SHLD: Our Take On SHLD Decision Tree

Take one bad company, merge it with an even worse company, then comp negative for the better part of 7 years on a levered balance sheet, and the balloon being held underwater is bound to pop sooner or later.

 

Could Sears really be reaching the end of its lifeline? If you want to read into the CIT debacle, the answer might be yes. We’re certainly not privy to Sears’ near-term financials, but the reality is that when you take one bad company and merge it with an even worse company and then comp negative for the better part of seven years on top of a levered balance sheet ($4.5bn in market cap plus another $4.1bn in debt), the balloon can be held underwater for so long.

 

The ‘saga’ I refer to, of course, is with CIT. CIT is the largest trade/receivable factoring company in the US, and is really what I’ll call a ‘lender of last resort’ in the retail space.

 

The recent timeline for this little lover’s quarrel looks like this…

  1. Jan 11, 1st cutoff. CIT refuses to fund Sears’ suppliers.
  2. Then on Jan 19th, CIT resumes sparingly under the guise of more financial disclosure by SHLD.
  3. Then today, Jan 31, after speculation that not enough financial info given, CIT reportedly cut off SHLD – again.

 

I should note that we cannot confirm the specifics of any of this, but simply want to provide context to our clients to the extent anything comes about.

In fact, I should note that CIT reported earnings this morning, and made no mention of Sears. Another point is that they are growing many areas of their business quite aggressively, so any decision here would be strategic, not one due to capital constraints.

 

All that said, SHLD isn’t reporting earnings for another 3-weeks. If CIT has to wait that long for the financial information it needs, SHLD will have a big big problem on its hands. After all, retailers make money by selling stuff. They only sell stuff when they can buy stuff. If the grease between the retailer and the supplier dries up, then it’s pretty difficult to get stuff into the stores. No stuff = no revenue.

 

The irony here is that the company comps down so consistently, that limited product flow into SHLD for a short time period can actually free up working capital.

 

Regardless of this situation, we can argue that Sears’ equity is worth zero. But as it relates to the industry, don’t get all excited about supply/demand coming into balance in the event of SHLD going under. The stores are still stores. Remember Circuit City? Yeah…some of those stores are now PC Richards, some are Best Buy, Dick’s, REI…you get the idea.  The point is that a brand going away is much different than floorspace going away.


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