Sears Holdings (SHLDQ) has assets and a few cards left to play, but it also has a crushing amount of debt that seems to make the retailer's efforts to survive an exercise in futility. The company could forestall its death by selling off the rest of its house brands, mortgaging its remaining real estate, and finding a buyer for the Diehard, Kenmore, Sears Home Services, and Sears Auto Centers businesses. In theory, those moves could bring in over $2 billion, but even that wouldn't be enough money to keep the company going for long.
Sears Holdings -- the parent company of Sears and Kmart -- has become a critical patient. The doctors -- in this case, CEO Eddie Lampert and the company's board of directors -- can take heroic steps to prolong its life, but that only puts off death.
Sears Holdings has been closing stores and selling assets to survive. Image source: Author.
How bad is the situation?
This has not been a quick fall. The company has "injected almost $12 billion in liquidity between 2012 to 2016 to fund ongoing operations given material declines in internally generated cash flow," according to Fitch Ratings. That has included real estate transactions, issuing debt, and reducing its working capital needs by closing stores.
The ratings service expects the company to have finished 2016 with comparable-store sales down 8% and follow that with a 2017 where comps drop in the mid-to-high-single-digit range. Total revenues should fall 12% to 13% in both years, according to Fitch, due to declining sales and store closures. Due to all of these factors, Fitch expects "EBITDA to be negative $950 million to $1 billion in 2016 and 2017, compared with a loss of $836 million in 2015."
That's bad news, but it's not the entire picture. The ratings service also said that Sears Holdings' interest expense, capex, and pension plan contributions should total $800 million in 2016 and potentially $1 billion in 2017. Fitch believes the company's "cash burn" will reach $1.6 billion in 2016 and $1.8 billion in 2017. That assumes $250 million in "annual working capital benefit" from store closings and smaller inventory buys.
What does Sears Holdings have left to sell?
Sears recently borrowed up to $500 million from a fund controlled by Lampert with some of its real estate securing the deal. The company's board has a plan to raise another $1 billion from either selling or taking loans against its other unencumbered properties. In addition, the company will receive $525 million when its sale of the Craftsman brand to Stanley Black & Decker closes later this year. The company will also receive a royalty for 15 years and $250 million three years after the close.
Craftsman was the company's most valuable brand, but it also owns Kenmore and DieHard as well as its Sears Home Services and Sears Auto Centers businesses. Fitch does not speculate on a value for those brands and there's no guarantee that a buyer exists for all three.
Where does Sears Holdings stand?
Sears had total liquidity of $432 million as of Oct. 29, 2016, according to Fitch, consisting of cash of $258 million and $174 million available under its credit facility. It also has the $525 million coming from the Craftsman sale, a theoretical $1 billion from further real estate transactions, and an unknown amount it could get from its unsold brands and businesses.
Given the company's cash burn, interest expense, capex needs, and mandatory pension expenses, Fitch estimates "Sears will have to raise approximately $2 billion in liquidity in 2017, roughly in line with the annual average over the past five years." That means the company may have enough assets to survive 2017 -- if it can pull off all of these transactions -- but without something else, would enter 2018 basically stripped bare and leveraged to the hilt.
Lampert has been pushing a scenario where Sears Holdings shrinks its store base to a profitable core and then shifts some of its business to its online Shop Your Way platform. Doing that, however, takes money and there's no reason to believe a failing brand with a shrinking customer base can somehow build a thriving internet platform.
And there's no guarantee the company could compete in a space dominated by Amazon in which giants like Wal-Mart are investing heavily. Sears has been selling pieces of itself in order to survive since 2012. It's reaching the end game where it's going to have to pull the copper wire out of its walls just to buy another day. There's no logical reason to expect Sears to turn its sales around. The company's remaining assets might buy it a year, maybe even 18 months, but the end is coming, it's just a question of when Lampert throws in the towel (or whether his creditors and vendors eventually force his hand).
