Sears Bankruptcy…Coming Soon

The rapidly changing economy has created real challenges to many retailers. Earlier this month, electronics retailer Radio Shack (OTC: RSHC) filed for bankruptcy. Is a Sears bankruptcy next?
It is difficult to see how Sears Holding (NASDAQ: SHLD), which operates Sears and K-Mart stores, and other brick-and-mortar retailers such as Bon-Ton Stores (NASDAQ: BONT) and J.C. Penney (NYSE: JCP), will survive much longer, either.
Being on the wrong side of shopping history is never good for a retailer.  That is especially true when those aligned with the forces of consumer choice are competitors such as (NASDAQ: AMZN), Apple (NASDAQ: AAPL), and Wal-Mart Stores (NASDAQ: WMT).
Amazon, Apple, and Wal-Mart have all evolved, embracing the Internet and adapting to the changing retail landscape, in one form or another.  Each does very well as a result of the Internet.  And while the Internet has done damage to department store mall denizens such as Bon-Ton Stores, J.C. Penney, K-Mart, and Sears, Amazon, Apple, and Wal-Mart do very well at the ground level, too.

Share Prices Tell the Tale

That is shown by the only meaningful data point for an investor: the price of a share of stock for each.
Amazon is up 19.7% for 2015.  Since the first of the year, Apple has risen by 8.89%.   For the last quarter, the stock price of Wal-Mart has jumped by just over 11%.   The long-term performance of each of those market leaders has been equally as impressive as the short-term results. In addition, there is a high level of ownership by institutional investors such as mutual funds and pension groups.
How well Amazon, Apple, and Wal-Mart have done is also evinced by how poorly the investment community has treated shares of Radio Shack, Sears Holding, J.P. Penney, and Bon-Ton Stores as shown by the chart below:

Month Quarter Six Months Year 2015
Bon-Ton Stores -21.40% -31.38% -39.04% -43.44% -22.04%
JC Penney 0% 6.28% -15.15% 44.28% 22.69%
Radio Shack -35.08% -75.98% -58.59% -89.99% -35.08%
Sears Holding -6.76% 0.83% -6.50% 22.96% -0.12%

Source: Finviz
The main reasons for the terrible stock performances can be seen in the price-to-sales, debt-to-equity, and cash conversion ratios of the industry leaders and the laggards in the retail sector.
A low price-to-sales ratio does not mean a retail stock is undervalued. Just the opposite: The price-to-sales ratio is distorted, as little is selling at full price. What is selling has to be drastically discounted. That is buttressed by the weak cash conversion cycle, which is how long a retailer takes to sell what is on the shelves and turn it into cash.
If the goods and services are not selling, plus a company carries a staggering debt-to-equity ratio, the future is grim for any business, especially a traditional retailer with massive fixed expenses in terms of property and personnel costs.

Real Estate? Forget It.

Don’t fall for any claims that the real estate of Sears Holdings and others has meaningful value.  Radio Shack is the latest retailer to collapse into bankruptcy despite claims of it having appealing real estate holdings.
At present, the Sears Holding real estate website has 208 Sears and K-Mart closed stores available to buy or lease, along with 2,739 operating stores available. Too many of the stores for Sears Holding, J.C. Penney and others are in malls that are no longer appealing to shoppers.  Apple has its own retail stores, which are highly profitable. But the real estate for Bon-Ton Stores, J.C. Penney, and Sears Holding would not be for investors.
The chart below shows how a long-term industry leader in traditional retail such as Wal-Mart compares:

Price-to-Sales Ratio Cash Conversion Cycle in Days Debt-to-Equity Ratio
Bon-Ton Stores 0.04 109.84 21.13
J.C. Penney 0.20 94.54 2.23
Radio Shack 0.01 128.44 8.46
Sears Holding 0.10 111.47 41.17
Wal-Mart 0.57 17.64 0.70

Source: Finviz, GuruFocus, YCharts
Obviously investors want to be shorting the shares of Bon-Ton Stores, J.C. Penney, and Sears Holding in the very logical expectation that all will follow Radio Shack into bankruptcy.
But it will be very difficult to find any shares to short.  A combination of a low level of sales coupled with a high level of debt is very alluring to the short community, which results in little if any shares being available to short Bon-Ton Stores, J.C. Penney, and Sears Holding. That in itself is a very telling indicator.  Combined with all the other negative features, it is difficult to see Bon-Ton Stores, J.C. Penney, and Sears Holding avoiding the ultimate fate of Radio Shack.
Jonathan Yates does not have a position in any of the stocks mentioned in this article.

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