Tuesday, September 16, 2014

Sears: Worst Loan Ever?

OK, I’ll admit it right now: There’s more than a little bit of hyperbole in the headline. Still, the loan Sears (SHLD) just took out from its billionaire CEO isn’t making investors happy, as might be gathered by the stock’s big drop in reaction to the news.


The Wall Street Journal has the details on Eddie Lampert’s loan to Sears:

Sears Holdings Corp. is borrowing $400 million from Chief Executive Edward Lampert’s hedge fund, giving the retailer an infusion for the holidays after it burned through cash over the summer.

The loan is being made by entities affiliated with Mr. Lampert’s ESL Investments Inc. and secured by 25 of the company’s properties, Sears said in a securities filing on Monday.

The loan will mature on Dec. 31, though that could be extended until Feb. 28, assuming Sears doesn’t violate the terms of the loan.

Seems pretty innocuous right? Yahoo’s Jeff Macke dug into the filing to see what else was going on between Sears and Lampert–and it all comes down to those 25 stores:

That values the stores at $16 million apiece for the purposes of this loan. In reality Sears has been selling properties for anywhere between $20 and $50 million for the last few years. The company’s balance sheet list real estate assets of $5 billion. Bulls say the company’s 400 most valuable stores are worth at least $18 million a piece and the company has been selling locations for much more than that over the last year…In exchange for giving Sears the right to live through Christmas, Lampert will collect either $10 million in interest or his pick of 25 stores that could easily be worth more than half a billion.

S&P Capital IQ’s Efraim Levy reiterates his Strong Sell rating on Sears:

We reduce our 12-month target $5 to $28, or 0.9X our 2015 revenue per share estimate. We apply a historical and peer-discounted multiple, reflecting weakening financial performance and execution risk. We widen our FY 15 (Jan.) loss per share estimate $1.45 to $8.97, as we cut our revenue forecast 4.4%. Additionally, while Sear’s obtained $400 million in liquidity via a loan from CEO Lampert affiliated sources that should provide the funds needed to purchase inventory for the holiday selling season, we think it puts at risk, via liens, Sears real estate at discounted valuations.

Shares of Sears have dropped 7.2% to $31.10 at 12:15 p.m. today.

UPDATE: In hindsight, it probably should have added a little more context around the loan. For instance, 25 stores would be just 6% of those most valuable stores, and that collateral on these types of loans generally higher than the loan value itself. And as S&P Capital IQ’s Levy implies, having enough cash to get through the holiday season is essential for Sears’ future–just look at the speculation surrounding RadioShack (RSH) and the new iPhone. Still, the market has voted today, and it’s none to happy with the news. Shares of Sears have dropped 8.5% to $30.67 at 2:28 p.m.

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