Turnaround Talk: Sears’ Liquidity Plan is Just ‘Treading Water’

Tapping into its line of credit will only help the chain store stay afloat for now

Sears Holding Corp.’s (Nasdaq: SHLD) recently announced plans to sell assets, close stores and enhance liquidity may offer only short-term solutions to ongoing financial problems, say analysts.

Sears has been “good at treading water, but they have to start thinking about how to start growing and getting back into profitability,” Neil Saunders, a managing director at retailed-focused research firm Conlumino, tells Mergers & Acquisitions. “They can’t keep selling stuff. It’s great and keeps the business going, but, at the end of the day, if you are making a loss at the operating level, the liquidity will run out.”

Sears, which acquired Kmart in 2004 for $11 billion funded with cash and equity, might consider placing that portion of its business on the block. But it could be a tough sale. Kmart has also suffered in the midst of the overall retail sector’s ongoing struggles with changes in consumer spending and the growth of e-commerce.

“Kmart is “the more interesting part of the business, but because of the problems and issues with Kmart, they are not going to get what they would want for it,” says Saunders. “I think selling Kmart is a possibility, but it would be a long-term play. I could see that some players would want it.”

On Feb. 9, Sears released preliminary results for its fiscal fourth quarter 2015, which ended Jan. 31, saying revenue for the period totaled $7.3 billion, and $25.1 billion for the fiscal year. Fourth quarter adjusted Ebitda will range between $50 million to $100 million, compared with $125 million a year ago.

The company has already shed $1 billion of its net debt, aided by its sale of 266 properties to Seritage Growth Properties, a real estate investment trust (REIT) it formed in April, which was also used to fund its pension plan and absorb operation losses. During the first half of 2016, Sears will target an additional $300 million of asset sales and is considering unloading its Sears Auto Center business. Store closures, like many of its retailer peers, have also been a part of Sears’ ongoing restructuring efforts.

Liquidity is high on the retailer’s priority list. The company may tap into availability under its credit facility and pursue real estate-based financings to secure these borrowings. The borrowings will be used to enhance the customer loyalty program for both Sears and Kmart, which it feels will also curb losses.

“Our intention is not to borrow money to fund continued operating losses, but instead to provide us flexibility as we transition from a traditional network-based model to a more asset-light member-centric integrated retailer leveraging our Shop Your Way program,” Sears said in the report.

As of Jan. 30, it has $550 million of total cash and funds available under its revolving credit facility. At the end of 4Q15, borrowings under a $3.275 billion domestic credit facility totaled $1.4 billion.

Fitch Ratings also expressed little confidence in Sears’ game plan, calculating that the retailer needs $2.5 billion to fund operations in 2016, far short of the $550 million available.

Sears defends its plan, however.

"Sears Holdings is highly focused on restoring profitability to the company," says Howard Riefs, a representative for the company. "We continue to proactively transform our business to a member-centric integrated retailer leveraging our Shop Your Way and Integrated Retail platforms. We believe this will position the company as a leader in the changing retail landscape as we become more efficient with our promotional programs and the use of our Shop Your Way program to replace traditional forms of marketing with more targeted and personalized digital interactions with our members."

For the previous edition of Turnaround Talk, see, "Genworth Drafts Plan to Pay Down Debt in Light of Losses". For more struggling companies, check out Mergers & Acquisitions' Distressed Company Watch List.



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