Sears Holdings Is Running Out of Time

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Last Thursday, Sears Holdings (NASDAQ: SHLD) reported fourth-quarter results that were better than some analysts feared. The company was particularly proud of achieving positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) for the first time in three years.

Still, it's one thing to earn a slight "profit" -- excluding major expenses like interest, pension costs, and capital investment costs -- in the seasonally strong holiday quarter. It's another thing entirely to be profitable year-round with no adjustments. There's no sign yet that Sears Holdings is approaching profitability in any meaningful sense. Furthermore, its balance sheet continues to erode rapidly. As a result, Sears remains on a path toward bankruptcy.

The bleeding has slowed, but it hasn't stopped

Sears Holdings' fourth-quarter adjusted EBITDA of $2 million was roughly in line with the updated guidance that the company published in mid-February, and it was a $63 million year-over-year improvement. For fiscal 2017 as a whole, adjusted EBITDA improved by nearly $250 million but remained far from positive territory, at negative $562 million.

While Sears Holdings' losses did recede modestly last year, the company's profit improvement was a fraction of the $1.25 billion in annualized cost savings that Sears supposedly captured over the course of fiscal 2017. That's hardly surprising, though, given that comparable-store sales plunged 13.5% for the full year -- including a 15.6% drop in the fourth quarter. This sales erosion offset the vast majority of the company's cost cuts.

The exterior of a Sears full-line store
The exterior of a Sears full-line store

Sears Holdings reported massive sales declines throughout 2017. Image source: Sears Holdings.

Sears CFO Rob Riecker noted that the recent rate of EBITDA improvement has continued in the first month-plus of fiscal 2018. However, that's not particularly impressive.

First, Sears Holdings faces its easiest comparisons of the year this quarter, as Q1 was the only period in fiscal 2017 during which adjusted EBITDA deteriorated. Second, even if adjusted EBITDA were to improve by $63 million year over year in each quarter of fiscal 2018, full-year adjusted EBITDA would still be negative to the tune of $310 million.

Liquidity problems are getting worse

Getting Sears Holdings back to breakeven cash flow is becoming increasingly urgent. At the end of the fourth quarter, it had just $353 million of liquidity, down from $701 million a year earlier. (The company did amend its short-term borrowing basket after the end of the quarter to create an additional $250 million of liquidity.)