Shares of Sears Holdings (NASDAQ: SHLD) popped last Thursday after Memento S.A., a Swiss family office, announced that it owns nearly 2 million shares of the company and recommended that Sears Holdings either go private or take other measures to crack down on short-selling.
Some traders are engaged in illegal "naked shorting" of the stock -- selling it short without first borrowing the underlying shares -- according to Memento (other experts dispute this assertion). The family office further stated, "We believe Sears has the potential for strong financial performance once it addresses a few critical concerns including, among others, the high volume of short-selling activity in its shares."
It didn't take long for Sears Holdings stock to surrender virtually all of its gains from last Thursday. Indeed, while short-selling has contributed to Sears stock's downward trajectory, the main reason for its dreadful performance is that Sears Holdings is a failing company.
Sears Holdings Weekly Stock Performance. Data by YCharts.
Sears Holdings has been hemorrhaging cash for years
It would be one thing to blame short-sellers for Sears Holdings' single-digit stock price if the company was just having a bad quarter, or even a bad year. However, Sears has been losing gobs of money for many years.
Free cash flow turned negative more than five years ago and only got worse thereafter. Since 2014, Sears Holdings has consistently burned at least $1.5 billion of cash annually.
Sears Holdings Free Cash Flow (TTM). Data by YCharts.
Furthermore, the company's customer base is evaporating. Last quarter, revenue plunged 27% year over year to $3.66 billion. Sears has closed nearly 400 stores in the past year -- which should theoretically send more business to the remaining stores -- but the company has still posted a double-digit decline in comparable-store sales year to date.
No recovery in sight
Sears Holdings CEO Eddie Lampert (who also owns about half of the company) remains defiant about the company's chances of survival. Sears initiated a deep cost-cutting program earlier this year. Lampert believes this will drive a big improvement in profitability in 2018. However, his outlook seems overly optimistic, given that the cost cuts barely made a dent in Sears Holdings' losses last quarter.
Meanwhile, Sears Holdings has had to sell assets at a rapid pace just to pay the bills. At the end of 2016, it owned 360 large-format stores across the Kmart and Sears brands (the rest are leased). For comparison, it owned 662 large-format stores just two years earlier.