By Brian Sozzi
Kudos to Sears Holdings Corp. (SHLD) for finally admitting what everyone already knew: it’s almost dead.
As TheStreet broke the news on Twitter Tuesday evening, Sears indicated in its newly filed annual report that “substantial doubt exists related to the company’s ability to continue as a going concern.” For those clickbait-loving headline writers out there with no financial services training: what Sears essentially said is that yes, it’s unsure if it could stay in business. Well, duh.
Sears’ cash position has melted from a high point of $1.7 billion for the 2009 calendar year to a mere $286 million to close out 2016. Revenue hasn’t grown since the credit boom lifted all ships in retail in 2006. The company hasn’t generated cash flow from its operations since 2006. “With negative news like this, it’s never good for confidence on the company,” Moody’s VP Christina Boni told TheStreet. Earlier this year, Moody’s downgraded its credit rating on Sears to Caa2 from Caa1. The downgrade reflected the accelerating negative sales performance of Sears’ business and risk of possible default.
There are a probably zillion other horrible sounding stats floating around in the Bloomberg terminal, but they all point to the same conclusion that the company is a dead man walking. The seriousness of Sears’ disclosure must not be downplayed. For if Sears raises more cash from high yield debt issuance (always a favorite move from retailers on the verge of dying), the market will still go back to the statement and reason Sears is still doomed. If Sears sellsmore assets such as land or the Kenmore brand, the market still won’t believe it can continue as a going concern.
In effect, Sears has admitted that its current asset base is worth less than its ridiculous comments made in recent years (you should see the zombie properties out there for sale in rural America). Moreover, it has admitted that no matter what it does, such as deliver on the $1 billion in recent cost cuts it has promised, the business will still likely die.
Believe it nor not, there are remaining delusional Sears fans out there that believe the company is sitting on amazing land holdings that are worth billions of dollars. Take this email I received on Tuesday from an analyst that works for a firm that holds Sears shares.
“I often read your articles with amusement because I think they are so far off. But after reading the last one on Target, had to at least respond. You are totally off and Target (TGT) setting up shop there is AWESOME news for the box at Penn Plaza and value, if only you looked at this on asset value and stopped looking at this from the traditional lens of a failed retailer which it surely is.”
I hear you, my man. Listen, I have covered the death of Sears going on 10 years now. The asset values have never lived up to their hype. Meanwhile, the operations have performed worse than anyone’s already low expectations. Bottom line: On March 21, 2017 the once-iconic Sears declared itself dead.
“The blood bath continues,” Corali Lopez-Castro, partner at KozyakTropin& Throckmorton’s bankruptcy and commercial litigation practice group, told TheStreet.
“Is this new? No,” Lopez-Castro said. “The fact that they put it into writing is scary.”
When asked when she expects we will see a bankruptcy filing from Sears, she said she’s not sure because it will avoid it at all costs.
“Depends, I would want to know what their vendors are insisting upon,” Lopez-Castro said. “When you go into bankruptcy, you lose control. And no company wants to lose control.”
For the record, Lopez-Castro doesn’t believe Sears can get out of its current dire situation without filing for insolvency. If, or when, the retailer does, she said it will likely tap Kirkland & Ellis for debtor counsel.
Shares of Sears finished the session lower by 12.3% to $7.98.
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