Unless there really is a Santa Claus, Sears Holdings Corp. (NASDAQ: SHLD) is going to seek bankruptcy protection.
It’s only a matter of time. And that time is running out, quickly.
Billionaire hedgie Eddie Lampert, who besides running his namesake ESL Investments fund also runs Sears Holdings as its chairman and CEO, just put another $200 million into Sears last month.
That brings his Fund’s helping hand, I mean handout, to a tad more than $2 billion!
Poor Sears was once the Amazon of its day. Now, it’s not only a dinosaur; it’s already dead.
Here’s how much of a mess SHLD already is, and how you can profit from its extinction…
Hell Will Break Loose Any Day Now
To be clear, that ESL $200 million went to Sears USA, not Sears Canada.
You know Sears Canada, don’t you? The Canadian unit of Sears was spun out of Sears Holdings back in 2014 in a financial engineering move that, presumably, attempted to save both units’ lives.
That didn’t work out so well. Sears Canada declared bankruptcy this past summer. It has until November 7th to get itself out from under the protective blanket covering it, and then all hell breaks loose.
Sears Canada’s CEO recently split from the company to assemble an investor group (hopefully with some private equity swashbucklers) to make a bid to buy the company out of bankruptcy.
So far, with the clock ticking, they’ve got nothing. In fact, the race is practically over, and there’s no deal.
Creditors want to immediately close and liquidate eleven stores in Canada to get paid what they’re owed. Taking those eleven stores down kills the former CEO’s chances.
ESL owns 45% of Sears Canada… but it’s even worse than it sounds. Eddie Lampert-controlled entities own close to half of Sears Holding’s (SHLD) equity (what’s left after Sears Canada was spun out) and holds more than $1.7 billion of Sears’ debt.
But Eddie’s no fool; the money he’s lending Sears is backed by real estate. The last $200 million, besides being collateralized by more of what’s left of Sears’ real estate also came with an interest rate tag of 11%, which triggers higher in a default.
As if Sears Holdings isn’t leveraged enough, it owns 12% of Sears Canada.
The reason Lampert had to pony up another $200 million last month is that it’s coming on Christmas, and even before Sears gets there and tries to sell its way back to life, vendors are jumping ship.
Some have just stopped selling to Sears, but most of the rest are demanding they get paid a lot sooner than the typical 90 days that Sears enjoyed years ago. A lot of vendors are demanding 30 days, and some want 15 days. Increasingly, they’re demanding cash, hence the latest $200 million cash infusion.
Vendors are being charged as much a 4% a month in insurance (in the case that they don’t get paid) on the merchandise they ship to Sears. It’s killing the already thin margins of many Sears’ vendors.
Soon, there’ll be nothing left to sell at all.
Those Jingle Bells are Ringing Sears’ Death Knell
Sears Holdings has lost more than $11 billion since 2011. Sales are down 44% since 2013.
Lampert subsidized vendor insurance contracts to the tune of $93 million in 2012, $234 million in 2013, and $80 million in 2014.
Is he afraid of leveraging his exposure to the billions of inventory at risk? I bet he is. Don’t forget: his direct loans to Sears are collateralized by real estate. Inventory loans aren’t backed by inventory.
When Sears Canada gets liquidated, and whatever merchandise they’re sitting on floods discount aisles everywhere, it will hit Sears stores in the U.S. even harder because they sell the same merchandise.
Lampert’s eventually going have to concede its game over. There won’t be any private equity group bailing Eddie out and buying Sears.
When is a declaration of bankruptcy going to happen? How about January 2018, right after they’ve sold as much as they can and head into the post-holiday hangover months and quarters.
Now is the chance you’ve been waiting for.
If you’ve been onboard with Zenith Trading Circle for a while, where members can get in on these kinds of trades the quickest, you have already been betting against SHLD since February. But there’s enough room in this opportunity for everyone, so now is as good a time as any for readers of Wall Street Insights & Indictments.
It’s time to get in on the news that Eddie just bought himself some more real estate on the cheap. He’s not going to let that latest $200 million go to waste, or the money he poured on the smoldering fire. He put it up to control what’s left of the assets Sears owns, that he’ll get as a creditor sitting high up on the liquidation preference ladder.
I recommend you buy the SHLD March 16, 2018 $4.00 puts (SHLD180316P00004000) for about a buck. They look like a good bet to me.
As always, I love to hear how readers are doing, so drop me a note in the comments below or send me a message here.
Now, let’s see if Sears handles Christmas. If they want to liquidate, they’re going to want to have a big – make that giant – holiday sale.
I can see it now… GOING OUT OF BUSINESS. EVERYTHING MUST GO.
You should get going, too.