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Sears has an Amazon problem it probably can't survive

InvestorPlace logo InvestorPlace 3/7/2017 Lawrence Meyers
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I do not see how the embattled retailer Sears Holdings will survive this one.

I’ll get into details in a moment, but the long and short is that Sears management is pulling planks from the foundation and burning them to keep the house warm. Asset and real estate sales — raising cash to pay down debt — is all well and good. But the problem for Sears' stock goes much deeper.

Sears is destined for bankruptcy because brick-and-mortar retail is dying a death of a thousand cuts.

Look at Circuit City. Look at J.C. Penney. Look at declining sales at Macy’s and Target. Consumer retail stocks are in trouble, and that includes Sears' stock.

The reasons are twofold, but only one is fixable.

The fixable part is a lousy economic recovery, still slogging along after eight long years. Perhaps the new administration’s policies will jump-start things again.

The second problem is not fixable. It’s called Amazon.

Amazon Has Killed the Need to Go Out

There’s a simple and terrible fact when it comes to department stores like Sears. That fact is that department stores, by and large, sell low-margin commodities. Think about it. Walk through a SHLD store and tell me what you find there that is specialized retail.

There isn’t anything.

Consumers are learning that rather than spend time, buying gasoline, waiting in line at the register, paying state tax, and wandering all over the store to find what you want, you can cut to the chase by going to Amazon. It sells everything. You can find what you want in no time, read reviews, order and have it shipped to you.

For the cost of a Prime membership, it’ll even show up in two days at no extra cost.

Other than clothing, which some people want to try on, there is simply no reason to go to a store any longer. Sears could have sold its Craftsman business ages ago, because there are hardware superstores that sell all that gear cheaply as well.

And there’s ruinous news coming out of the retail sector.

Moody’s says one out of every seven retail companies in its retail and apparel portfolio is a distressed issuer — the largest since the Great Depression. Of these retailers, about $1.2 billion of debt is due by the end of next year.

Macy’s rating was cut from BBB to BBB- last week, just one notch above junk. Standard & Poor’s downgraded Neiman Marcus from B- to CCC+ with this horrific note:

“The company’s capital structure is unsustainable over the long term. Trends such as weak mall traffic, highly promotional retail apparel environment and cautious consumer spending continue to weigh heavily on Neiman Marcus’ operating performance and EBITDA.”

No kidding. Sears knows all about it. So do bankrupt American Apparel, Aeropostale, Wetseal, Quicksilver and Pacific Sunwear.

Bottom Line on Sears' Stock

For the first nine months of 2016, Sears’ online sales fell 6% and by 9% in 2015 while other department stores are actually increasing online sales. I mean, comps fell by 9% in 2015. That’s just horrible. Revenue over the past 10 years is down 50%. That’s just nuts!

There’s nothing that’s going to stem that tide. SHLD has a net loss of $2.25 billion in the trailing 12 months alone, and burned $1.7 billion in cash.

Sears is down to $258 million in cash plus whatever else it can sell to boost that amount. It has $3.2 billion in debt. You don’t have to know calculus to see that there is no way out here.

With SHLD stock at $7.30, you can short it. Or you can scale in slowly, because Sears will pop on every new asset sale.

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