Another day, another loan to keep Sears Holdings (OTC:SHLDQ) afloat. Following the report of yet another ballooning quarterly loss, CEO Eddie Lampert will lend the retailer $300 million through his hedge fund, ESL Investments, that will be secured by a junior lien against the retailer's inventory, receivables, and other working capital.
The countdown clock is ticking
Sears had a disastrous fiscal second quarter with net losses of $395 million, or $3.70 per share, compared to a profit of $208 million, or $1.84 per share in the year-ago period. Even after adjusting for significant items, losses totaled $217 million, or $2.03 per share. Mind you, those profits last year were the result of a significant infusion of one-time cash flows from creating the real estate investment trust Seritage Growth Properties and the sale proceeds from much of Sears' real estate, not any improvement in its business.
In the press release, CFO Rob Schriesheim said, "During the first half of 2016, we have demonstrated our ability to finance our transformation strategy with the levers available to us through our portfolio of assets and businesses." Unfortunately, Sears' abilities apparently don't extend to actually succeeding as a retailer -- it's all about Lampert's financial legerdemain to keep the ghost of the company going.
It was Lampert's ESL Investments that proposed Sears accept $300 million of additional debt financing, which also allows the company, at its discretion, to "offer to third party investors the right to participate in up to an additional $200 million of debt financing on the same terms and conditions."
Neither borrower nor lender be
Earlier this year, Lampert loaned Sears $125 million as part of a $500 million loan package that included financing from an investment firm that manages Bill Gates' fortune. And before that, it had secured a $750 million term loan, which itself followed a $400 million loan last year to make it through the holiday season.
And that's where the worry concerning the latest loan arises: Retailers are heading into the all-important holiday season, and Sears' shaky financial footing may once again cause suppliers to get cold feet. If the company is unable to secure inventory, then the few shoppers it does still attract will flee, causing it to spin faster down the drain.
Sears' second-quarter financials were driven by a 3.3% decline in comparable sales at Kmart due to lower sales in the pharmacy, grocery and household, and consumer electronics categories. At Sears, comps were down 7%, primarily due to decreases in home appliances, apparel, consumer electronics, footwear, lawn and garden, and tools.
That's important as Sears was once the unrivaled appliance leader. While its star in the sector faded long ago, the downward spiral has accelerated in recent periods as Home Depot and Lowe's take larger swaths of market share. Lowe's said appliances drove solid comps in the quarter and believes it gained more share in the space. And now, J.C. Penney is making a big push to introduce appliances at its stores in the back half of the year.
Considering this retailer's newfound strength, that should be worrisome for Sears, as should Best Buy's recovery as well. The consumer electronics chain reported near-1% comps growth as the industry suffered a better-than-3% loss, suggesting there's little that Sears has to offer consumers they can't find somewhere else.
Assets picked clean
Sears did say it's still exploring strategic alternatives with its Kenmore, Craftsman, and DieHard brands as well as its Sears Home Services business, and though nothing has come of these efforts, it has reportedly received "interest" in the brands. Should they go, the dismantling of a once-great retail icon will be virtually complete.
Lampert does own a sizable amount of Sears stock, and he has committed to turning the retailer into a leaner operation, investing large sums in digital channels, but it amounts to too little, too late. The loans Sears Holdings is now forced to accept on a regular basis just to make it through the next quarter indicate that the end isn't too far away.