Sears Holdings Corp. (SHLD) has relied on controlling shareholder Edward Lampert for years to help fund its operations. Now the billionaire is cutting out a form of lending he’s provided since 2010 to the owner of its namesake retail chain and Kmart.
Sears’s outstanding commercial paper -- short-term debt used to fund day-to-day operations -- fell on Feb. 1 to $9 million, according to a March 18 regulatory filing, none of it held by Lampert’s hedge fund ESL Partners LP. A year earlier, the company that has reported operating losses for the past 12 quarters, had $345 million of the IOUs outstanding, $285 million of it to ESL.
The pullback on lending may be a warning flag that Lampert wants to lessen his exposure or is under pressure to fund redemptions from ESL, Matt McGinley, managing director at securities researcher International Strategy & Investment Group in New York, said in a telephone interview.
“If he has billions of dollars of his own net worth tied up in Sears, and if he’s reducing the exposure, that’s not necessarily a good thing,” said McGinley, who has a “sell” rating on the retailer’s stock.
Steven Lipin, a spokesman for ESL at Brunswick Group LLC, and Chris Brathwaite, a spokesman for Hoffman Estates, Illinois-based Sears, declined to comment on the commercial paper.
Lampert, who engineered the merger of Kmart Holding Corp. and Sears, Roebuck & Co. in 2005, has presided over 28 straight quarterly sales declines and a revolving cast of executives while attempting numerous strategies to lure shoppers.
On the equity side, Lampert has increased his personal holdings in the past couple of years. In March 2013, he bought 1.24 million shares at $44.36, while ESL sold 1.24 million shares for the same price. In January 2013, he spent $13.6 million to buy 332,048 shares, and in September 2012, he bought 2.4 million shares while ESL sold 2.4 million shares.
Sears has a $1 billion five-year term loan it took out in October. It also had $1.3 billion in revolving credit facilities outstanding on Feb. 1, compared with $749 million last year, “due to lower commercial-paper borrowings and increased domestic cash balances,” the company said in the March 18 filing with the U.S. Securities and Exchange Commission. The retailer can borrow $549 million more under the revolving facility.
Snapshots of Sears commercial paper in its annual regulatory filings showed those borrowings peaked at $360 million at the end of its 2010 fiscal year, with $240 million from ESL. In fiscal 2012, which ended Jan. 28 of that year, ESL’s $285 million of Sears commercial paper was the largest portion owned by the fund over five years. Lampert personally held $169 million of that, the reports showed.
“Their liquidity picture overall has not improved over the course of the past several years, and it hasn’t improved because the core operations of Sears are an absolute disaster,” McGinley said. “For the investors who still use the investment thesis that Eddie Lampert is a smart guy, well, Eddie Lampert is a smart guy, and guess what, he’s reducing his exposure to Sears.”
The company’s free-cash flow has been negative for each of the last four years, with an outflow of $1.44 billion in the latest period. Free cash is money that can be used to invest in the business, reward shareholders with dividends and buy-backs, or pay down debt. At this rate, if operations don’t improve or it doesn’t obtain additional financing, Sears will burn through its cash in less than nine months, Bloomberg data show.
Sears rose 0.5 percent to $48.16 at the close in New York. The shares have declined 1.8 percent this year, compared with a 4 percent decrease for the Standard & Poor’s 500 Retailing Index.
Richard Sears, a Minnesota railway agent, bought a load of watches being returned to their maker in 1886, according to the company’s website. He hired watchmaker Alvah Roebuck and then formed the mail-order company that became Sears Roebuck in 1893. The company issued its first general merchandise catalog in 1896, primarily targeting farmers, and opened its first retail store almost 30 years later.
Kmart acquired Sears Roebuck in 2005 in a $12.3 billion takeover that Lampert said would create a company with the geographic reach and scale to compete with Wal-Mart Stores Inc.
The company has about $3.8 billion of bonds and loans outstanding, Bloomberg data show.
With Sears struggling, clients have been pulling money out of ESL Partners, the primary hedge fund run by ESL Investments. Lampert used $393 million of shares in AutoNation Inc. to meet client redemptions in June, according to regulatory filings. In December, he issued Sears stock to investors redeeming shares in ESL, a move that reduced his stake to 48 percent from 55 percent.
Sears has cut its commercial paper before, with $7 million outstanding at the end of January 2008. The company’s circumstances were different, with net income of $826 million and $1.55 billion in cash from operations in its 2008 fiscal year. That compares with a loss of $1.37 billion for the year ending Feb. 1, 2014, and $1.1 billion of cash outflow from operations.
Lampert is benefiting as assets are separated, including the spin-off of the Lands’ End clothing unit this month, which will give Sears stockholders 0.3 of a share in the new entity for each Sears share held. A Sears subsidiary will receive a $500 million dividend from the spin-off.
“They’re transferring valuable assets to the shareholders, and he’s the largest shareholder,” Mary Ross Gilbert, an analyst at Imperial Capital LLC in Los Angeles who has a “sell” recommendation on Sears shares, said in an interview.
Some investors think the next spin-off could be the company’s reinsurance unit, which would give shareholders ownership of $1.25 billion of mortgage-backed securities and $1.8 billion of securities backed by its KCD IP unit’s rights to the Kenmore, Craftsman and DieHard trademarks, Gilbert said.
Moody’s Investor Services lowered ratings on KCD IP’s asset-backed notes to B3 on March 19, citing “the accelerating negative performance of Sears’ domestic business.” The rating is the lowest level in a category of debt considered to be “subject to high credit risk.”
The retailer has other potential one-time sources of funds, including its stores and divisions such as its auto centers. “We believe we can readily generate liquidity from this asset base,” Chief Financial Officer Rob Schriesheim said on a Feb. 27 conference call to discuss fourth-quarter results with analysts and investors.