sears

Sears Holdings Corp. continues to aggressively shrink its store base as affiliates of ESL Investments come through with another lifeline for the company.

The retailer is said to be closing around another 30 sites with store liquidation sales slated to begin on Jan. 6 and be completed by mid-April. Most of those sites operate under the Kmart nameplate, with the balance under the Sears nameplate.

Howard Riefs, Sears’ director of corporate communications, in an e-mail to WWD, said, “We have been strategically and aggressively evaluating our store space and productivity, and have accelerated the closing of unprofitable stores, as we’ve previously announced.” He declined to elaborate further or confirm the total number of closures.

The latest round of closures are on top of the 17 Kmart stores the company said in September that it would close. September’s group of stores are part of the 235 Sears and Kmart store locations that Sears Holdings sold to Seritage Growth Properties in 2015 when it formed the real estate investment trust. Sears Holdings did a sale-leaseback arrangement for those sites. A few days later it was learned that another 60-plus Kmart sites outside of those held by Seritage were slated for closure in mid-December.

For the round of closures that will begin next month, employees at the stores affected were said to have been notified by Riefs via an e-mail on Tuesday.

Like most retailers, Sears’ fiscal year closes at the end of January. At this point, it will be closing more than 200 stores in the current fiscal year, leaving Sears Holdings with less than 1,500 stores when the new fiscal year begins in February.

Sears’ chairman Edward S. Lampert bailed Kmart Holdings Corp. out of bankruptcy in 2003 — Lampert’s hedge fund ESL Investments controlled a significant amount of Kmart’s debt — and in 2005 merged Kmart with Sears, Roebuck and Co. in an $11 billion deal to form Sears Holdings. At that point in time, the combined entity had projected annual revenues of $55 billion and more than 3,500 stores in operation.

Given that many of the company’s store closures have been Kmart sites, rumblings in the marketplace surfaced in late September that the Kmart nameplate might be on the way out. Sears Holdings has denied that and continues to do so. On Thursday, when asked about the future for the Kmart nameplate, Riefs referred to Lampert’s Oct. 3 blog regarding the company’s commitment to Kmart. “It still holds true,” Riefs said in the e-mail.

In that blog, Lampert wrote: “Recent reports have suggested that Kmart will cease its operations. I can tell you that there are no plans and there have never been any plans to close the Kmart format. In fact, we’ve been working hard to make Kmart a more fun, engaging place to shop, powered by our integrated retail innovations and Shop Your Way [program].”

Lampert added that a “significant number” of Kmart stores in operation — at the time of the blog there were over 700 stores — are “profitable and have been profitable for years.” He further wrote that the company has been clear on its “intent on improving the performance of our unprofitable stores and, if we cannot, we will close them.” Lampert said the company is acting more aggressively and continues to evaluate its stores as leases expire, as well as when other opportunities present themselves that would “improve the economics of Sears Holdings.”

But while Lampert touts the company’s commitment to turn around operations at Sears, there’s a lot going against the company. The credit ratings agencies Fitch Ratings and Moody’s Investors Service each have Sears on their respective watch lists. Of concern is its debt leverage, as well as its cash burn rate. Fitch analyst Monica Aggarwal has estimated the 2016 cash burn rate at $1.6 billion to $1.8 billion. She also estimated that Sears had injected almost $10 billion in liquidity to fund ongoing operations between the years 2012 to 2015. The $10 billion includes $4.7 billion from real estate transactions.

In mid-December, rumblings surfaced that Jan. 15 might be a key, critical date for Sears since that’s when the bills come due for most retailers for the holiday season. And while there has been speculation that Sears didn’t have enough cash to pay those bills, many believed that Lampert would figure out a bailout to extend Sears’ retail life expectancy.

They weren’t disappointed as word surfaced Thursday morning that affiliates of ESL were providing another liquidity boost in the form of standby letters of credit in an initial amount of up to $200 million. The facility may be expanded by up to an additional $300 million at the request of the retailer and with the consent of the lenders.

The liquidity event wasn’t a surprise given that the Lampert’s ESL in August provided Sears with $300 million of additional debt financing secured by a junior lien against the company’s inventory, receivables and other working capital. It’s been the playbook that Lampert has been following for the last few years to keep Sears afloat while he tries to effect a turnaround. That playbook has included short-term loans from ESL, store closures where needed and the monetization of assets, whether it was the spinoff of Lands’ End or the sale of real estate to create Seritage.

Sears still owns about 250 unencumbered Kmart and Sears full-line mall stores, and it is still evaluating alternatives for its Kenmore, Craftsman and DieHard brands, as well as its Sears Home Services business.

According to some credit analysts, the new key, critical date for Sears could be late next summer or early fall. That’s when some believe that Sears might give up its ghost and file for bankruptcy since the two-year mark for the real estate transactions connected with Seritage will have past and can’t be undone as a “fraudulent conveyance.”

When posed with the question regarding the timeframe and concerns about a bankruptcy filing, Riefs said: “We won’t comment on rumor or speculation.”

So how bad is Sears’ financial picture as it heads into 2017?

Sears has a $500 million term loan maturing in July 2017 that’s secured by 21 properties. One credit analyst said a question exists over what can Sears do in the matter of a refinancing. Another credit analyst said the company can continue to close more stores, noting that “would help, but it is not enough to help its financial profile.” One commercial lender, a factor, said his firm had been “approving orders through the summer but now is almost all out of Sears.” Another individual on the credit side said he’s been telling clients for months not to ship to Sears and if they do, it would be at their own risk. This person said he’s called clients to tell them they “shouldn’t be in there and if they are to reduce their exposure.”

Sears ended its most recent quarter — its third quarter that ended Oct. 29 — with a net loss of $748 million, or $6.99 a diluted share on a net revenue decline of 12.5 percent to $5.03 billion. At the end of the three-month period, Sears said it had $258 million cash, while short-term borrowings were $618 million. Merchandise inventories were $5 billion, while merchandise payables were $1.6 billion. Sears said at the time that it used about $1 billion of its $1.97 billion revolving credit facility, and the amount available to borrow was $174 million. Total long-term debt was $3.7 billion.

Sears chief financial officer Jason M. Hollar said earlier this month when the company posted third-quarter results that the company has financing resources available, but then said it was under a credit facility through its 2nd Lien Debt capacity. Sears said the 2nd Lien Debt Capacity is $2 billion, of which it had $604 million in debt outstanding at the end of the third quarter.

Shares of Sears shot up 5 percent earlier in the day when it said it had the standby letters of credit facility, but then rose even further to close up 10 percent to $9 in Nasdaq trading.

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