Fears expressed by Kmart employees this summer that its new inventory management program of moving all merchandise out of the stock rooms and onto the sales floor meant parent Sears Holdings (NASDAQOTH:SHLDQ) was preparing for a liquidation seem to be coming true.
Although Kmart's president dismissed the concerns, saying the retailer was merely preparing for a "WOW experience" for customers, Sears is now reportedly closing 64 Kmart stores within the next year, including 17 owned by real estate investment trust Seritage Growth Properties (NYSE:SRG). The closures will be in addition to the 68 Kmart stores Sears announced it was closing in April when it also said it would be shutting 10 Sears locations. Coupled with the report chairman and CEO Eddie Lampert had to make yet another short-term loan to keep the company afloat and it's clear Sears end is coming into view.
The end is nigh
Ratings agency Moody's thinks so. It said Sears and Kmart lack the financial wherewithal to stay in business, and though it has significant assets, its debt burden is too high. Sears Holdings has some $3.5 billion in long-term debt and its unfunded pension liability exceeds $2 billion.
The retailer has suffered under the not-so-benign neglect of Lampert, who has ignored many of Sears problems until it was too late. While, lately, he has poured money into the company to make it a leaner operation that can compete digitally with its rivals, the vortex pulling it down is much too strong to evade.
Sears has proven unable to compete effectively against the likes of Wal-Mart or Target in the off-price wars and the impact Amazon.com had on its operations in e-commerce is even more pronounced than it is at other retailers. In its second quarter earnings report last month, Sears said net sales tumbled 9% from the year-ago period, largely because of the number of stores it was closing, but also because same store sales continued their decline, just as they have every quarter for the past 11 years. Comps were off 3.3% at Kmart and 7% at Sears.
Comparable sales are an important retail metric because they largely strip out any growth that might occur simply from opening new stores, so they are seen as a more organic measure of a business's health.
Net losses widened to $395 million, or $3.70 per share in the period, compared to a profit of $208 million, or $1.84 per share a year ago.
Neither a borrower nor a lender be
The lack of sales and mounting losses has forced Lampert to continuously lend the retailer money to keep it going and prevent suppliers from bolting and cutting off its lifeblood of goods. In addition to the $300 million Lampert's ESL Investments just loaned Sears, the hedge fund operator also loaned Sears $125 million earlier this year as part of a $500 million loan package, plus a $750 million term loan earlier this year, which followed a $400 million loan last year to make it through the holiday season. It might not be so lucky this year.
The swarm of bad news that hangs over the retailer could cause its suppliers to balk this time around and it will face increased costs due to the store closures.
In Sertiage Growth Properties filing with the SEC announcing the pending lease terminations, the REIT said Sears will continue to pay the rents on the stores until the closures occur in January, but then it will "pay Seritage a termination fee equal to one year of the aggregate annual base rent, plus estimated operating expenses."
While the closures will let the REIT benefit from leasing the spaces again to better tenants, it's a sign that Sears Holdings tenure and existence is hanging by the most tenuous of threads and it's merely a matter of time before it comes crashing down.
Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com. The Motley Fool recommends Moody's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.