As the Sears ship continues to sink into the depths of devalued stock prices, irrelevancy and non-existent sales, the rats scurrying for dry ground have expanded from executive talent to activist investors.   Noted activist investor Bill Ackman has reduced his SHLD holdings by 92.5 percent. When an activist like Ackman dumps like that, he has probably decided that nothing he says or does will make a difference.

So why did Ackerman bail?   In fairness to Sears, he may have simply decided that the the current state of the retail sector merited a pull out. He however does not appear to have reduced his Target holdings.   It is more likely  that he finally came to the conclusion that there is nothing he could offer that was going to stop the SHLD free-fall or turn company fundamentals around for the long term. He realizes that changes such as the return of layaway are simply desperation gimmicks and not fundamntal changes.  It is also more evidence of the either unwillingness or personality inability of Sears chairman Eddie Lampert to listen to anyone with real world experience.  If you do not have a Ivy League MBA you have nothing meaningful to say to him. Maybe all the Harvard, Yale and other big time MBA types at Sears can waterproof their degrees to use as as rafts when Sears finally goes under.

Sears Holdings(SHLD) chief Eddie Lampert just announced that they would be closing 12 under-performing stores outside of Illinois.  Sears continues to plummet in almost every possible metric. The stock has dropped from a 52 week high of 139  to its current trading price around 50 plus or minus a few points.  This translates to a market cap valuation drop in excess of 4 billion dollars. That’s the good news.  As we approach what should be on of the biggest holiday “non-spending” seasons since the Great Depression and an expected demand plunge in the retail appliance sector, the plummet should continue.  IMHO we will see Sears trading in the 30-40 range bye the end of the year.

The most recent stock plummet while more dramatic than others has followed the trend of most other retailers in these troubled economic times.  Word on the street is the Sears actually puts itself in as better positioned than the likes of Target and Walmart due to a hefty cash on hand surplus.  That is the biggest slight of hand since Houdini.   A cash surplus hoarded while your company goes under is not a positive asset.  Sooner or later, sales do not keep up with expenses and that cash will have to be used.  You can only close so many stores.  Pretty simple math.   Walmart, Target and Loews are well run companies.  People who shop there will continue to shop there even if they are going less frequently . They are not going to suddenly decide to switch to a poorly run Sears with outdated stores and a less desireable inventory with the exception of a very few brand that inspire loyalty such as Craftsman.  The Sears free-fall is only accelerated.  Not only do they have to deal with  reduced foot traffic as a result of the current economy, they are still the same poorly run company they were before the Wall Street meltdown. The same retail decision making fundamentals will continue to plague them apart from these troubled times.

Word on the street is that Sears is locked in on their lines of credit(although I hear they had one reduced). If this is true Lampert may be able to continue to sit on his cash surplus while spending none of it to improve infrastructure and most importantly get someone in who knows retail and will actually be allowed to speak out with authority to get things done.  If it is not true and credit continues remain  tight throughout the holiday season, we can expect Eddie Lampert to have to part with a lot of that cash surplus to keep things going.  I also find it interesting that guys like TheStreet.com’s Jim Cramer have consistently spoken positively about  about Sears.  Have we been looking at the same company?  Jim seems to consistently fall back on Sears strong balance sheet and their EBITDA.   I am not sure what that has to do with sound company fundamentals going forward.  It is no secret that  Jim has  been “in the tank” for Sears.  His friendship with Eddie Lampert dates back to their Goldman Sachs days.   This in a vacuum does not mean Jim can not be objective but it does get to the point where you look at his Sears analysis and recommendations and say WTF.

There is a huge differene however between the drops of Sears as compared to Walmart, Target and some other retailers.  While they will also suffer as a result of depressed spending and severely tightened credit, they are still fundamentally well run companies.  Even in these ridiculously tight credit enviorment, while they may pay a little more for their money, the banks will still renew their lines at comparatively favorable rates.  Their custmoers may show up less frequently but they will still show up.  Business will continue as usual. Sears will continue to lose market share through these tough times.  Credit will be harder to get. When they do get it the money will be more expensive.  Eddie will be forced to use cash surplus.   When the cash is gone will there even be a Sears?

Mark Cuban wrote  an interesting piece called “The AIG-Lehman-Merrill Lynch Link“.   In that article he asks in a comparative  way whether there is a link between the failures of Merrill Lynch, AIG and Lehman and their large corporate stock buybacks.

“3 Companies facing cash crunch oblivion. A bankruptcy, an desperation sale and pure desperation. What do all 3 companies have in common ? Share buybacks. Billions and Billions and Billions in share buybacks over the last 18 months”

He goes on to state:

” …..think all 3 companies could have used that cash they spent trying to pump up their stock prices ? All that cash going to people who sold the stocks, huge losses going to those who held the stock. Thats why dividends are far better than share buybacks. At least in this case all shareholders could have gotten something back other than “the bag” remaining shareholders continue to hold.”

