Is Sears' (SHLD) Stock Doomed? Fundamentals Say Yes.

As of late, shares of Sears SHLD have been losing value at a dramatic rate.  What’s new though?  Sears’ stock has been plummeting for over half a decade.  As a matter of fact, the discount retailer has lost about 83% of its market value over the last five years.

Is Sears doomed?  Some disturbing fundamental trends over the last few years would suggest that it’s well on its way.

Inventory Turnover Isn’t Great for Discount Retailers

It should be noted that Sears lags behind its peers with regards to the pace at which it gets inventory off of its shelves.  A good measure for this is the inventory turnover ratio.  In fiscal 2015, fellow peers Ross ROST and Target TGT had inventory turnovers of 5.21 and 5.69, respectively.  Sears lags behind both of them, and it has an inventory turnover ratio of 4.53. 

The presence of e-commerce is definitely leaving its mark on traditional brick-and-mortar stores.  Amazon AMZN had an amazing inventory turnover of 8.4 over 2015.  This demonstrates how much sales power the company has, as well as how well the e-retailer does to offload its inventory in a quick manner.  The reason why I point this out is because the turnover ratio suggests that e-commerce has taken sales from traditional retailers.  This leaves those stores with more troubles in managing inventory levels and the pace at which their goods are sold. 

To compete with this, retailers are forced to make their prices even more competitive.  This won’t save these companies, as there is such high selling and administrative costs associated with having a traditional store-based business model.

Where’s the Cash Going?

Sears has had negative operating cash flows since fiscal 2012.  In fact, the operative activities section got deeper into negative territory as each year progressed. 

The brunt of these negative numbers stems Sears’ inability to produce any income.  In fact, the company has been posting losses for years.  Since fiscal 2013, Sears’ net losses have been growing at a fast pace.  It should be noted that the company posted a net loss of $1.8 billion in 2015.

Balance Sheet Shows Crumbling Capital Structure

Sears most recent year-end balance sheet shows that the company is short on cash.  With a cash balance of $250 million as of January 31, this represents a 76% decline in cash from this time last year.  This is the lowest year-end cash balance posted by the company in at least five years.

Being short on cash has caused the company to become more and more leveraged as the years pass.  Long term debt has grown considerably each year since fiscal 2013, growing by 60% since then.  A quick glance at the company’s liabilities shows how it has become increasingly levered each year over the last three years. 

In 2014, liabilities accounted for 88% of the balance sheet.  In 2015, liabilities accounted for 107% of the balance sheet.  That’s right; Sears’ shareholder’s equity is in the minus right now.  That means the book value of each share of SHLD is negative (-$8.87 per share).

Bottom Line

Sears has been shrinking its PPE (Property Plant & Equipment) for years, due to the retailer’s closing of stores.  Sears recently announced that it is going to accelerate the closing of 50 stores, which has raised eyebrows.  Folks are wondering just how desperate the 123 year old company has become.

The rise of e-commerce has forced other retailers to become competitive on the price front.  These companies can afford to sell products cheaper because there are fewer costs associated with selling.

With its brick-and-mortar business model, Sears may just fade into obsolescence.  Selling and administrative expenses have been larger than the company’s gross margin every year since 2012.  It looks like Sears is trying to close the stores which aren’t generating enough business so that the problem associated with high expenses doesn’t eat them alive.  They’ve been using this strategy for years though, with less than nothing to show for it.

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