Is Sears Headed for Bankruptcy?

SearsShares of Sears Holdings (SHLD) fell 27% on Tuesday, as a whopping 9.6 million shares exchanged hands on news that the struggling retailer would close as many as 120 Sears and Kmart stores.

The market doesn't usually react this strongly to a corporate retreat. If anything, shuttering unprofitable stores is occasionally applauded by investors. If taking one step back is the key to eventually taking two steps forward, kiss the leases goodbye.

However, the challenge here is that this doesn't appear to be an isolated issue. The operator of the Sears and Kmart department store chains is suffering on all fronts. Sales have fallen every year since hedge-fund icon Eddie Lampert orchestrated the combination of the two retailing laggards seven years ago.

A Blue Christmas

No one should be surprised. Shoppers have been sidestepping Sears and Kmart for years. I argued that Sears will never be great just three weeks ago. The decline at both chains has been evident for years, so why should this holiday shopping season have played out any differently?

Comparable-store sales at Kmart fell 4.4% during the eight weeks ending on Christmas Day. Things were even worse at Sears' stateside stores, which suffered a 6% decline in that time. In short, Santa seems to have skipped both hungry chains in handling his shopping list this season.

Sears Holdings will record up to $2.4 billion in quarterly charges as a result of the soft holidays and store closures, but this isn't just a lamentable accounting move. Lampert is now tapping the company's credit line and predicting that profits during the seasonally potent holiday quarter would be shaved in half.

The Harder Side of Sears

KmartWe can't mistake a smaller fiscal-fourth-quarter profit for the lost art of making money. Sears is losing more money through its first three quarters than it makes back during the holiday-spiked fourth.

Analysts now see Sears Holdings posting a chunky deficit of $3.83 a share this fiscal year, followed by a loss of $2.35 a share in fiscal 2012 that will likely widen as more of Wall Street's bean counters come to grips with the grim reality.
Sears Holdings is in trouble, and there are no guarantees that this operator that was originally pieced together by a financial guru as a turnaround play rich in real estate assets will ever pan out.

A walk through one of the company's stores -- particularly Kmart, but lately also Sears itself -- is sobering. There's not the flurry of bargain-hungry shopper activity that one routinely finds at global leader Walmart (WMT). The "cheap chic" allure of Target (TGT) isn't there.

Sears Holdings is in a bind. It needs to lower its prices to compete with Walmart, but it can't afford to work on even leaner margins given its current lack of profitability. It needs to make significant capital improvements to update its stores to make them more like Target, but it can't afford the makeover now when it's tapping its credit line just to stay alive.

All hope isn't lost here. Sears still has the golden brands of Kenmore appliances and Craftsman tools, even if their reputations are slipping. Kmart had initial success with its Kardashian Kollection, though that appears to have lasted as long as a Kim Kardashian marriage.

Will a buyout save Sears Holdings before the bankruptcy vultures come to pick at its remains? The clock is ticking on Lampert -- and at more than the 120 stores that will likely close now.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. The Motley Fool owns shares of Walmart Stores. Motley Fool newsletter services have recommended buying shares of Walmart Stores. Motley Fool newsletter services have recommended creating a diagonal call position in Walmart Stores.

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393 Comments

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John Bratcher

I have worked at Sears for over 12 years. We have a great team at our store. Customers keep coming back, sometimes to just to say hello and thank us for giving them good service. In the long run Sears may show some losses but they have updated, many of its store. Don't worry Sears will be here for another 100 years.
Come to your local Sears see the changes going on. Sears is an American icon all Sears need is for you the Customer to trust us as your local retail store. Come on back shop at the all new Sears.

October 15 2012 at 4:29 AM Report abuse rate up rate down Reply
H.Fleasklausner

The association with Sears is what is killing K-Mart. I have refused to deal with Sears since 1974.

January 12 2012 at 7:25 PM Report abuse rate up rate down Reply
Chuck

SEARS NEEDS TO CHANGE THE GAME..... DEVELOPE A SECTION IN EACH DEPARTMENT THAT IS AMERICAN MADE... DEVELOPE A AD CAMPAIGN THE UTALIZES THE SLOGAN " MADE IN AMERICA" . THE BOTTOM LINE GOAL IS TO HAVE A NEW SEARS. ONE THAT SELLS ONLY AMERICAN MADE PRODUCTS.... PEOPLE WOULD PAY A LITTLE MORE TO SUPPORT OUR COUNTRYS MANUFACTURES.... IT WOULD GET AMERICA MANUFACTURING BACK TO WORK AND CREATE MORE MANUFACTURES AND JOBS. WHAT BETTER COMPANY TO DO THIS THAN SEARS..... THE LONG TERM GOAL WOULD BE TO SELL ONLY AMERICAN MADE PRODUCTS....

