By Nathan Layne and Sruthi Ramakrishnan
Sears Holdings Corp's (SHLD.O) shares tumbled as much as 16 percent on Wednesday as bondholders and investors questioned how long the retailer could remain in business after it flagged doubts that it could continue as a going concern.In a competitive and changing retail landscape where many brick-and-mortar retailers have gone bust and e-commerce has boomed, Sears has struggled in recent years with big losses, store closures and divestitures.The company, which has $13.19 billion in liabilities, said it could have difficulty procuring merchandise from vendors, and bondholders are watching to see whether Sears will have the cash and credit needed to stock its shelves for the crucial 2017 holiday season.Sears Chief Financial officer Jason Hollar wrote in a blog post on Wednesday that the company had boosted its liquidity by up to $1 billion through loan agreements and amended an existing credit facility to provide an additional $250 million, among other steps to improve performance and finances."As 2016 proved to be another challenging year for most 'bricks and mortar' retailers, our disclosures reflected these developments," Hollar wrote. "While historical performance drives the disclosure, our financial plans and forecast do not reflect the continuation of that performance." Many question the company's chances for survival, however. Sears last turned an annual profit in 2011."The retail industry is just too competitive, the brand value of Sears has diminished dramatically, the seismic shifts in consumer spending both in terms of the move to e-commerce and to experiences don’t bode well for Sears," said Ken Perkins, president of industry research firm Retail Metrics. "We have seen a spate of Chapter 11 filings in recent months, and it is difficult to see how Sears avoids the same fate."Shares of Sears were down 14.8 percent at $7.76 at midday after falling to $7.60, their largest one-day percentage decline since an 18.79 percent drop on Nov. 16, 2012.CASH NEEDS
As the 2017 holiday season nears, Sears will need cash. Retailers typically book orders for merchandise for the vital fourth quarter from now through midsummer.The company said in a filing that continued operating losses could restrict access to new funds under its domestic credit agreement. (bit.ly/2mRUcce)Since 2012, Sears' annual revenue has fallen 47 percent to $22.1 billion, and the company has accumulated $10.54 billion in losses, including $2.22 billion in the year ended Jan. 28. During that time, Sears cut the number of its U.S. stores by nearly a third, reduced holdings in Sears Canada and spun off the Lands' End clothing chain.In recent years, the company has also placed some of its stores into a real estate investment trust, sold its Craftsman line of tools and repeatedly raised debt from billionaire Chief Executive Officer Edward Lampert's hedge fund.
The company has $286 million in cash on hand, down from $609 million in 2012. At the same time, receivables, which retailers in distress often use to fund operations, fell to $466 million from $635 million. Neil Saunders, managing director of retail at research firm GlobalData, said Sears would probably have a hard time meeting its obligations as the year progresses. "It's going to add more debt, use more of its debt facility," he said. " ... It's going to be in a very, very difficult position, unless they find some other asset they can quickly liquidate and sell to keep the business going." BLOW TO LAMPERT
The announcement of Sears' potential demise is a blow to Lampert, a hedge fund investor who took control of Sears after merging it with Kmart, which he controlled, in 2004.He soon published a 15-page manifesto, in which he stated that conventional measures of retail success, such as same-store sales, were no longer relevant. Sears would regain its health by closing struggling stores and focusing instead on profitable sales, he wrote.Lampert owned nearly 10 percent of the REIT that paid Sears $2.6 billion in 2015 for the stores it purchased, many of which were then leased back to the retailer.The company said on Tuesday that actions taken during the year to boost liquidity, including the $900 million Craftsman sale to power tool maker Stanley Black & Decker Inc (SWK.N) early this year, could satisfy its capital needs for the current fiscal year.But the filing also makes clear that additional asset sales could prove problematic.As part of the Craftsman sale, Sears Holdings reached an agreement with the Pension Benefit Guarantee Corp. That puts a claim on some assets to protect pensions of retired employees.The agreement "contains certain limitations on our ability to sell assets," the company said.Already, the pension board agreement requires Sears to make a $250 million cash payment to its pension plan by March 2020, and the pension board has a 15-year lien on revenue owed to Sears from future sales of Craftsman products. (Additional reporting by David Greising; Writing by Bernard Orr; Editing by Lisa Von Ahn)
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Updated Date: Mar 23, 2017 00:30 AM