Editor's Note

Rumors refuse to die about an impending bankruptcy for Kmart. All the actions taken by their parent Sears Holdings suggests there will be an announcement after the holidays and a large number of Kmart stores will be closed, possibly all of them.



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SHLD - Sears Holdings - Company Profile

Sears Holdings Corporation operates as a retailer in the United States. It operates in two segments, Kmart and Sears Domestic. The Kmart segment operates retail stores that offer a range of products, including consumer electronics, seasonal merchandise, outdoor living, toys, lawn and garden equipment, food and consumables, and apparel; and in-store pharmacies. It provides merchandise under the Jaclyn Smith, Joe Boxer, and Alphaline labels; Sears brand products, such as Kenmore, Craftsman, and DieHard; and Kenmore-branded products. As of the end of May, this segment operated approximately 833 Kmart stores.

The Sears Domestic segment operates stores that provide appliances, consumer electronics/connected solutions, tools, sporting goods, outdoor living, lawn and garden equipment, apparel, footwear, jewelry, and accessories, as well as automotive services and products, such as tires, batteries, and home fashion products. It also offers appliances and services to commercial customers in the single-family residential construction/remodel, property management, multi-family new construction, and government/military sectors; appliance and plumbing fixtures to architects, designers, and new construction or remodeling customers; parts and repair services for appliances, lawn and garden equipment, consumer electronics, floor care products, and heating and cooling systems; and home improvement services, as well as protection agreements and product installation services. This segment provides merchandise under the Kenmore, Craftsman, DieHard, Covington, Canyon River Blues, Metaphor, Outdoor Life, Structure, and Apostrophe brands, as well as under the Roadhandler, Ty Pennington Style, and Alphaline brands. As of the end of May, this segment operated 709 Sears stores. Sears Holdings Corporation was founded in 1899. Company description from FinViz.com.

After 117 years, Sears is about to go the way of the dinosaurs. The chain has not been able to keep up with the changing times and the competition from online retailers. The company announced in mid September it was closing 64 additional Kmart stores in addition to the 68 Kmarts and 10 Sears stores previously announced in July. In May, they warned the total store closings for the year would reach 170 so they are well on their way.

The chain has lost more than $9 billion in recent quarters and were it not for investments by Edward Lampert and sales of real estate for $2.7 billion the store would already be out of business. In Q2 Sears lost $395 million and ended the quarter with only $276 million in cash on hand. CEO Lampbert agreed to loan the company another $300 million so they could survive another quarter. Moody's warned that Sears and Kmart do not have enough cash to stay in business. Moody's said the company was bleeding cash and would have to continue relying on real estate sales, sales of assets or outside funding to sustain operations. Moody's estimated their cash burn was $1.5 billion a year. In August, Sears reported cash on hand of only $276 million and not near enough to buy inventory for the holiday shopping season. The company's minimum pension contributions for 2016-2017 are $596 million and nearly twice the cash on hand.

In Q2, sales fell -8.8% to $5.7 billion. Same store sales for Sears fell -7% and -3.3% for Kmart.

In 2000, Sears had sales of $41 billion a year. That declined to $15 billion in 2015. Over the same period Kmart sales have fallen from $37 billion to $10 billion. Sears has funded debt of $3.5 billion and unfunded pension liabilities of $2.1 billion.

Shoppers claim when they do go to a Sears store they have to beg them to take their money. Many report wandering around the floor for a long time just trying to find a sales person to handle their sales. Other say they have quit going back because the shelves are bare and the merchandise they do have has been picked over so much there is nothing left but scraps.

Shoppers at Kmarts claim the store has been using sheets and shower curtains to hide empty shelves and closed departments.

The recent cash burn headline from Moody's may have put Sears into its final death spiral. The shelves are empty, cash is limited and Lampbert is not going to continue putting good money into a bad investment. This could be a long-term position.

In late September, Fitch warned that Sears had a high risk of bankruptcy within a year. The 114 page report showed a heightened risk of bankruptcy with Sears, Claire's Stores and Nine West Holdings. Fitch said consumers are abandoning the shopping mall in favor of online shopping or local boutique stores. Fitch also said a Sears bankruptcy would obliterate Seritage, the REIT spun off from Sears last year to generate $2.8 billion in cash. Seritage has 266 retail properties with 170 leased to Sears and 82 leased to Kmart. About 79% of Seritage's rental income comes from Sears. The retailer has already filed notice of termination for 17 stores totaling 1.7 million square feet at the end of January.

Last week Detwiler Fenton warned that Sears was apparently working on monetizing its real estate. DF said the number of Kmart closures was going to accelerate in order for Sears to raise cash and offset the burn rate. DF said Sears had sent directives to a large number of stores telling them to clear backroom inventories. They also began cutting prices on appliances by 50% and using heavy promotions to reduce inventory. They also noted that Sears was moving appliance inventories from Kmart stores into certain locations suggesting a new round of store closures was coming.

Also making headlines last week was Jakks Pacific halting shipments of much needed toys to Kmart for fear of not being paid. Multiple reports suggested a potential post holiday bankruptcy filing. BMO Capital Markets said it had been asked repeatedly by other suppliers if they should continue shipping merchandise to Sears and Kmart. This news could not come at a worse time for Kmart ahead of the holiday shopping season. Once the news spreads of one supplier halting shipments, it is sure to spread to other suppliers as well. This could be Kmart's last Christmas.

Earnings December 1st.

Shares bounced on a suggestion they might be preparing a real estate sale but are returning to the lows. A trade under $10.50 would be a 13-year low.

Sell short SHLD shares, currently $10.96, initial stop loss $12.05.

No options recommended.