Sears Holdings' (NASDAQ: SHLD) CEO Eddie Lampert is justifying suspicions that he is crazy. His newest turnaround strategy of blaming the vendors is positively insane.
Lampert has sued One World Technologies; the company that supplies its Craftsman tools, to force it to keep shipping merchandise Sears might not be able to pay for, The Chicago Tribune reported. The suit appears to be the latest effort in Lampert's campaign to blame Sears' vendors for his company's woes.
One World threatened to break its' contract with Sears unless the troubled retailer cut back on its orders, The Tribune reported. One World's executives were afraid that Sears would not be able to pay for the merchandise.
That would be a huge problem because Sears might be the only place those tools can be sold. Sears sold Craftsman to Blackman and Decker last year but retained the right to sell Craftsman products on a royalty free basis for 15 years.
Lampert wants a judge to force China-based One World to accept letters of credit from Sears Acceptance Corporation as payment for tools, the suit in Cook County Circuit Court on May 15 indicates. One World is balking at that, because those letters might not be worth the paper they are printed on.
Blame the Vendors
One World and other vendors are Lampert's latest scapegoats for Sears' problems. He went out of this way to attack them at Sears' shareholders meeting and in a May 10, Chicago Tribune interview.
"If you're a vendor, and want to do business with us, then you have to treat us like a customer, you don't treat us like a pariah," Lampert told Tribune reporter Lauren Zumbach. "I'll take an even playing field, I'll take an uneven playing field, but what I won't do is basically not even let us on the playing field or let the game be fixed by people exploiting a certain amount of uncertainty."
That statement sounds like the ravings of a paranoid; Lampert is attacking the vendors for demanding payment for their merchandise. How I wonder would he act if somebody walked into Sears with no money and demanded to be given goods on credit? That is what Eddie is demanding from his vendors.
Can Sears Pay its Vendors?
The vendors are leery of Sears because they've seen its earnings report. The latest earnings report from January 31, 2017, gives plenty of indication that Sears has no money to pay its vendors.
Sears reported a loss of -$2.221 billion on January 31, 2017. It also reported a free cash flow of 0 on the same day, meaning it might not have the money to pay vendors. Sears only had $286 million in the bank on January 31, 2017, but reported a shortfall of $1.381 billion in cash from operations.
If all that was not bad enough Sears' liabilities of $13.19 billion' greatly exceeded its assets of $9.326 billion, and the enterprise value of $4.767 billion. By my calculation Sears' simply lacks the resources to pay its debts, which means bankruptcy might be inevitable.
Is Sears Headed to Bankruptcy?
Bankruptcy might be inevitable but Lampert may want to avoid it. He might be afraid that a bankruptcy court would give vendors; or the Sears employees' pension plan which is owed $4.5 billion, priority in debt repayment.
One big fear Lampert may have is that the bankruptcy court would force him to sell Sears and Kmart real estate on the open market rather than to his Seritage Growth Properties (NYSE: SRG) real estate investment trust. Seritage is making big money renting old Sears' stores to high end retailers such as Whole Foods Market (NASDAQ: WFM), Business Insider reported.
Lampert is biggest shareholder in Seritage, and he owns 58% of Sears. Seritage has the right to recapture half the space in Sears and Kmart stores and rent or lease that to a new tenant. It can only do that while Sears stays in business and keeps out of bankruptcy court.
Lampert's Lousy Business Strategy
Sears is also paying Seritage a lot of rent; $194 million in 2016 and $133 million in 2015, Business Insider reported. If Sears goes under that stream of cash disappears which might drive Seritage out of business.
Seritage reported a net income of -$63.06 million and $26.54 million in the bank on March 31, 2017. If the Sears and Kmart rent disappears, Seritage might collapse.
This explains why Lampert has loaned Sears hundreds of millions of dollars from his hedge fund. It is also a very lousy business strategy because what Lampert is effectively doing is financing Sears' operations so he can collect rent on it.
There is another way that Lampert is propping up Sears; by buying its' stock. This means keeping Sears' stock prices low benefits Eddie because he can buy up more and more stock. That puts him in control and blocks any effort at removal, while leaving him free to manipulate Sears to make money.
How and Why Lampert is closing Sears and Kmart Stores
This also explains the pattern to Sears and Kmart closures. Lampert is systematically closing down all the stores that pay rent to somebody besides Seritage. He is leaving only those stores that pay rent to his organization in business.
That may explain many of Sears' problems because Lampert might have deliberately neglected the company or certain stores. The stores then do poorly; which gives him an excuse to shut them down and stop paying rent. That also gives Lampert a cause to shut down; or cut the size of stores, and rent the space to some other retailer.
An added benefit to this scheme is that it drives down Sears' stock price; making it easier for Eddie to buy up more and more of the company. This points to a very self-destructive end game because it cannot be sustained. Sooner or later Lampert will run out of money; or Sears will run out of real estate, which means the house of cards will collapse.
Lampert has become the opposite of a value investor; he's turned into a predator that is slowly devouring Sears. Once Sears' value is gone he will end up broke because the money will be gone.
Lampert is Getting Crazier as Sears collapses around him
This bizarre strategy proves that Lampert it seems is getting crazier as Sears goes down. One has to wonder how long this madness can continue. Hopefully somebody will find some way to throw Eddie Lampert out of Sears. Blaming the vendors is the dumbest turnaround plan I have ever heard of.
One person who certainly doesn't buy that "turnaround strategy" is Mr. Market. Seritage shares were trading at lower price of $39 on May 17, 2017. Sears' shares were trading at $7.90 on the same day. That gave it a market capitalization of $846.49 million. Expect both stocks' prices to fall far lower real soon if Lampert keeps opening his mouth.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.