Dead Stock Walking: Sears Holdings Has Nowhere to Go but Down

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The recent announcement by Sears Holdings (NASDAQ: SHLD) that it is closing an additional 66 stores, including 49 Kmart locations, shouldn't have been a surprise. Retail is in a downward spiral, with even department stores in better financial condition needing to close more stores. That the arguably worst retailer still operating is following suit isn't exactly a revelation.

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And yet hope persists, as Sears stock seems to rally on any glimmer of good news. When chairman and CEO Eddie Lampert unveiled a plan to trim $1 billion in costs from operations earlier this year, it took the stock from under $6 a share to over $14 in just two months, but since then shares have lost virtually all of those gains. The reality of the retailer's situation simply weighs too heavily, meaning Sears ought to be considered a zombie stock: It's dead, but just doesn't know it.

Deep pockets

There are multiple reasons that Sears has yet to succumb. First, Lampert and his friends have deep pockets. Time and again he's come up with financing plans to keep the lights burning, only to have to go back to the well a short time later; at the rate Sears is burning cash, that's going to get old soon.

Second, Sears hasn't been completely stripped of value. While some brands like Lands' End and Craftsman tools have been spun off or sold, it still owns Kenmore and DieHard, and has a portfolio chock-full of supposedly valuable real estate.

Third, there's speculation Lampert is doing some clock-watching. Apparently, there's a two-year look-back period following a transaction that bankruptcy courts can use to determine whether a company was bankrupt at the time of conveyance, or became so as a result of the deal, in which case they can unwind the transaction. Lampert sold hundreds of stores to the real estate investment trust Seritage Growth Properties (NYSE: SRG) in 2015; that window closes on July 8, and some analysts suspect he's been keeping Sears limping along to make it over that finish line, as he has just enough cash on hand to make it.

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While that's certainly a possibility, Lampert has made sizable investments in digital technology that in many cases are novel and worthy of exploration by other retailers (in fact, some, like Wal-Mart Stores, have seemingly picked up on them), suggesting he really does hope there's a U-turn ahead. His store closures also make it look as though he's trying to shrink Sears' footprint enough that it will be able to functionally operate, perhaps even profitably.

Unfortunately, that's not likely to be the case. Lambert's not-so-benign neglect of his stores early on hastened their downfall, and there might not be enough stores in his portfolio to achieve functionality.

The end of retail as we know it

According to a recent note by Credit Suisse Group, some 8,600 stores will close this year, a record that supersedes the 5,800 that shut down during the recession. Retail bankruptcies are running rampant too, as attempts to compete against Amazon.com (NASDAQ: AMZN) and other e-tailers prove to be too much.

Apparel, for instance, represents 24% of Sears Holdings' total sales, or $1 billion last quarter, but sales in the segment fell 20% for the period. While a lot of the decline was undoubtedly due to all the stores Lampert closed, it's also because few customers are shopping at his stores. Comparable-store sales tumbled 12% at Sears and 11% at Kmart.

At the same time, Amazon is poised to overtake Macy's this year as the biggest apparel retailer. Last year Amazon's apparel sales are estimated to have exceeded $22 billion, so it's not just Sears stores where people aren't shopping -- it's most retail chains.

Too little, too late

Lampert undoubtedly waited too long to do anything with the Kenmore brand. While Sears' partnership with a third-party gas-grill maker to extend the brand further into the outdoor area was smart, Kenmore's leadership in the appliance market has dwindled away. Many peg the decline to when Lampert severed ties with Whirlpool (NYSE: WHR) to save money, but today Lowe's, Home Depot, and Best Buy are just more important outlets.

And Lampert's branding of an auto center with the DieHard battery name was a bit of genius marketing, but that also is probably too little, too late. He has other potential opportunities, such as a tire co-branding deal -- a survey found that DieHard tires were a top choice among consumers -- but he has yet to take advantage of them.

In short, there's little left of value to strip from Sears Holdings, and time is running out before Lampert will have to work some more hedge-fund magic to raise more cash. Sooner or later Sears will succumb. As of right now, it's just a dead stock walking.

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Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends Home Depot and Lowe's. The Motley Fool has a disclosure policy.