After years of falling sales and losses, Sears Holdings (symbol SHLD) is now in danger of running out of cash and ceasing operations. That could spell the end for the iconic American retailer, which is what we were worried about when we warned investors to stay away from Sears shares in January. But Sears isn't the only seemingly cheap retailer stock we advised against owning.
The management of Sears Holdings, which also runs Kmart, said in a regulatory filing that there is increasing uncertainty as to whether Sears can keep its doors open. "Our historical operating results indicate substantial doubt exists related to the company's ability to continue as a going concern," the company said in its Form 10-K annual report filed with the Securities and Exchange Commission for the fiscal year ended Jan. 28.
So-called “going concern" warnings don't automatically mean a company is headed for bankruptcy. They can, however, serve as a prelude to a Chapter 11 filing. Sears, in essence, is running out of cash and saying it may not be able to raise more through asset sales or borrowing.
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Around the time Sears was trading near all-time lows in early February, we told investors to steer clear. At one point closing at just $5.54 a share, stocks that trade at such levels can be hard to resist, especially when they're attached to a household name. Sears closed March 21 at $9.10 a share, but that was before the sell-off sparked by the "going concern" warning.
But just because a stock looks cheap on its face doesn't mean it's a bargain. Often, a recognizable stock trading in the single digits is doing so because the underlying business is in trouble.
Sears stock rallied hard soon after our January warning, gaining 67% from an all-time low on February 9 to a recent peak on March 10. Anyone who timed that trade can pat himself or herself on the back. But that's speculating, not investing. For the longer haul, Sears' prospects as a value stock have never been bleaker.
The struggling retailer's revenue has fallen annually since 2007, and Sears hasn't made a profit since 2010. The company is closing another 150 stores, including 108 Kmart locations. Even before the latest revelation by management, Fitch Ratings had issued a warning about how much cash Sears was burning through. Moody’s had downgraded Sears' already low credit rating due to declining sales.
Two More Retailers to Avoid
Retail is known for being an unforgiving business. Sears is hardly the only recognizable name that's struggling. Just have a look at Staples (SPLS).
The office-supply chain isn't in the same boat as Sears, but its shares are nevertheless a poor choice for long-term investors. With a stock price of $8.64 as of March 21 and a dividend yield of 5.9%, Staples' shares look mighty tempting to income-starved investors. In reality the quarterly dividend hasn’t increased in four years, and today's inflated yield is the result of a declining share price.
Shares of Staples have been falling steeply for years – losing about half of their value over the past two years alone – as Amazon.com and other online retailers chip away at the office-supply chain’s market share.
SuperValu (SVU) is another stock with superficial appeal that investors would be wise to avoid. The supermarket company operates well-known brands such as Cub Foods, Farm Fresh, Hornbacher’s, Shop 'n Save and Shoppers. Shares go for $3.35 apiece as of March 21. The yield on the dividend stands at 10.7% based on the last four quarters of payouts. And yet none of this makes the stock a bargain.
Intense competition from grocery chains such as Albertsons and Kroger has caused prices to fall across the industry, but it's hurting SuperValu more than most. Its revenue is declining faster than that of competitors, according to market research from CSI Markets. SuperValu has lower profit margins as well. The stock has lost 71% over the last two years as a result.
Staples and SuperValu are in better shape than Sears, but all three stocks are more Hail Mary shots than underpriced comeback candidates. They will likely continue to deteriorate. If they do, don't say we didn't warn you.
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