When Sears announced Friday that its fourth-quarter sales have tanked, the company also promised investors that it has a plan to cut costs that will return the company to profitability.
Investors seemed only to focus on the good news. The shares soared 25% — one of the biggest one-day gains in the stock’s history.
But the move also prompted some head scratching among Wall Street money managers, industry experts, and analysts.
After all, some of the measures Sears touted — specifically the closing of stores — were old news.
The cost-cutting announcement — which promised to save the company $1 billion in 2017 — was “vague” and didn’t address the company’s core issues: plunging sales and customer traffic, Chuck Tatelbaum, senior attorney in the bankruptcy and creditors’ rights department at the Tripp Scott law firm, told Marketwatch
“All that verbiage is that they’re going to cut costs,” Tatelbaum said. “And it’s still not going to bring people into the store.”
Moody’s Investors Service seemed similarly unmoved, repeating its Caa2 credit rating on Sears, which puts the company in speculative or “junk” territory.
In a note, Moody’s retail analyst Christina Boni said that the plan could improve liquidity, but it doesn’t change the fact that the company’s sales are falling and it’s running out of assets to sell.
“The retail environment remains challenging for even top-tier department store operators which will provide significant headwinds despite its initiatives to take out meaningful costs,” Boni wrote.
Boni also questioned the viability of the Kmart brand “given its meaningful market erosion.”
The rally had some wondering if a “short squeeze” was to blame. In that situation, investors who had sold shares to bet on the stock’s collapse would be rushing to buy them back because of the restructuring plan.
Turns out that wasn’t the case, according to research firm S3 Partners, which noted that the short sellers have made a killing betting against Sears.
Another explanation? Sears shares have become highly volatile as the company’s business has eroded — and some people have started to wonder how long before it has to file for bankruptcy.
‘On its way to zero’
“Every stock, on its way to zero, doubles at least three times and triples at least twice,” fund manager Whitney Tilson wrote in an email to the hedge-fund community.
“It’s hard to imagine that the company avoids bankruptcy this year, Lampert’s best efforts notwithstanding,” Tilson wrote.
Tilson, who manages Kase Capital, a$70 million New York-based hedge fund firm, later told Business Insider that he has no plans to short shares of Sears’ stock.
Sears CEO Eddie Lampert assured investors, however, that the plan will return Sears to profitability.
He said the company would accrue savings from the closure of 150 Sears and Kmart stores over the next couple of months, among other actions, such as reducing corporate overhead and more closely integrating Sears and Kmart operations.
“We believe the actions outlined today will reduce our overall cash funding requirements and ensure that Sears Holdings becomes a more agile and competitive retailer with a clear path toward profitability,” Lampert said in a statement.
Sears’ same-store sales plunged 10.3% in the fourth quarter, including an 8% decline at Kmart stores and a 12.3% decline at Sears US stores, the company said on Friday.
For the full year, revenue is expected to fall 12% from last year to $22.1 billion.
Sears has been closing hundreds of stores and selling off assets, such as its Craftsman brand, to cut costs and raise cash. The scale of its losses have analysts speculating that the company could file for bankruptcy and some suppliers cutting back on shipments.
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