Strategy: Sears is in 'free-fall' and its rate of decline is 'very concerning' (SHLD)
Sears' operational decline is accelerating and its burning through cash at an unsustainable rate, according to one analyst.
Sears' shares enjoyed a strong surge this week, soaring as much as 20% on Thursday after the company reported its first net profit in two years.
But traders' cheer quickly wore off and shares dipped again, as the grim reality behind the initially rosy headlines set in: Sears' operational decline is in fact accelerating, and its odds of survival beyond 2017 remain uncertain, according to Evercore ISI analyst Greg Melich.
A closer look at Sears' earnings show that the company's sale of its Craftsman brand in March is responsible for its net income of $244 million in the first quarter. Excluding the sale, Sears' losses deepened to $230 million from $199 million the prior year.
"Operating losses… show no sign of improvement" and "sales remain in a state of free-fall decline," Melich wrote in a research note.
Sears' sales overall tumbled more than 20% to $4.3 billion in the first quarter, which the company blamed on store closures and declining sales at its stores open at least a year. Same-store sales plunged 12.4% at Sears stores and 11.2% at Kmart stores.
Sears says it is "fighting like hell" to turn business around and has promised to cut costs by $1.25 billion. The company has announced more than 180 store closures so far this year and recently told investors that it has bids for $700 million in real estate sales, which would provide much-needed cash to help keep it afloat.
Assuming those sales occur and Sears can achieves success with its cost-cutting plan, "it should have sufficient liquidity to make it through holiday, although the cash burn and rate of sales decline are very concerning," Melich wrote.
But the company is still a very sick patient with little evidence of any sustainable forms of cash flow going forward, according to his note.
"Improving the cash burn rate is imperative as the company shrinks, and Sears remain very far from sustainable levels of loss that does not require external liquidity," Melich wrote. "Given the very weak store base, continued comp declines, anemic sales productivity, and continued share loss in most major categories, Sears does not appear well positioned for the rest of 2017."
Moody's vice president and senior analyst Christina Boni last month delivered a similar assessment on Sears' survival, saying the real estate sales will help the company survive a little longer, but at the same time diminishes the company's lifeline as it struggles turn business around.
"Sears’ financial performance remains extremely weak," Boni said. "Its effort to sell real estate which has produced over $700 million of bids currently will enhance liquidity, but accelerates the timeline required to stem operating losses as it asset base diminishes."
Sears CEO Eddie Lampert addressed bankruptcy concerns recently and said the company has "as much time as our vendors and our lenders and our shareholders are willing to give us."
"The reality needs to be better than it is for us to really demonstrate to people that the transition is starting to take hold," he said in an interview with the Chicago Tribune.