January 02 2012 at 9:00 AM Report abuse rate up rate down Reply
1 reply to Chuck's comment
bassmnsc

Everybody screams about businesses selling products not made in USA.What they dont look at is that the NAFTA agreement caused this and all the idiots in Washington and all our representatives got their head up their A--.They need to repeal the nafta agreement and then start working together as a team in Washington and stop siding along party lines

January 02 2012 at 9:32 PM Report abuse rate up rate down Reply
percheron1

Sears Catalog WAS The Amazon BEFORE the internet...it is a pity that they ignored their own historical roots and did NOT jump into the internet with both feet way back when...NOW the question is WHEN they will have the CLOSEOUT sales like when Woolworth went under.

January 01 2012 at 4:57 PM Report abuse rate up rate down Reply
cpo1514

Time to bail out Sears..... The Chicago area cannot afford to lose this great company... Right Barry & Ron .... Or on the other hand, just because Barack is from Chicago (Hawaii, Kenya) and Ron Emanual is from Chicago, this is an Organizers campaign dream... NOw if this was Boeing and South Caroline (or Walmart) then Barry & Ron would be leading the occupy protest.

January 01 2012 at 9:37 AM Report abuse rate up rate down Reply
Jack Allen

I think that was Z, not W. It's been a while.

December 31 2011 at 9:37 PM Report abuse rate up rate down Reply
Jack Allen

Just like W: Woolworth. Too bad; I've always liked the Sears stores, other than for clothing, although that wasn't bad, either.
Unfortunately for KMart, their financial problems led to their selling off some of their better real estate locations, a local one to Costco near me, even though it was a fairly new store.

December 31 2011 at 9:36 PM Report abuse +1 rate up rate down Reply
gainder2

Lampert took a risk. He saw something dying on the vine and figured he could turn it around. His first response to critics was along the lines of gee whiz, the real estate value alone of these properties more than justifies the merger etc., etc.
Of course meanwhile coporations like , um, let me see, AMAZON and WALMART continued on their upward trend of gaining market share. They went from gaining to blindly TAKING market share from Sears and Kmart, well, Kmart is the buggywhip that should no longer be.
Amazon has shown all that the location/distribution business model has changed to an online tsunami.
Sears could actually better that business model but its doubtful Lampert has the hutzpah to go for it. Sears has one distinct advantage over Amazon and thats its old distribution skeleton of existing sites around the nation!
I'll add here that Costco has shown us all that being the best at what you have to offer allows you to invade other less profitable forays such as pharmacy/deli/clothing offerings.
While the consumer and our economy have changed, Sears/Kmart have been left behind thinking that locations on everyother section of our metro grids is good enough. It is for costco but then look at how few costco's there are!
Its too much overhead for a newly developed class of MAYBE retail stores like Sears and Kmart have become.
Unfortunately, it seems to late but I have to say that my experince at my local Sears store in 2011 was very positive! It felt good for the first time in a couple decades, walking into a Sears store! I bought several applinaces this year at Sears, and had a few items delivered to my house with no problems at all! It was refreshing!
In the end, stripping away needless overhead and keeping that welcome feeling inside the stores that are left combined with more emphasis in online business may just lead not only to survival but also to gaining marketshare across a couple venues of modern day retail operation!
I hate to say it, I have my doubts that Lampert can pull it off, his silence speaks loudly on the entire issue.

December 31 2011 at 12:34 PM Report abuse rate up rate down Reply
rtgarton

Its ashame. Sears was as American as Apple Pie. They probably will go out. Nothing is like it used to be. Sometimes I wish I was born in a different era. Things were less complicated and you enjoyed life more. To many choices and products that ware out before their time. Yea I am a so called dinosaur but I used to be a happy one

December 30 2011 at 5:21 PM Report abuse rate up rate down Reply
1 reply to rtgarton's comment
cpo1514

rtgarton.... you are a Conservative,,, just not used to the Lib in power and dragging down the Spirit of this Country. This will be a great year starting in November....

January 01 2012 at 9:40 AM Report abuse rate up rate down Reply
Gary

Worked at Sears for 23 years until '88 when I was "downsized". Among lots of other reasons, I suspect my departure was partly because of some objections I made in our monthly meetings to determine the direction the copany should. take. One example, they kept trying to define their "core customer". A very large store and my opinion was that there were sever core customers. Automotive, childres, hardware, large appliances. No singe core customer. Another objection was to selling brand name products. At that time Serad dominated washers and dryer sales, had about 85% of hand held power toos, and several otherareas. My objecton was that by selling the branded items, the customer could actually seehow overpriced Sears products were. Corporate mgmt didn't seem to like that I was right about some of this.

December 30 2011 at 2:27 PM Report abuse -1 rate up rate down Reply