The stock price of SEARS CANADA INC COM NPV (OTCMKTS:SRSCQ) collapsed recently as a result of the company’s restructuring process that commenced over summer. In our opinion, the market has pushed down the stock price to completely illogical levels. In this article, we will review what was said in the newspapers about the situation of the company. We will also check the financial accounts, which we don’t think many looked at. Let’s keep the best part for the end of the article. Have a look at the recent share price action before we provide any hints:
Sears Canada Inc. is a Canadian retail chain headquartered in Toronto, Ontario. The company was first founded in 1952. As said, Sears is in the middle of the restructuring process, because its revenue dropped from $6.7 billion in 2001 to $2.6 billion in 2016 and the company posted a net loss of $321 million. On July 23, 2017, a report by financial post mentioned that Sears Canada is filing for bankruptcy, but it also mentioned that it expects to remain in business.
On Jul 18, 2017, the Financial Post reported that Sears Canada is starting liquidation sales at its stores in order to “maximize” benefits for the shareholders. The report by the Financial Post also said that the liquidation process would only occur in stores that have been selected to be closed and the sales will begin on July 21 and run no later than Oct. 12. To cut costs, the company plans to close 59 out of its 225 stores and cut 2,900 out of its 17,000 workers.
On Aug 21, 2017, Sears Canada also reported that it is closing nine Sears Home Stores in Canada by August 27. As mentioned earlier, the firm is in the middle of restructuring process and closure of these stores will be part of its plan to close 59 out of its 225 stores. Four stores will close on August 23, whereas the remaining five will close on August 27. It also announced that discounts would range up to 90% off on branded furniture, refrigerators, washers, dryers, ovens, dishwashers, mattresses, and home décor, while merchandise remains available.
According to BankruptcyData.com, the retail bankruptcy is not new in the US and Canada markets. Due to competition with various online giants, such as Amazon, the business of malls have plummeted over the years. According to an estimate by CNN, 25% of U.S. malls could close within the next five years and the department stores in the US have shed 46% of their work force since 2001. It is a higher percentage than the job cuts in coal mines over the same period.
Financial Statistics – The company is trading at 0.16x its book value per share
By only checking the news, we may conclude that the situation is alarming. As we always appreciate to check all the angles, the team decided to check the Yahoo Finance statistics. Have a look at it:
|Total Cash (mrq) (mrq = most recent quarter)||129.63M|
|Total Cash Per Share (mrq)||1.27|
|Total Debt (mrq)||111.65M|
|Total Debt/Equity (mrq)||177.89|
|Current Ratio (mrq)||1.79|
|Book Value Per Share (mrq)||0.62|
What did we learn?
The most significant in the previous table is that the company’s book value per share is $0.62. This means that if the company is liquidated right now, the shareholders would obtain $0.62 for each share owned (This is after paying debt holders and the employees). The fact is that as of September 5, 2017, the shares can be bought on the exchange for $0.10. Hence, according to the last quarterly reports for the period ending on January 28, 2017, the financial situation may change in 2017 fair enough. But, we don’t really believe that the company could burn so many millions in six months. Is the market underestimating the financial situation of SRSCQ?
SRSCQ is in a really complicated situation, as the company is restructuring the business. In this type of process, sometimes shareholders get wiped out, thus we believe that we need to proceed with extreme caution. Having said that, we need to note that the financial situation did not seem quite bad a few months ago. We had a look at the last financial situation reported and saw that the book value per share was high in comparison to the share price. We still need to revise the new quarterly report, but we cannot really imagine how SRSCQ could have destroyed so much value in that short period of time. As said, proceed with caution, however, the setup looks to be good a risk/reward opportunity at current levels.
We will be updating our subscribers as soon as we know more. For the latest updates on SRSCQ, sign up below!
Image courtesy of Mike Mozart via Flickr
Disclosure: We have no position in SRSCQ and have not been compensated for this article.