Sears Will Drown In Debt As Savvy Consumers Shop Elsewhere

After losing $975 million in the first half of this year, Sears needs financial aid.  In order to sustain the company, Eddie Lampert, the Chairman, CEO and largest shareholder of Sears Holding, will pump $200 million into the corporate coffers immediately and an additional $200 million by the end of October 2014. The secured loan provided by his hedge fund is backed by 25 of Sears’ unencumbered properties. The transaction appears to be self-serving since, I would assume, some of the best properties are backing the loan and the ability to control any call on the loan is in Mr. Lampert’s hands.  In reaction to this news, the stock took a swan dive and one analyst lowered his estimate from $25 to $5 a share.

October is always a treacherous month for retailers. Big orders written in late spring and early summer, in anticipation of a good fall and Christmas season, are about to ship from the manufacturers. Letters of credit have to be secured. Suppliers want to be paid in anticipation of the holiday season and they are starting to question if Sears’ cash flow is adequate. Moreover, if there is any hope for generating a strong cash flow, a retailer like Sears has to have fresh, wanted merchandise. Skittish suppliers can sink a shaky retailer if they decide the risk of not being paid is too high.

It would be a sad day if Sears fails. Many expect that the company could close its doors by the end of 2016. There are very few new initiatives that excite customers. General merchandise manager Ron Boire has not stressed its strengths or bolstered confidence that there will be any substantial progress. Sears recently took an interesting step, opening a small, one-floor store in the King of Prussia shopping center.  The store is a test of a downsized unit in a company that always had multiple floors in their suburban stores. But it feels like too little, too late in the context of a 1,980-store portfolio in the United States and 449 units in Canada. It is worth pointing out that this move by Sears parallels the opening of J.C. Penney’s new Brooklyn store, which is also miniscule compared to the cavernous units J.C. Penney used to open.

Fitch downgraded Sears Holding credit rating last week from CCC to CC, since it expects the company’s EBITDA (earnings before interest, taxes, depreciation and amortization) to be a negative $1 billion in 2014, topping a negative $337 million in fiscal 2013. Fitch also expects Sears’ cash burn to be about $2 billion. The rating agency does not expect any catalysts to quell the rate of decline.

Mr. Lampert, who does not make himself available to discuss his company, has been unsuccessful in taking steps to turn the battleship around.  Many short-lived strategies have been tried; all have failed, including efforts to attract more female customers. Quality men’s shoes like Weinberger and Nike were eliminated from the assortment, and Lands’ End merchandise was treated like sauerkraut in two stores I recently visited.  In a particularly damaging move, Mr. Lampert saw it necessary to give up the exclusivity of its valuable mainstay brands: Craftsman (tools), Kenmore (appliances) and Die-Hard (batteries).  These once important, exclusive, brands are now sold in other retailers’ stores. Beyond the merchandise mistakes, Sears’ stores are crying for needed upkeep: the traditional seven-year cycle of maintenance has essentially been ignored in the vast majority of Sears stores.

As if these failed strategies and flawed philosophies were not enough, I think Sears’ attempt to create a robust loyalty program called “Shop Your Way” has been ineffective. To attract today’s savvy consumer, Sears stores have to be attractive and they must have innovative technology.  Innovation is necessary to create excitement and shape the store’s image.  Some innovative moves might include a Microsoft MSFT +1.8% center, or finding a way to deliver merchandise faster, or making repairs on Sears (and Kmart) products quicker, or emphasizing that a real transformation is on the way. Even though this is what needs to happen, there are no signs Sears management has any interest in innovation.

Of course Sears could put its real estate up for sale. After the 25 stores used to back the recent loan, Sears still has about 342 full-line Sears stores, 183 Kmart discount stores and 12 Kmart supercenters that are unencumbered. Retailers like Forever 21 and Zara have taken some locations. I am sure that H&M and Primark would also look at some properties as they realize that there are few good locations available in general. Kmart stores can be split up into supermarket and specialty stores. However, every time Sears sells real estate properties or other assets such as Canada, Automotive, and Lands’ End, it reduces its viable base and ability to generate needed cash flow.

I think the company’s crimes include: inaccessible management; no vision for the future that I and other observers understand; and a focus on divesting valuable properties from its real estate portfolio that were often the strongest pillars of the company. As Sears continues to lose money and burn though cash, with no innovation, and no vision, it is slowly sinking into oblivion.