Editor's Note

The post earnings bounce came to a dead stop at prior resistance. We have played Sears several times and I believe Friday's short squeeze is the perfect opportunity to jump back in.



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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 October 31, 2015, this segment operated approximately 952 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 October 31, 2015, this segment operated 735 Sears stores. Company description from FinViz.com.

We played Sears as a short several times before. Sears is eventually expected to file bankruptcy. It is only a matter of time.

Fitch warned Sears will burn through $1.5-$1.8 billion in cash this year and even selling off the Craftsman brand will only gain them an additional 12 months of life.

Sears closed at a new 14-year low on Feb-9th before spiking the next day on misplaced optimism to stop us out of a short position for a decent gain.

In early January, they announced they were closing 150 stores. There are 109 Kmarts and 41 Sears stores. Last week they announced the completion of the sale of the Craftsman brand to Stanley Black & Decker for $525 million in cash and payments over the next 3-5 years to total $900 million. That shows how desperate they are for cash since they originally expected to raise $1.5 to $2.0 billion on the sale. Now they are looking to sell the Kenmore and Diehard brands.

Sears reported an adjusted Q4 loss of $1.28 that was better than expectations for a loss of $2.85 per share. That still represented a loss of $607 million and they are burning cash at an alarming rate. Analysts now believe they need $2 billion to make it through 2017. Revenue was $6.1 billion, down from $7.3 billion but beat estimates for $5.9 billion.

Earnings June 8th.

Susquehanna said Sears is struggling just to exist and the results were terrible. They do believe the chain will continue to exist through 2017 thanks to sales of real estate and brands, and then the outlook becomes increasingly worse once there are no longer any assets to sell. By selling their real estate and leasing it back, they raise immediate cash but they take on a new debt on every store. Outstanding debt and capital lease obligations rose from $2.2 billion to $4.2 billion in 2016. That means their cash burn in 2017 will actually increase significantly.

Shares spiked on short covering after the earnings but came to a dead stop at $9.50 and exactly where resistance held back in January. I think the shorts will load up again now that earnings are over and no further headlines are expected.

Sell short SHLD shares, currently $9.22, initial stop loss $9.85.

No options recommended because of price.

The $9 put is $2.05 and 22% of the stock price.