Sears Holdings (SHLDQ) is burning cash like almost never before. According to a filing, Sears appears to have gone through $200 million in a single month.
After borrowing $100 million from Sears CEO Eddie Lampert's ESL Investments Fund at an interest rate of 11%, the retailer took on $40 million on October 18, and an additional $60 million on October 25. While it's not out of the ordinary for retailers' working capital to go negative as they stock up for the holiday season, the speed with which Sears seems to be bleeding through cash struck some investors as remarkable and is adding to concerns about the company's potential bankruptcy.
Despite operating at a loss since 2010, Sears has managed to stay afloat by selling off assets like the Craftsman tool brands and 235 stores to Seritage Growth Properties (SRG -0.54%), but same-store sales continue to fall, losses are mounting, and the stock is at all-time lows. Investors are certainly justified in worrying about Sears' cash balance -- but just how much cash does it have left?
Image source: Sears.
Burn, baby, burn
As of July 29, Sears had $442 million of cash on its balance sheet. However, $230 million of that was restricted cash, and the $212 million cash available for business purposes represented its lowest cash balance ever. Other asset accounts such as inventories have declined sharply over the past year, and the total value of assets on the company's balance sheet have fallen more than 20% to $8.35 billion from a year ago.
Sears' free cash flow may provide a better picture of the company's ability to avoid bankruptcy, as it's the best estimate of a cash-based profit or loss. In its most recent quarter, Sears posted free cash flow of -$277 million, and nearly -$2 billion over the last year, which is a lot of money to be going out the door. That value has disappeared on the balance sheet as Sears shut down more than 300 stores this years in an attempt to curtail its losses.
Sears' borrowings, which are now at about $4 billion, have weighed on the bottom line through interest payments totaling $471 million. That makes any prospective turnaround and improvement in operations even more difficult.
Is the end near?
Sears is starting to get squeezed by suppliers. Whirlpool (WHR 0.74%), the country's biggest producer of appliances, said it would stop selling its merchandise to Sears over a pricing conflict, ending a century-long relationship between the two companies. Other spats have come to light as Lampert has railed against suppliers over lawsuits and the media for exaggerating the company's demise. Tool supplier One World Technologies, for example, threatened to pull out of a contract with Sears earlier this year.
As suppliers clamp down on the retailer, the company's future will become even dimmer as it struggles to keep merchandise in stock. Such issues will lead to more stores closing or shrinking.
However, Sears has an advantage over most of its peers. Eddie Lampert, its CEO and largest shareholder, has essentially acted like a patron for the company, keeping it afloat through a series of loans from his hedge fund and by engineering liquidity through spinoffs like Seritage Growth Properties. In addition to its stores, Sears also has brand assets it could sell like DieHard batteries and Kenmore appliances.
In other words, Lampert will likely put off Sears' bankruptcy for as long as he can, or at least until the company's underlying real estate assets can justify it. That means that Sears' demise is likely to come piece-by-piece, just as it's been unraveling in recent years, rather than in a sudden bankruptcy declaration. As of its most recent quarterly report, it still had 1,250 stores, so there's plenty more assets to unwind and stores to close. Though the retailer appears to be in the last throes of death, it could still hang on for a few more years if Lampert wishes.
