OAK BROOK, IL—Add Credit Suisse to the ranks of analysts calling for Sears Holdings Corp. to liquidate its stores. Published reports say that a Credit Suisse team led by analyst Gary Balter cited the opening line of a 1967 song by the Doors in summing up the retailer's prospects on Thursday: “This is the end.”
Balter wrote that SHLD is generating negative cash flow of at least $1 billion this year, and likely $2 billion. Last month the company reported a second-quarter loss of $573 million, compared to $194 million for Q2 the year prior. “Unless it sells off real assets while somehow maintaining the cash flow from those assets, this story is not likely to have a happy ending, and that ending continues to depend on suppliers,” Balter wrote.
Bloomberg reported that Mary Ross Gilbert, an analyst at Imperial Capital LLC in Los Angeles, estimated last year that SHLD could garner more than $6 billion from a liquidation sale of the more than 2,000 Sears and Kmart stores it owns or leases. That figure would depend on “aggressive” assumptions, Gilbert said.
The Credit Suisse analysts wrote that investor confidence in SHLD was hurt by three recent developments: the dismal Q2 report, which marked the eighth consecutive quarter of negative EBITDA; a lack of new financing options, aside from a sale of its stake in Sears Canada and a possible sale of its Sears Auto Centers, both of which have been on the table for some time; and SHLD's comment that it is not fully committing its apparel buys for Christmas. To Credit Suisse, this comments says “'we won't have anything that turns out to be popular, as the logistics make it hard to restock in time,” Balter wrote.
Earlier this week, SHLD secured a $400-million short-term loan from entities affiliated with controlling shareholder ESL Investments Inc., of which SHLD chairman and CEO Eddie Lampert is the sole stockholder. It's being secured by first-priority lien on 25 SHLD-owned properties. “The loan, which is being funded in September, is scheduled to mature on Dec. 31, 2014, which indicates how tight liquidity is going into the holiday season with the need for additional capital to fund inventory build-up,” according to Fitch Ratings.
Last week, Fitch downgraded SHLD's long-term issuer default ratings to 'CC' from “CCC,” a move that the ratings agency calls a reflection of “the magnitude of Sears' decline in profitability and lack of visibility to turn operations around, leading to heightened liquidity concerns.” Fitch says it expects top-line contraction of around 9% to 10% in 2014, due to estimated domestic comparable store sales of negative 1% to negative 2%, loss of ongoing Lands End business due to a spinoff –the brand had represented 4.3% of 2013 consolidated sales—and ongoing store closings.
The retailer's gross margins are expected to contract another 200 basis points to 22%, on top of the 220-bp contraction seen last year. “Fitch does not expect any catalysts in the business that will stem the rate of decline,” according to an article on Fitch Wire.
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Paul Bubny
Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.
