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Analysts Remain Wary of Sears

Debt analysts expect Edward Lampert will continue to sell assets, cut costs and borrow money to make up for operating shortfalls.

Edward Lampert still has plenty of convincing to do.

This story first appeared in the May 8, 2014 issue of WWD.  Subscribe Today.

The chairman, chief executive officer and architect of the ailing Sears Holdings Corp. told shareholders that the company would continue its transformation by, among other things, trimming back apparel and focusing on its stronger stores and the Shop Your Way loyalty program.

Lampert’s comments helped send the company’s shares down 4.9 percent to $40.58 Tuesday.

While the stock did recover some Wednesday, rising back 2.9 percent to $41.74, debt analysts in particular remain wary of the company’s path forward and expect Lampert will continue to sell assets, cut costs and borrow money to make up for operating shortfalls.

“We’ve been very focused on serving [Shop Your Way] members, providing products they want and very focused on price,” Lampert said at the company’s annual meeting Tuesday.

Shop Your Way is a membership rewards program that offers a social commerce platform, a marketplace with more than 120 million products and, for some members, free shipping.

“When we see the driver of a retailer, it’s not that they have the best loyalty program,” said David Kuntz, debt analyst at Standard & Poor’s, which rates Sears at “CCC-plus” with a negative outlook. “People don’t go to Nordstrom because they’ve got a fabulous loyalty program. They go to Nordstrom because they’ve got the merchandise they want to get.”

Kuntz added, “We see quarter after quarter, year after year, just an erosion of Sears’ profitability and revenues. You could have the best loyalty program in the world, but if you don’t have the right blocking and tackling, the basics down, people aren’t going to shop your stores.”

Like many other analysts, Kuntz noted that Sears has not invested as much in its store base as its competitors.

“Performance will continue to be challenged,” he said. “Liquidity will continue to be an issue. But that being said, the company has a lot of assets, they have a lot of real estate and our view is that they will continue to divest those assets to raise funds for the shortfalls in their cash flows.”

Sears Holdings is expected to have big holes to fill in its finances.

Monica Aggarwal, credit analyst at Fitch Ratings, said Sears put about $2.7 billion worth of liquidity into its business last year by selling real estate, cutting inventory and taking out a loan.

She said the company will likely need another $2.5 billion to $3 billion this year with losses before interest, taxes, depreciation and amortization of $800 million to $1 billion. (Most recently, the company raised $500 million by spinning off the profitable Lands’ End business to shareholders in April.)

Aggarwal expects both of the company’s nameplates — Sears and Kmart — to continue to lose market share.

“They’ve had inconsistent merchandising execution,” she said. “Over the longer period, there’s been a lack of clarity of what their longer-term strategy is.”

The Shop Your Way program “doesn’t seem to be enough to offset the decline in foot traffic and [comparable-store sales] in their whole retail operations,” she said. “You’re trying to offset midsingle-digit comp declines in a $30 billion business and I don’t know if the Shop Your Way initiative is anywhere close to being able to offset that.”

The apparel business is still seen by some as having unrealized potential, even as Lampert said Sears had too much space dedicated to apparel.

“We need to be more effective with all our constituents or more effective with one or two,” he said. “We are evaluating who our core customers are going to be. We can’t be all things to all people, but we want to serve the entire family.”

John Henderson, the director of Matter Strategic Advisors who counted Sears as a large customer when he was president of Sag Harbor, said the chain has “a huge opportunity.

“Junior sportswear, the young business, the special size business I think are the low-hanging fruit,” Henderson said. “They’re not a store for basics, their clientele likes fashion. If they have to become nimble by becoming smaller, that would be better for them.”

The company also has a singular positioning it can use to its advantage.

“They have the only different format in the mall,” Henderson said. “You can buy a wrench and you can buy a blouse. It’s just a matter of them focusing and maximizing that…formula.”