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USA Today: Sears and Kmart might not have enough money to stock their shelves featuring Robert Rostan

http://www.usatoday.com/story/money/business/2017/03/21/sears-says-substantial-doubt-can-stay-business/99479726/

By Charisse Jones

Sears, an iconic department store chain whose name is as steeped in Americana as apple pie and Levi’s jeans warned that it might be going the way of the blue light special, uncertain that it can survive more than another year in the midst of the upheaval that has disrupted the retail industry.

But despite the death watch that has taken root around a brand that was once a lifeline for the American shopper, Sears Holdings which also operates Kmart stores, still has cash to invest, assets to sell, and a plan to move forward that some experts say signals that its demise is not imminent.

Investors were shocked on Tuesday when the company that operates Sears said in a filing with the Securities and Exchange Commission that it had “substantial doubt” about its ability to stay in business unless it can borrow more and tap cash from assets. Its stock plunged 12.3% to $7.98 by the time markets closed on Wednesday.

“Our historical operating results indicate substantial doubt exists related to the company’s ability to continue as a going concern,” Sears Holdings said in a filing with the Securities and Exchange Commission.

But analysts say that Sears may have more time to stage a turnaround than other companies who made a similar declaration in the past.

A three-year-old rule change requires businesses to be more transparent about potential risks they face within a year of their reported financial statements. Sears, which has closed stores and borrowed millions from its own CEO, acknowledged in the federal filing the headwinds it faces as shoppers bypass traditional retailers for online sellers. Yet, in that same filing, independent auditor, Deloitte, gave an opinion that expressed confidence in Sears’ viability.

“Those are the people who are really intimate with Sears and its finances, and if they’re not saying there is a problem, I’m going to buy it,’’ says Robert Rostan, CFO for Training The Street, a firm that provides financial training to banks and financial institutions. “Yes, they are one inch closer to bankruptcy,  but I don’t think (Sears’ situation has) changed materially.’’

Sears has been roiled by many of the same challenges that are confronting the broader retail industry, with traditional stores struggling to compete with online sellers. But Sears has also suffered in the wake of its management’s decisions, including the sale of its more than $30 billion credit portfolio to Citibank in 2003, and a merger with Kmart, another struggling chain, a year later.

That tie-up was shepherded by Eddie Lampert, the hedge fund manager who is Sears’ Holdings CEO. He has been accused of having conflicting interests with those of other Sears investors, as he cordons off assets that could cushion his personal financial losses if the company ultimately goes bankrupt.

Sears has also failed to keep up with changing shopper tastes and habits, losing customers to specialized stores and rivals such as Walmart even before the competition from e-commerce sites took hold. The company hasn’t turned a profit since 2010 and in 2016 racked up more than $2.2 billion in losses.

Sears is taking steps to steer itself back to profitability. In January, it said it planned to close 150 stores. And a month later, the retailer initiated a restructuring program aimed at cutting $1 billion in costs annually and reducing debt by $1.5 billion helped by proceeds from the sale of one of its most valuable brands, Craftsman tools to Stanley Black & Decker.

“It is very important to reiterate that Sears Holdings remains focused on executing our transformation plan and will continue to take actions to help ensure our competitiveness and ability to continue to meet our financial obligations,” the company said in a blog post Wednesday. It did not return requests from USA TODAY seeking further comment.

Still, Sears said in its Tuesday filing that it can’t be sure it will be able to raise the cash to keep going. If it continues to experience operating losses and is unable to generate additional cash, it may not be able to access additional funds under its credit agreement or be able to afford to pay for inventory to stock its stores or pay for other services it needs to operate.

“We acknowledge that we continue to face a challenging competitive environment,” Sears said in the filing, noting that after  its 2016 loss, it had to finance its cash needs for operating expenses from “investing and financing activities.”

Sears, which at the end of its fiscal year had about 140,000 employees, said that it expects to continue to try to generate cash from real estate sales and borrowing. The company said it is also exploring ways to “unlock value” through its Home Services and Sears Auto Center, Kenmore appliances and DieHard batteries and parts business by partnering with other companies, or other means. It says it hopes those actions are enough to ward off the “substantial doubt” that it warned about in the filing.

Dan Nicolich, an analyst at Reorg Covenants, a service that follows the leveraged finance market, said that though Sears “is issuing a warning, it has outlined steps it is taking to stay solvent which may mitigate concerns and help appease auditors.”

But others believe Sears’ demise is only a year or two away.

“The business has enough cash on hand and debt financing to see it through this year,” says Neil Saunders, managing director of retail analysis firm Global Data. But with Sears’ liabilities currently exceeding its assets by nearly $4 billion. “it will have trouble beyond that, and it will likely collapse in 18 months to a year. Time and money are both running out for the once iconic brand.”

Sears, steeped in nostalgia, would be missed by many shoppers.

Founded in 1886, Sears was built around its famous catalog that was so complete that entire houses could be ordered — delivered in pieces to be built on a site. For decades, Sears reigned supreme in middle America by offering the widest range of products — from jewelry to electric saws, dresses to tires.

“I’ve been coming to Sears as long as I’ve known,” says Ron Marcinko, a furniture builder in Antioch, Tenn. who has been shopping at Sears for nearly half a century. He believes other stores’ tools can’t compare to the quality of Sears’ Craftsman brand. “Now Sears is slowly shutting down and I have to buy off-brand tools. It’s a shame to see the good stores close.”

John Krug, 85, of Springettsbury Township, Pa. worked for Sears for 42 years. He retired in 1989.

It was a store where the customer was always right, says the retired executive. And Krug recalls how shoppers would come to the Sears store that once sat in the former York County Shopping Center to buy hot dogs and paper cups of root beer at the lunch counter. “At lunchtime, the line was 10 miles long,” Krug said.

Vic Tuseck, a 64-year-old plumber in Los Angeles who was visiting a Sears in the suburb of Torrance, reminisced about how the department store chain had been a presence since he was a child. “I’d hate to see it disappear,” he said. “I’m from Ohio. They were always there. They had the best prices on TVs.”

But other shoppers voiced the indifference that has made Sears more of an afterthought than a destination for many consumers.

“I hardly ever come to Sears because I shop more online or at Walmart where I can buy my groceries at the same time,” said Jan Minter, who was checking out mattresses at Sears in her hometown of Goodlettsville, Tenn, near Nashville. “I always try to find the cheapest price.”