Will Sears Get a Death Row Pardon?

The death spasms of Sears Holdings (OTCPK: SHLD.Q) might be the longest in the history of the stock market. The iconic retailer opened 125 years ago as a watch proprietor. It’s much anticipated 500-page catalogs were an early omen of the online purchasing habits that helped dig its grave. 

The faltering of Sears’ business is not new news, but those calling for its demise have had to wait a very, very long time.

The company received a stay of execution this week in the form of a possible offer in bankruptcy court. Eddie Lampert, the company’s largest shareholder and creditor, offered $5.3 billion for the company. The $5 billion offer is a long way from the $11 billion that the combined company was valued at the time of the merger.

But it is significantly higher than its current market cap of $63 million. The difference between the value of the stock in that valuation and the $5 billion offer is the company’s gigantic debt pile which stands at $5.8 billion.

The offer needs to be approved by a bankruptcy judge but might give the retailer a short life-line to keep a handful of stores in operation.

The “Garbage” Merger

Sears merged with Kmart in late 2005. Sales for the combined company peaked at $53 billion. The merger was a bad idea from the start. Taking two poor-performing retailers and mashing them together makes zero sense. Back when it was announced, the deal was described as two garbage trucks crashing together.

Eddie Lambert, the largest shareholder of Sears, did little to improve operations. Instead of picking through the garbage, tossing out what didn’t work and then reinvesting in fixing up the dour stores, store improvement spending dried up, and sales followed its path.

Since that $53 billion high-mark, sales have fallen each year and stood at $13 billion for the last 12 months ending in November. As you might imagine, it’s nearly impossible to cut expenses and store operating costs fast enough to compensate for the withering sales trends.

The company has been unprofitable since 2012 despite the shuttering of hundreds of stores. At the time of the merger, Sears had 3,500 stores. Lampert hopes to keep 400 stores open if his deal is approved.

In retrospect, the demise of Sears seems obvious. The stale brand was losing relevance, the stores dusty and sparsely stocked. The Internet tsunami was cresting, and Amazon (NSDQ: AMZN) stood perched to take out just about every retailer. Even those with much better positions in the market suffered wounds from the rise of Amazon. As the list of retailer bankruptcies over the past years illustrates, many of these wounds were lethal.

Many bears have been predicting Sears’ demise for over 10 years, but this retail behemoth continues to show a blip on the heart monitor. We’ll see if Sears Holdings manages to cheat death again. Regardless, it remains a toxic stock that prudent investors should avoid.