The Fairholme Fund (Trades, Portfolio)’s Bruce Berkowitz (Trades, Portfolio) revealed this week that he sold more shares of his stake in Sears Holdings (SHLD, Financial) as the struggling retailer touched historic lows on Aug. 21.
Berkowitz is the second-largest investor in Sears, holding more than 16% of the company including shares owned by his Fairholme Funds (Trades, Portfolio) as of mid-year. On Aug. 21, he trimmed his holdings by 19.31% to 14,061,947, which was equivalent to 13% of the company.
Berkowitz’s sale came as Sears’ shares tumbled almost 33% from the previous week to an all-time low of $1.23 per share. They had lost 67.5% of their value since starting the year at $3.78 per share.
A letter from Sears Holdings’ CEO and chairman Eddie Lampert, founder of hedge fund ESL Investments, to the company’s board kick started the freefall the week of Berkowitz’s sale. In the letter dated Aug. 14, Lampert offered to buy all or a portion of the Sears’ Kenmore brand for $400 million and other assets for $80 million. The letter also stressed the company’s need for “speed and certainty” in securing the sale, saying that, “an expedited process is in the best interest of all parties involved.”
Haste has become important as Sears continues to require more cash to sustain its flagging business. At close of its first fiscal quarter ended May 5, the company had $466 million in cash and $3.5 billion in debt, while reporting a net loss of $424 million, or $3.93 per diluted share.
The Kenmore sale would be the latest move Sears has taken to keep afloat. Last year it sold its Craftsman brand to Stanley Black & Decker for $775 million and a percentage of sales after the third year. It also slashed its store count, including the closure of 259 Kmart stores and 122 Sears stores in its last fiscal year.
In his second-quarter letter, Berkowitz said he approved of the cost-saving measures. “Sears securities are priced for doom, but we continue to expect additional asset sales and continued cost cutting will fuel outperformance in our remaining Sears investments,” he wrote.
But the Sears investment has proved dismal for Berkowitz’s funds overall, he said earlier. As markets soared to all-time highs in 2017, Sears “wrecked the funds’ performance.”
“Sears realized billions of dollars from asset sales, as we predicted, but I did not foresee the operating losses that have significantly reduced values,” Berkowitz wrote in his 2017 annual letter. “Getting the asset values largely correct, but missing the company’s inability to stop retailing losses, has been hugely frustrating and fatiguing for me to watch.”
Years earlier, Berkowitz said he believed the company’s assets were worth multiples of values to its stock price and called the store “the beginning of a new Berkshire Hathaway.”
Berkowitz started his Sears position in 2005, a year in which the iconic retailer's price ranged from around $69 to $112. Struggles with the position began early. In his first mention of the stock, he wrote in 2005 that it declined “over doubts about the ultimate success of the company’s retail strategies.”
Berkowitz made his last purchase of the company in the first quarter of 2017, buying over a million shares around $8. Since the third quarter of 2017, he has been backing out of the position, cutting his holding by about 51% as the price plunged.
“Today Sears is a much diminished position and nowhere as relevant to our financial position,” Berkowitz wrote in his mid-year letter.
In the first quarter, Berkowitz moved into less risky territory, opting for stocks of more stable companies. He purchased Spectrum Brands Holdings Inc. (CPB, Financial), Citigroup Inc. (C, Financial) and Jefferies Financial Group Inc. (JEF, Financial).
See Bruce Berkowitz (Trades, Portfolio)’s portfolio here.
