Where’s the Beef with Sears?

Sears Going Concern Is an Ongoing Concern

Sears (SHLD) just issued its 10-K (annual financials) today and finally stated the obvious that it has a going-concern risk–that it’s at risk of not being able to operate as a viable business. Followers of Sears have known this for a long time. So why state it now?

In my opinion, this goes back to the original premise from my last/prior posts on Sears (Fast Eddie Is Hustling to Run the Table on Sears). Fast Eddie has been conducting his own orderly and ongoing liquidation of Sears. Eddie is staking claim to Sears assets for his personal gain via equity spin-offs and debt secured by liens on real estate (worth more than the debt he is offering), which will leave other stakeholders holding the bag when Sears finally files for bankruptcy.

I think some of the stakeholders, particularly vendors, are now getting more and more nervous, hence the new language in the Risks section added in last year’s filing: “The lack of willingness of our vendors to do business with us or to provide acceptable payment terms could negatively impact our liquidity and/or reduce the availability of products or services we seek to procure.” Despite the new $500 million loan Eddie provided on January 3, 2017, the vendors know that the loan has staked claim to 46 properties, leaving fewer assets for vendors to go after in an event of default.

Eddie’s Ownership Stakes…Where’s the Beef?

This goes back to my original premise that Eddie is sacrificing his equity stake in SHLD in order to gain from his other stakes/claims in Sears and its spin-offs. Let’s compare the two (see related party transactions in 10-K):

Eddie’s 48% ownership of SHLD with $858 million market cap = $412 million.

versus

Other holdings = $2.6+ billion*.

  1. 51% ownership of SRG with $2.4 billion market cap = $1.2 billion. ESL owns approximately 7.9% of the total voting power of Seritage, and approximately 43.5% of the limited partnership units of Seritage Growth Properties, L.P., the entity that now owns the properties sold by the Company in the Seritage transaction and through which Seritage conducts its operations.
  2. Loans to Sears of roughly $1.8 billion (thru Eddie and Fairholm and others) secured by real estate. He has a majority of this, but for quickness-sake, let’s assume it’s $1 billion*.
  3. Equity in other spinoffs = $460 million. They aren’t worth much because they are in the dumps, but they do count for something: 59% of Lands’ End $611 million market cap, 45% of Sears Canada $130 million market cap, and 57%  of SHOS $77M market cap.

The stark difference between his equity stake in SHLD and his other claims makes it pretty obvious where Eddie’s interests lie.

The Clock is Ticking

In my Fast Eddie post, I lined up potential shots I thought Eddie was going to make. He self-financed Sears by providing more debt and then skipped to shot number three by selling the Craftsman brand. Eddie convinced the Pension Guaranty Board to allow the sale by giving the pension $250 million in year 3 payments in exchange for the $525 million upfront payment so Sears could have some liquidity.

Eddie’s getting pressured to shoot quickly, so my shots were out of order, but he still trying to run the table. Some of Sears debt owed to Eddie comes due in July, which I expect to be paid back. He’s going to have to line up another big sales of real estate before then. Otherwise, his vendors may not give him the chance to even play in the next holiday/Christmas season.

In the back of my mind, I can’t help thinking that this “going-concern” language is just a set up to help Eddie justify selling Sears properties at fire-sale prices to his Seritage REIT. Eddie is still hustling.

My Trade

I’m still kicking myself for not buying more puts last summer when SHLD was trading in the $16-18 range. I don’t think it’s going back up to that area again, so I may have missed out on more profits. I’ll be watching to see if SHLD gets a big boost when Sears sets up its next big asset sale. If it does get up over $10 per share, I will have to think about buying more puts. It’s just gotten a little too pricey now since the market sees bankruptcy as being imminent. Most likely, I’m just going to watch SHLD’s price continue its drop to zero and cash in on my current put position.

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