By
with contributions from Sharon Edelson
 on March 22, 2017
A Sears store front inside a mall.

Shares of Sears Holdings Corp. on Wednesday dropped more than 16.5 percent in intraday trading after the company said in a regulatory filing there was “substantial doubt” about the retailer’s future, something that shouldn’t have been a surprise to anyone who has been tracking its years of losses and comparable-store sales declines.

Credit executives, analysts and others in the financial community for the past few years have questioned the viability of the Sears and Kmart nameplates, with some expecting a bankruptcy filing at some point as the end game. For many, the big question isn’t whether the company will file, but when. And with the annual report — Form 10-K — filing on Tuesday with the Securities and Exchange Commission, some investors think that day could come within the next year.

All that the filing did was indicate one risk factor among several that could impact the operations of the retailer. And the language used was required as a disclosure of risks under a FASB rule change. FASB issued a new “going concern” guidance in 2014 that makes disclosure more stringent, and requires the “substantial doubt” language to be used when there’s a chance that a company might not meet obligations that become due within one year of the filing of the financial statements. Further, the reason the language was used in the most recent filing is because the standard applies to all companies filing annual reports after Dec. 15, 2016.

One credit analyst said he expects to see more going concern warnings from companies in their annual filings, noting that many of these firms are already on watch lists.

Christina Boni, a vice president at Moody’s Investors Service and the lead credit analyst who has been tracking Sears, said, “The language used basically cites historical financials that reflect that there could be an ongoing concern risk.…There’s no new news that wasn’t already reflected in our rating of Sears.”

Boni also emphasized that the company’s independent auditors did not give a “qualified audit”opinion, which means “they did their analysis and did not see a going concern issue in the next 12 months.”

Monica Aggarwal, managing director at Fitch Ratings, said the company’s management when it posted fourth-quarter results earlier this month already spoke about improving operational performance and boosting liquidity through actions such as raising additional debt, closing unprofitable stores, and managing inventory and costs, “so it’s unlikely that strategy has changed in the past few weeks.”

Aggarwal added that given the significant cash burn in the business, “Fitch expects Sears will continue to find liquidity sources to fund operations. Fitch continues to believe Sears’ remaining unencumbered real estate assets will be a part of their liquidity generation story, although the full value is uncertain.”

The annual report disclosure also includes plans to mitigate risk, which Boni noted already had been previously announced.

Those plans were the subject of a company blog posted after the 10-K filing on Tuesday from Jason Hollar, Sears’ chief financial officer. Hollar emphasized that Sears remains “focused on executing our transformation plan and will continue to take actions to help ensure our competitiveness and ability to continue to meet our financial obligations.” He also said, “While historical performance drives the disclosure, our financial plans and forecast do not reflect the continuation of that performance.”

Hollar reiterated some of the financial maneuvers to mitigate certain risks, such as increasing liquidity through a secured loan facility and an amendment to an existing asset-based credit facility to give it access an additional $250 million; a restructuring program, and monetization of certain Sears store locations.

One credit analyst — who requested anonymity — isn’t impressed with the financial maneuvers, even though chairman and chief executive officer Edward Lampert has managed to extract more value from Sears than anyone had expected. This individual’s chief complaint is that the retailer has done nothing to fix the operating component of the store structure.

Shares of Sears closed down 12.3 percent to $7.98. Trading of Sears shares also dragged down the shares of some mall operators, including Seritage Growth Properties, the real estate investment trust Sears created in 2015. About 70 percent of Seritage’s revenues are from rental income under Sears and Kmart leases. Seritage was down 1.8 percent to $42.77, while General Growth Properties was down 2.4 percent to $22.67 and Simon Growth Properties slipped 2 percent to $165.51.

Pennsylvania Real Estate Investment Trust, a Philadelphia-based REIT, said it has been reducing the number of Sears and Kmart stores in its portfolio, down to nine stores from 27. Its shares were down 3.5 percent to $13.95. PREIT ceo Joseph Coradino said his firm has been “mitigating our anchor risk” and proactively replacing Sears stores.

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