Why do companies engage in stock buy-back campaigns?  There are various reasons. There is the school of thought that buybacks show confidence in the stock and the company.  Of course company CEO’s are not using their own money to buy the shares.  Is it a show of confidence or simply a “slight-of-hand”  means of driving up the price of the stock and make it look more attractive to analysts, investors and employees?   The plights of the the “Wall Street Three” make one suspicious that it is the latter.   So is there a direct correlation between large buybacks and a companies financial stability?

I decided to put his implied theory to the test using a company that is in serious trouble but has not yet failed at least in a bankruptcy sense.  For the last year I have been writing about the downward spiral of once mighty retail giant Sears Roebuck now known as Sears Holding Corporation(also including Kmart).  Sears has been on a brutal financial no brakes down hill freight train ride.  SHLD stock has gone from a 52 week high of 152.91 to a low of 67.36.  It is currently fluctuating in the mid to upper 90s. Their retail same store sales number have been in steady decline. They are losing market share in asteroid size chunks.   Over the last 3 years SLHD has also engaged in large stock buybacks.  Let’s take a look.  The following are press releases available on the SHLD web site.

Sears Holdings Reports Second Quarter Results(2008)

During the 13- and 26- week periods ended August 2, 2008, we
repurchased 5.6 million and 6.0 million of our common shares at a total
cost of $437 million and $477 million, respectively, under our share
repurchase program. As of August 2, 2008, we had remaining authorization to
repurchase $206 million of common shares under the share repurchase
program. Share repurchases may be implemented using a variety of methods,
which may include open market purchases, privately negotiated transactions,
block trades, accelerated share repurchase transactions, the purchase of
call options, the sale of put options or otherwise, or by any combination
of such methods. Timing of repurchases is dependent on prevailing market
conditions, alternative uses of capital and other factors. Since the third
quarter of fiscal 2005, when our repurchase plan was first approved, we
have repurchased approximately 38.7 million of our common shares at a total
cost of $4.8 billion pursuant to the program. As of August 2, 2008, we had
approximately 126 million common shares outstanding.

It probably not fair to say this in itself is the sole predictor of financial doom. When we add  massive talent defections, plummeting sales with no end in sight, skyrocketing inventory, massive markdowns and “red light”  clearance gimmicks and real estate holdings worth a fraction of their original value, the correlation certainly strengthens.

Is SHLD going the way of  “The Wall Street 3″ ?  If it does I do not think we will be seeing a federal bailout. From the looks of the suits Barrack Obama wears I do not think he shops at Sears. Maybe their online preesnce will save them. You can bet John McCain will not be hitting their web site.  I hear he is still shopping from a 1960 Sears Roebuck Catalog.

 I’ve said it before. I believe Sears Holdings is toast as we know it.  The writing has been on the wall and is still being written. Eddie Lampert’s change to self contained profit centers is sleight of hand simply to categorize value and manage assets in preparation for a gradual sell off. 

What value does Sears really have now other than intellectual property/brand name?  We will not even talk about Kmart.  It has sunk below completely irrelevant.  It is not that it is not savable.  It is more simplistic than that.  Eddie Lampert will never ever ever invest the capital in Kmart that is needed to save it and he should not. 

It’s like that 100 year old deteriorating home in an up and coming neighborhood.  If it has not been kept up over the years, it eventually becomes so broken down than it would cost more to renovate than you could ever re-coup in your investment.  It is a “tear-down”.  That is what Kmart is… a tear-down.  The big difference is that a tear downs generally maintain its good real-estate value.   That’s why you tear it down.  Whatever you re-build re-coups the investment. The value of Kmart real-estate has been decimated.  The precise thing that made Eddie Lampert look like a genius in is now an albatross around his neck.  A bunch of junk real estate that nobody wants.  Unfortunately, the biggest Albatross around the neck of Sears is Eddie himself.

 Kmart does have some very good talent at the top. I have met some of them. Very smart guys. Unfortunately things have gotten to the point where nothing but an “immaculate resurrection” will do the trick and as good as these guys may be on paper, none of them walk on water.

So why should Wal-Mart purchase Sears.   Sears has some kick ass brand names that pretty much defines its value, particularly in the hardware/tool department.  Wal-Mart could do wonders with these brands.   Of course there is also the issue of whether these brands would want Wal-Mart who takes a draconian approach to their suppliers.

Eddie should do it now while   there is still intrinsic value to the operation.