Sears loses its biggest outside investor

After less than two years serving on the board, famed investor Bruce Berkowitz is resigning as a director of Sears Holdings(NASDAQ: SHLD) at the end of the month. Although he still has substantial holdings of Sears stock that go back to when Sears and Kmart were first merged -- and he hasn't sold a single share ever -- the fact he hasn't been able to accomplish his mission of returning the retailer to profitability or stopping its cash burn suggests there may be little hope it ever will.

Calling in the big guns

Berkowitz joined Sears' board in February 2016 and noted that few people understood or appreciated that the real value of the company was locked up in its asset base, both real estate and a variety of well-respected brands. It wasn't Sears being a retailer that attracted him as an investor, considering he once claimed it would be "icing on the cake" if it ever became one, but rather in optimizing Sears' assets.

Certainly, Sears chairman and CEO Eddie Lampert has been optimizing those assets over the years, though not necessarily to the benefit of the retailer. He has sold hundreds of pieces of real estate to the Seritage Growth Properties(NYSE: SRG) real estate investment trust he created for the purpose and stripped almost every brand of value from the balance sheet.

It's only this year that Lampert has implemented numerous branding deals that allow Sears itself to reap some benefit rather than leave it barren. Unfortunately, it's becoming a case of too little, too late for the retailer, and to ensure its vendors don't bolt before the all-important Christmas shopping season, Lampert has once again extended credit to Sears to give it sufficient liquidity. With comparable store sales still falling at double-digit rates, the prospects for how long it can continue look bleak.

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Clock ticking down

Berkowitz says he took the director position knowing it would be of limited duration, but he would be able to better communicate the ideas his firm Fairholme Capital Management had about how best to realize its objectives. Berkowitz says his tenure allowed him to achieve that, and though he's leaving, he believes the assets of Sears Holdings still "have enormous value."

Maybe, but his mission of making Sears profitable or quenching its cash burn seems to have failed. Last quarter the retailer reported net losses of $251 million, narrower than the year-ago period, but still substantial, and comps tumbled 11.5% from last year. Its vendors are also getting antsy.

In the wake of the bankruptcy filing of Toys R Us, a development caused when suppliers stopped shipping product, which caused a snowball effect, Lampert was forced to loan Sears $100 million to stop the same from happening with it. It had already reportedly lost several suppliers and earlier in the year had to sue two others to force them to live up to their end of their contracts. Last year toymaker JAKKS Pacific bailed on it.

And Sears just tapped an additional $40 million from Lampert to further improve liquidity.

Seeing things in a new way

Although Sears and Berkowitz issued separate statements essentially saying they remain on the same page, the resignation coming so soon after the loans still suggest they may not be seeing eye to eye. Moreover, the value of Sears real estate -- the purported assets that have propped up bullish sentiment for so many years -- may not be as valuable as they once were.

According to data from Real Capital Analytics, investment sales volumes on retail real estate have fallen to their lowest levels since 2013. Moreover, retail REITs as indicated by the Dow Jones U.S. Retail REITs Index, lost more than a quarter of their value between September 2016 through mid-August 2017, an indication of how gloomy the outlook is.

It also can't be good timing that all this is happening the same month Sears Canada announced it would seek court approval to liquidate.

Bruce Berkowitz pulling up stakes from Sears Holdings right now may just be the normal cadence of his investment in the retailer, but the loss of its largest outside investor could also signal the end truly is approaching for this retail icon.