Shares of Sears Holdings (NASDAQ: SHLD) have been on a wild ride so far in 2017. After falling 40% by February, Sears' stock more than doubled from its lows and at one point was up about 50% by late April. It then sold off again, and as of this writing was trading about 12% higher than where it began the year.
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Yet Sears Holdings' most recent swoon may be a harbinger of more trouble ahead. In fact, here are seven reasons you may want to consider selling the stock today.
1. Plunging same-store sales
Perhaps the most prominent sign of Sears' waning significance is its declining comparable-store sales. It owns both the Sears and Kmart brands. Comps plunged 9.2% in 2015 and 7.4% in 2016, including a 10.3% drop in the fourth quarter. So it's not just that Sears' sales are being negatively impacted by its store closures; the much more worrisome sign is that sales continue to weaken at its remaining stores. If Sears is to have any hope of survival, its comp sales will need to stabilize at some point in the near future.
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Image source: Getty Images.
2. Massive losses
As Sears' sales have fallen, it's racked up years of gruesome losses. In fact, in each of the last five years, Sears' annual net loss has exceeded more than $900 million, including over $2.2 billion in 2016. Losses of this magnitude simply cannot continue if Sears is to remain a viable business.
3. Dwindling cash reserves
With its losses mounting, Sears has burned through an incredible amount of investor capital in recent years. Incredibly, the beleaguered retailer was forced to inject "almost $12 billion in liquidity between 2012 to 2016 to fund ongoing operations given material declines in internally generated cash flow," according to Fitch Ratings. Yet even with these actions, it ended the fourth quarter with only $286 million in cash and $4.2 billion in debt.Sears is therefore getting dangerously close to running out of cash before its hoped-for turnaround plan can come to fruition.
4. Fire sales
In order to slow the bleeding, Sears has sold off many of its most valuable assets to obtain the capital needed to continue to fund operations. These efforts include selling the rightsto its popular Craftsman tool brand and spinning off non-core businesses such asSears Canada, Sears Hometown and Outlet Stores,and Lands' End.Worse still, Sears has sold off or mortgaged many of its best real estate properties.
While these deals have certainly helped to extend a vital cash lifeline, they've also stripped Sears of much of its value. Moreover, it will eventually run out of properties and brands to sell -- a harrowing thought for a business that would have perished long ago without these cash infusions.
5. Malls may be better off without Sears
With many malls struggling with declining traffic and retailer bankruptcies, you may think that mall operators would be willing to work with Sears to help it remain afloat. Yet that might not be the case.
As my colleague Rich Duprey explained, Seritage Growth Properties (NYSE: SRG), the real estate investment trust that Sears created in 2015 to help it monetize its asset portfolio, is successfully carving up Sears properties and renting them -- at substantially higher rates -- to other tenants.
Mall operators are no doubt watching this trend. And while they are likely less than thrilled at the prospect of being overwhelmed with retail space should Sears go out of business, they may also be intrigued by the possibility of realizing higher rents on Sears' locations. Thus they may be less likely to agree to rent reductions, and Sears' may have one less lifeline than some investors are currently hoping for.
6. Management's interests may not be completely aligned with shareholders
Sears Holdings' stock recently surged on news that CEO Edward Lampert and board member Bruce Berkowitz had added to their already sizable stakes in the company. Yet rather than a vote of confidence for Sears Holdings, their actions may have more to do with their other Sears Holdings-related interests.
As fellow Fool Adam Levine-Weinberg notes, Lampert and Berkowitz have far more money invested in Seritage Growth Properties and Sears' debt than they do in Sears' stock. These somewhat conflicting interests do give Lampert an incentive to keep Sears' afloat as long as possible. However, attempting to maximize the long-term value of Sears Holdings' equity may be a lesser priority for Lampert than creating value for Seritage and ensuring that Sears' debt is paid in full. This is something Sears' shareholders may want to keep in mind when deciding if they want to invest alongside Lampert and Berkowitz in the stock.
7. Sears Holdings doesn't even know if it will survive
In its 10-K report filed on March 21, Sears stated, "Our historical operating results indicate substantial doubt exists related to the Company's ability to continue as a going concern." Even after years of poor results, this was the first time Sears had publicly acknowledged that there's a real risk it may not survive. And if Sears itself does not know if it can remain a viable business, how can investors be confident in the company's turnaround plans? Ultimately, this may be the biggest sign of all that Sears' problems may be worsening -- and that its stock may be headed for a fall. Thus, investors may be best served by selling their shares today.
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