Coverage: Future of Sears looks bleak

The future of Sears, once America’s largest retailer, is now in doubt after a regulatory filing expressed concern about its parent company’s ability to continue to operate.

Laurel Wamsley of NPR had the news:

“Our historical operating results indicate substantial doubt exists related to the Company’s ability to continue as a going concern,” the company reported. The company says that it is taking steps to improve its financial position. However, “we cannot predict, with certainty, the outcome of our actions to generate liquidity, including the availability of additional debt financing, or whether such actions would generate the expected liquidity as currently planned,” it said.

Sears Holdings’ CEO, Eddie Lampert, is a hedge fund manager who is also the company’s biggest investor. He has been attempting to orchestrate a turnaround for the brand, which struggles to survive in a retail environment that has become increasingly tricky for physical stores.

Sales at locations of Sears and Kmart that have been open at least a year dropped 10.3 percent in the fourth quarter of 2016, the Associated Press reports.

Earlier this month, Sears sold off its Craftsman brand of tools to Stanley Black & Decker. The company plans to use the profits from that sale to shore up its pension plan, which Sears acknowledges ties up a significant portion of the company’s cash on an annual basis.

Jennifer Saba and Richard Beales of Reuters Breakingviews looked at Lampert’s strategy:

If its operating environment continues to deteriorate, and there are few signs of improvement, it may have trouble borrowing more money. The liabilities on its balance sheet top $13 billion, including more than $4 billion of debt or debt-like obligations and nearly $2 billion more earmarked for pensions.

As well as owning 48 percent of Sears, Mr. Lampert and his hedge fund, ESL Investments, have provided a drip feed of debt funding, keeping the cash-burning business afloat. That means that while Mr. Lampert’s equity holdings — which date back more than a decade — could end up worthless, he has collected interest on the debt and he will be near the front of the line of creditors if the company goes under.

Mr. Lampert, meanwhile, has deconstructed the company, spinning off the Lands’ End clothing business and a portfolio of property, among other things. Mr. Lampert and ESL own 59 percent of Lands’ End, a $630 million publicly traded company, and slugs of the $1.3 billion real estate vehicle Seritage Growth Properties, and related entities. Another investment firm, Bruce Berkowitz’s Fairholme Capital Management, also holds hefty stakes.

That means there are paths by which Mr. Lampert can recoup some of what he has sunk into Sears. Barring a miracle, the retailer’s own stock may only go one way, but its boss’s financial bets are at least partially hedged.

Nathan Bomey of USA Today wrote about how Lampert has retained assets:

Lampert has retained assets even as Sears has shriveled:

•Lands’ End: Sears spun off retailer Lands’ End in 2014, but Lampert’s hedge fund owns 59% of the company. That stake was worth nearly $360 million as of Wednesday morning.

•Real estate: Sears sold 235 store properties and its interest in another 31 properties to a newly formed real estate investment trust (REIT) called Seritage Growth Properties for $2.7 billion in 2015. The deal gave Seritage control of some of Sears’ best properties in a sale-leaseback transaction. Lampert’s ESL owns 43.5% of the limited partnership units of Seritage and 7.9% of the REIT’s voting power.

The move was similar to transactions favored by investors in legacy retailers whose real estate is considered more valuable than their actual business.

The problem is that “then you end up signing leases” and saddling the company with lease liabilities, said Neil Stern, senior partner at retail consulting firm McMillanDoolittle.

Sears agreed to pay Seritage $134 million in annual base rent for the first year, with 2% annually increases beginning in the second year.