Sears (NASDAQ:SHLD) has just filed its 10-K for 2011. There's not much in terms of news that wasn't already disclosed in its earnings release published earlier. The sales of the profitable stores should be concluded during April 2012 and thus be reported with Q1 2012, providing a one-off lift to earnings that would otherwise show massive losses. Obviously, one-off gains are to be excluded, especially knowing that in the future Sears will have to close unprofitable stores, and those usually contribute negatively to the P&L.
The pension nut
There is, however, a single item that might be relevant for Sears' future. It has to do with the behavior of Sears' pension fund, and how it will involve a huge cash outlay within the next 2 years.
First, the Sears pension fund had a horrible 2011, with returns on plan assets around 1%, which taking into account the return assumptions (previously 8%/year, now reduced to 7.5%/year) naturally led to a larger underfunding. This can be seen below:
What really stands out and is more relevant to SHLD's present dire straits, is the cash contribution that this underfunding will require in the next 2 years. The 10-K puts such cash needs at a whopping $1.05 billion, and over the next 3 years? $1.43 billion. This can be seen here:
Aside from the operating leases, which are already part of the operating losses to be expected for Sears (which by themselves might come to $300 million or more per quarter), this pension nut is one of the largest cash needs in the next 2 years. As per Eddie Lampert's recent letter, Sears has several possible sources of cash, though we cannot really consider inventory as one of them, as any cuts in inventory from their presently low levels would probably have a further negative operational impact. These sources are listed below:
Although Sears probably has the means to face both operating losses and this pension cash drain for 1-2 years, both from credit lines it holds and from selling more real estate, such actions might be seen as unnecessarily draining even more value from the retailer, with the most likely outcome still being one where the common shareholder is wiped out.
Disclosure: I am short SHLD.