there is not a path to a sustainable business, outline for us what it will cost to shut the operation down and effectively liquidate. There is a substantial asset in the form of a massive Net Operating Loss at Sears Holdings. If liquidating the business is the best course of action, let stakeholders assess what that will cost and have management consider using the corporate shell and associated NOL for other purposes. Shareholders have largely endured the experienced losses that have generated that NOL. I believe they would be amenable to provide financing to shut the business down and put the NOL to better use with different businesses/investments over time.

No stakeholders will benefit from a formal bankruptcy filing and the associated legal costs. And ESL’s financings would likely be considered for equitable subordination in a bankruptcy, given how the business got to this place. If management, the Board and ESL want to have a chance at executing an out of court solution, it is time to open the kimono and come forward with some viable options. Otherwise, the lawyers will be the only beneficiaries.

Disclosure: I am/we are long SHLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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