Sears' Turnaround Still Going the Wrong Way (Update 2)
Updated to include analyst and management commentary, including added financial detail.
NEW YORK ( TheStreet) -- Adding to an 2012 stock run that lifted battered shares, Sears Holdings (SHLD) is selling and spinning off stores in a plan to raise $1 billion in needed cash and add confidence in its financial health, as earnings dim. Investors should focus on the company's continued operating losses, even as the company improves its liquidity.
After reporting weaker than expected fourth quarter earnings, Sears Holdings (SHLD) plans to sell 11 stores to General Growth Properties (GGP) for $270 million and spin its Sears Hometown, Outlet stores and select hardware stores to shareholders in a rights offering. Those moves and an earnings call clarified Sears' strategy going forward, but it won't help the company stem its biggest problem of falling sales, continued operating losses and declining market share, according to analysts.
Prior to Thursday's announcements, Gary Balter of Credit Suisse highlighted that the retailer's 2012 gain hinged on what it would disclose, after skipping previous quarterly calls. "The most important question for Sears is what is it? Is it a retailer that plans to make it on its execution and turnaround efforts? If that is the case, we believe it is going down the wrong path," wrote Balter in a Feb. 22 note prior to the Thursday's announcement.
In its spin plans and earnings call, Sears clarified how it expects to realize the value of its assets, while attempting a turnaround. But even with those plans laid out, the company's overall problems may be intractible. "Our most important question is if Sears indeed has all that underlying asset value, why does it keep operating?," added Balter in his Wednesday note. That question still lingers.
The spinoff of over a thousand total stores is expected to raise between $400 and $500 million, according to a Thursday statement. Sears Hometown stores carry the company's Craftsman, Diehard and Kenmore brands, which make it a market leader in appliance sales, outpacing competitors like Home Depot (HD) . Sears Chairman Edward S. Lampert who's fund ESL Investments is the company's largest shareholder intends to participate "in full" in the spinoff.
But the company's prospects are still cloudy, at best. "Sears has liquidity and the ability to fund negative operating cash flow, but that you can't do that indefinitely. The spin-offs and asset sales provide some offset to the operating losses, but the fundamental problems with the core business isn't a story that we think makes sense at these levels," says Philip Emma an analyst at R.W. Pressprich who is focusing on the company's second lien debt.
"It is important to distinguish between our operating performance and the unrecognized value in our asset portfolio, our substantial liquidity and financial flexibility," said CFO Robert A. Schriesheim in an analyst call. He noted the company's $3 billion in liquidity and minimal debt maturities until 2018.