by Reshmi Basu
Sears Holdings earnings outlook, following another quarterly loss, remains bleak, and a host of suppliers are now requesting cash in advance before they agree to ship or are opting instead to avoid shipments altogether, according to three sources familiar with the matter.
Rocky vendor relations for Sears are nothing new, given the borrower’s unrelenting cash burn and its shareholder-friendly transactions. The company’s vendors have been locked out of the credit insurance market for the past two years, as providers looked to cut their exposure to the money-losing retailer. And suppliers have also had to deal with the expiration of accounts receivable puts, another type of vendor protection.
But the cash-in-advance strategy now contemplated by some vendors would mark a new chapter in the company’s ongoing descent, according to the sources. Nonetheless, such an extreme tightening of trade terms may not serve as the death knell for the company, given the amount of inventory it already has coupled with a shrinking footprint, one of the sources said.
As of 29 October, merchandise inventories stood at USD 5bn compared to USD 6.2bn last year. Merchandise payables were USD 1.6bn, versus USD 2.3bn in the prior year period. The company had USD 258m of cash and USD 174m of availability under its revolver.
To offset the cash burn, Sears has been attempting to execute a streak of asset sales, including the divesture of its Kenmore, Craftsman and DieHard (KCD) brands along with the Sears Home Services warranty businesses. In 3Q, Sears also terminated the leases of 17 underperforming stores owned by Seritage Growth Properties, a publicly traded REIT.
Nonetheless, at minimum, Sears would need USD 1.5bn of asset sales or another source of new capital to avoid a restructuring in 2017, said a sellside analyst. As such, some investors and analysts prognosticate that management is incentivized to at least keep the company out of bankruptcy through July 2017, since that would mark the two-year anniversary of the landmark USD 2.7bn sale lease-back and rights offering transactions completed on 8 July one of the sources familiar noted. The bankruptcy code provides a two-year look-back period for the avoidance of fraudulent conveyance with state law often providing a greater look-back, one of the sources said. Those 8 July deals entailed Sears selling 235 Sears- and Kmart-branded stores to Seritage Growth Partners, along with Sears’ 50% interest in joint ventures with each of Simon Property Group, Inc., General Growth Properties, Inc. and The Macerich Company, which together hold an additional 31 Sears Holdings properties.
Sears earnings performance in 3Q16 was highly distressing, as the retailer’s top line declined by 12.5% to USD 5bn, due in part to store closures, noted the sellside analyst. Same stores sales also skidded, down 7.4% in the three-month period. EBITDA in the quarter tanked to negative USD 375m of EBITDA, as compared to negative USD 300m in the year period.
Adding to the jitters is the continued exodus of high-ranking officials at Sears, the sources noted. On 12 December, the company announced the resignation of its director Alesia J. Haas, who will now serve as CFO of Och-Ziff Capital Management Group. On 30 November, Jeffrey Balagna left his position as executive vice president to pursue other opportunities.
Looking ahead, Sears is expected to book negative USD 1bn of EBITDA for FY16, the sellside analyst noted. The cash burn would amount to nearly USD 1.5bn, based on USD 280m of cash interest, USD 18m cash taxes, and USD 165m of capex.
Boiling under the surface is the company’s enormous cash draining pension obligations. Moody’s Investors Service downgraded the borrower’s speculative grade liquidity to SGL-3 from SGL-2 on 13 September, citing high cash needs, including minimum pension obligations of approximately USD 596m in 2016 and 2017.
The company’s unfunded pension and retirement obligations totaled USD 2bn at the end of 3Q16, according to SEC documents.
The borrower’s USD 304m 6.625% senior secured notes due 2018 last traded at 96.5 to yield 8.658% on 17 November, according to MarketAxess. Its shares traded at USD 10.25 today, down USD 0.06 or 0.58% on a USD 1.1bn market cap.
A Sears representative said the company declines to comment on rumor and speculation.