Sears Plummets After Filing Sparks Concern That End Is Near

Updated on
  • Troubled chain adds ‘going concern’ wording to annual report
  • Company has struggled to recover from billions in losses

Sears Filing Sparks Concern That the End Is Near

Sears Holdings Corp. suffered its worst stock decline in more than two years after acknowledging “substantial doubt” about its future, raising fresh concerns about the survival of a company that was once the world’s largest retailer.

Sears added so-called going-concern language to its latest annual report filing, suggesting that weak earnings have cast a pall on its ability to keep operating. The 131-year-old department-store chain, which has lost more than $10 billion in recent years, was cited last year by Fitch Ratings as a company carrying a high risk of defaulting.

“They’ve got all kinds of issues,” said Noel Hebert, an analyst at Bloomberg Intelligence. Though the company has enough cash to get through 2017, there are plenty of troubling signs, he said. Its declining payables-to-inventory ratio, for instance, shows that vendors have been increasingly reluctant to keep the retailer stocked.

Sears’s forewarning comes after more optimistic signs from the company, which has been working on a turnaround under Chief Executive Officer Eddie Lampert. Sears posted a narrower loss than predicted in the fourth quarter, and it has pledged to lower its debt burden and cut annual expenses by at least $1 billion. That upbeat assessment helped propel the stock in recent weeks. The shares had gained more than 60 percent since Feb. 9.

That rally fizzled with Tuesday’s filing, sending Sears’s stock down as much as 16 percent to $7.60 in New York trading. It was the biggest intraday drop since October 2014.

“Our historical operating results indicate substantial doubt exists related to the company’s ability to continue as a going concern,” the Hoffman Estates, Illinois-based chain said. But the retailer added that its comeback plan may help alleviate the concerns, “satisfying our estimated liquidity needs 12 months from the issuance of the financial statements.”

Lampert, a hedge fund manager who is also Sears’s biggest investor, aims to reduce debt and pension obligations by $1.5 billion. The CEO has helped keep the ailing retailer afloat by offering more than $1 billion of assistance, including a $500 million loan facility announced in January.

Shutting Stores

As part of its comeback plan, Sears has closed stores, sold real estate and offloaded businesses. Earlier this month, the department-store chain completed the sale of its Craftsman tool brand to Stanley Black & Decker Inc. for about $900 million.

Sears, which also operates the Kmart chain, has reviewed its DieHard batteries and Kenmore appliance businesses for potential sales.

Selling those brands -- along with some of its ample real estate -- can raise enough cash to keep the retailer operating through this year, said Christina Boni, an analyst at Moody’s Investors Service. But cashing in on those assets also “starts to limit their options as they shrink.”

Moody’s downgraded Sears earlier this year. The new disclosure “isn’t anything that should not have been anticipated,” Boni said. Still, it “highlights the issues that have remained for some time.”

The punishing retail environment has claimed several victims in recent months. HHGregg Inc., Gordmans Stores Inc. and RadioShack have filed for bankruptcy, and other chains are taking drastic steps to adapt to sluggish mall traffic. Macy’s Inc. and J.C. Penney Co. have joined Sears in closing scores of locations. At Bebe Stores Inc., management is looking to transform the business into an online brand, people familiar with the situation said this week.

“While our historical operating results indicate substantial doubt exists, we want to be very clear that we’re taking decisive actions to mitigate that doubt,” Howard Riefs, a Sears spokesman, said in an email.

Meanwhile, Sears continues to burn through more than $1 billion a year. While Lampert has pledged to make $1 billion in annual cost cuts, it’s hard to see how he’ll hit that target, Hebert said.

“It’s not like this is a company that’s been running on a lot of fat,” he said.

(Updates with Moody’s comment in 10th paragraph.)
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