Professor Elam

Monday Sept 11, 2017

We are studying the Cash Flow statement in multiple accounting classes. Here is an example of what happens over time when  firm fails to generate operating cash to support investing and financing.

The company is famed Sears Holding which owns Sears and the remaining K Mart Stores.  Eddie Lampert bought the K Mart stores in Bankruptcy Court. He paid less than the real estate alone was worth and got the operating stores as sort of a bonus. Then he acquired Sears. He was hailed as the next Warren Buffet. But it did not work out that way.

Sears Needs $2 billion + to stay afloat.

Let's call this Chart, From Cash to Trash

At bottom the money flow indicator shows investors heading for the exits.

Yes that is 1.381 Billion in the red for the current year. And worse the previous and about the same two years back. So operations are not supporting Financing and Investment.

Instead Lampert has been selling off the most valuable assets SHLD owns, the iconic brands of Craftsman and  Kenmore. Add to that dozens of store closings, and well what is left?  Retail experts have criticized the lack of re investment in the stores still ope. And that is clear from Capital Expenditures.

Other Cash Inflows are from the sales of Sears Brands. Which is cannibalizing the firm.

Lampert certainly cannot sell any stock to the public. So the last resort is to borrow money and at a high 9.75% interest rate.

The very bottom line reflects the overall inability to generate cash. And that is how SHLD went from  140 to 7.50 in nine years. Most analysts expect the company to close and liquidate all assets in the next year.

This is amazing in that we are now in an on line shopping / retail realignment.  But it was Sears who invented on-line shopping with its catalog concept way back in  1890. Okay so the catalog was paper and now is a computer screen, but either way one shops at a distance from hoem.