- Tom Silva
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Is Sears Really In Trouble?
Sears is trading at its lowest level levels since John Kerry won the Iowa Caucus and New Hampshire Primary in 2004 — and that’s not good news for one of America’s oldest retailers. The retailer, which owns Kmart as well as the Kenmore, Craftsman and Lands’ End brands, announced after Christmas that it would close between 100 and 120 Seas and K Mart stores. Unfortunately, the news just appears to be worsening.
Sears shares declined after CIT Group halted lending to Sears suppliers — without comment — out of fear those vendors will not get paid. The news seemed to confirm it was true without actually saying so. A Sears’ spokesperson said the firm disagreed with CIT’s actions and that CIT payables affected less than five percent of Sears’ inventories.
“Sears Holdings has more than adequate liquidity and ample resources at our disposal which give us significant financial flexibility,” the spokesperson said, noting that it is “important to separate disappointing operating performance with liquidity.” The Sears spokesperson said that the company closed out December with $4.2 billion in liquidity.
Paul Swinand, an analyst with Morningstar in Chicago, said CIT may not be the start of a trend. He noted that the company now run by former Merrill Lynch head John Thain may be acting overly conservative because it went bankrupt in 2009. It can be forgiven for being more risk averse than other lenders. Swinand did note that Sears has to turn its fortunes around or suppliers could become reluctant to continue selling goods through Sears and Kmart stores. Sears is expected to report massive losses for the fiscal year and analysts are forecasting a decline in sales. Vendors could run out of patience. “When people talk about a retail death spiral, it starts when vendors start tightening shipments because you could lose the ability to get the best merchandise,” he said. “The worry is that if Sears keeps piling up losses, you have to wonder what companies like Electrolux or Whirlpool might do.”
One risk when a factoring company pulls credit to suppliers is that others may do the same thing. Some factors already have become reluctant to take on shipments to Sears, while others are demanding a “substantial” premium, Bobby Cohen, CEO of Lochem Capital, said, “There’s so much low-hanging fruit out there that they say to themselves, ‘I don’t need to have a dog in this fight,’” said Cohen, whose Roslyn, NY-based company serves as a broker between buyers and suppliers. The upheaval likely will be temporary, he said.
Sears has adequate liquidity that it will pull through the current situation, said Matthew McGinley, managing director at International Strategy & Investment Group in New York. “Even with Sears’ deteriorating financial condition, it is pretty unlikely that a vendor shouldn’t ship over the near term,” he said.
“We disagree with their action” and “point out that other factors are approving shipments to Sears,” Chris Brathwaite, a Sears spokesman, said. “It’s important to note that Sears Holdings has more than adequate liquidity and ample resources at our disposal.”
Despite Brathwaite’s optimism, losing CIT’s financing could ultimately set off a chain reaction among other backers, where they also stop backing Sears. Even though Sears has been making its payments on time, CIT has not been given some financial projections it requested, said Jack Hendler, president of Net Worth Solutions, a merger and acquisition advisory firm. Other factors — those who provide loans or lines of credit to suppliers to tide them over until retailers make payments — are still approving orders, he said, but are also waiting for similar information and have been wary. “CIT decided not to wait and get their attention,” Hendler said.
According to analysts, Sears will survive in the short term. Just the same, credit actions usually lead to more credit actions. Try maxing out a credit card and see what happens to your credit.