Sears Holdings Corporation (SHLD), Macy’s, Inc. (M), Kohl’s Corporation (KSS): This Retailer Might Be The Worst Investment You Can Make Right Now

Page 2 of 2

Although Sears still has roughly $700 million in cash (thanks to huge amounts of asset sales in recent years), investors need to start questioning Sears’ access to credit. The company notes that there are roughly $1.6 billion in untapped credit and inventory. But lenders cannot be pleased to see Sears inch ever closer to the debt covenants in place. Total debt has risen from $3.1 billion at the end of January to a current $3.7 billion.

Although the current credit facility won’t expire until April 2016, Sears needs to maintain a fixed charge ratio above 1.0 (which is EBIT (earnings before interest and taxes) plus lease payments divided by EBIT plus interest payments). Not only is Sears’ EBIT falling, but a recent spike in interest means that Sears interest payments are rising. Sears currently has about $240 million in annual interest expense, though that figure should move higher as rates rise.

There’s a reason why Moody’s rates Sears debt at B3 and S&P gives it a CCC+ rating. Judging by the just-released financial results, and Sears’ exposure to rising interest rates on that debt, further ratings downgrades may ensue.

Risks to Consider: As an upside risk, Sears plans to keep selling off its best assets, which may keep the lenders at bay and postpone any day of reckoning. 

Action to Take –> We are watching the slow-motion demise of a once-storied retailer. Eddie Lampert’s steady milking of cash from Sears, and a long period of under-investment, has left Sears Holdings Corporation (NASDAQ:SHLD) and Kmart simply unable to compete against savvier retail rivals. Avoid the temptation to view Sears’ current share price weakness as an opportunity, and instead focus on how financial trends appear set to worsen further in coming quarters and years.

P.S. — Sears and Kmart have both been around for decades, but wouldn’t you rather own companies that will likely be around for decades to come? My colleague Elliott Gue and his staff recently went looking for the absolute best stocks on the market. After six months and $1.3 milllion worth of research, the team found a handful of stocks good enough to buy, forget about and hold “Forever.” To learn more about the “Forever” stocks that they uncovered — including some names and ticker symbols — click here.

– David Sterman

Warren Buffett’s Top 5 Stocks

Buffett’s firm, Berkshire Hathaway, holds dozens of stocks. But these five make up 75% of its portfolio… worth $65 billion. Click here to get Buffett’s top 5 stocks plus his 16 latest buys, FREE.

Page 2 of 2