While Sears Holdings' (OTC:SHLDQ) agreement with Amazon.com (NASDAQ:AMZN) to sell Kenmore brand appliances on the e-commerce leader's site sent the retailer's stock soaring, shares were already moving higher after it was reported that Chairman and CEO Eddie Lampert had thrown another $200 million loan Sears' way. Investors were wrong to bid up the stock in both instances.
Online sales are only a small portion of the total appliance market, and because the Kenmore brand has lost so much of its leadership and value, there's little chance Sears will make any appreciable dent in its revenue problem, even if they are sold on Amazon. Worse, the loan that was extended to Sears indicates just how bad the situation is at the department-store chain. Both events are lifelines tossed Sears' way, but they'll each likely fall short of saving the retailer.
Holding back the tide with a broom
Sears Holdings has been burning through cash. It was estimated it had enough to just make it through July, and some analysts thought that would be perfect timing for it to declare bankruptcy. While it's clear that's not happening -- at least not anytime soon -- it's also apparent the retailer isn't making nearly enough money to pay the bills and needs a loan just to keep the lights on.
According to reports, with the current $200 million advance, Lampert has now lent Sears a total of $1.6 billion. Because he has a substantial portion of his money tied up in the retailer, he does have an incentive to keep the retailer afloat, but it's not as if these are charitable donations, as the interest he's charging is a pricey fixed rate of 9.75% annually.
With a maturity of 151 days on the loan, Sears gets some breathing room, which, coupled with the agreement reached with lenders earlier this year to avoid having to pay them back until July of next year, ought to give the retailer's vendors some peace of mind that they won't be stiffed. But they shouldn't rest too easy because it looks like Sears is still in trouble.
Suppliers have been growing antsy in recent months over Sears increasingly precarious financial predicament. Sears lost one major toy supplier last year ahead of the Christmas season and more recently has had to sue two others to keep them living up to their end of their contract. Taking yet another loan is only going to underscore Sears' dire straits to suppliers.
Sell, sell, sell!
The loan is probably also designed to give Lampert more time to sell additional properties to the real estate investment trust Seritage Growth Properties (NYSE:SRG) that he spun off from Sears two years ago. In a statement announcing the loan, Sears CFO Rob Riecker said, "This facility is intended to provide the company with the flexibility to generate additional liquidity on an as-needed basis."
The retailer has been closing down underperforming stores, and in addition to the 265 stores it already announced it was closing this year, earlier this month it said it was closing 43 more.
But to his credit, Lampert's also come up with some innovative ideas that, had they been implemented several years ago, might have generated real returns for the retailer and investors. Coming as they are now, they'll probably only stave off the inevitable.
Among them are the sale of the Craftsman tool brand, which, while shedding the business, does allow Sears to retain some of the benefits the popular tools engender. Likewise for rebranding an auto-service center under the DieHard battery brand and licensing the Kenmore name to third-party gas grill makers. Lampert's also opening dedicated appliance and mattress stores, and now he's selling Kenmore appliances on Amazon.com.
What might have been
These are all really good ideas, but they're too little, too late. Sales continue to plunge and losses are still widening, which means Sears is forced to rely on short-term loans like the $200 million it got from Lampert (again). It's not something to cheer that the retailer keeps needing to bridge the gap in its finances with debt.
Rather than run up the stock, investors may very well rue Sears Holdings' being forced to sell its wares on the competition's website. Amazon.com has been one of the leading causes of the retailer's downfall, and needing to pay the mortgage by getting deeper into debt can only end badly.