Struggling Sears borrows $300M from hedge fund as losses mount

August 25, 2016

Eddie Lampert, the hedge fund manager who runs Sears Holdings Corp., is once again lining up financing for a retailer that has lost more than $9 billion in recent years.

Lampert’s ESL Investments Inc. offered to lend Sears $300 million this month, and the retailer accepted, the Hoffman Estates, Illinois-based company said in a written statement Thursday. The loan is secured by a junior lien against Sears’s inventory, receivables and other working capital.

The announcement follows another quarter of declining sales and red ink, renewing concerns about the once-mighty company’s future. More than a decade after he merged Sears and the formerly bankrupt Kmart, the 54-year-old Lampert is still trying to find a formula that will lift both chains out their protracted slump.

Sears operates more than 60 stores in Indiana carrying the Sears name, including 14 department stores, more than 25 Sears Hometown Stores, five Sears Hardware stores and more than a dozen Sears Auto Centers. There are two Sears department stores in the Indianapolis area (Castleton and Greenwood), plus four Hometown stores, three Hardware stores, two Auto Centers and one Appliance Outlet store.

The retailer also has 20 Indiana Kmart stores, including two in Indianapolis, one in Brownsburg and one in Anderson.   

Sears lost $395 million, or $3.70 a share, in the period ended July 30, compared with profit of $208 million, or $1.84 a share, a year earlier. The year-ago results were bolstered by the company’s $2.7 billion spinoff of properties into a real estate investment trust. Same-store sales, a closely watched measure, dropped 5.2 percent.

Results were “only slightly better than in the first quarter, but slightly better doesn’t cut it,” said Matt McGinley, an analyst at Evercore ISI.

Sears shares fell 4.6 percent, to $14.03 each, Thursday morning. The shares had declined 29 percent this year through Wednesday’s close, compared with an 8.3 percent gain for the Russell 2000 Consumer Discretionary Index.

Lampert, Sears' CEO and biggest shareholder, has been selling assets and closing stores to stem the company’s continued cash burn. Sears also said in May that it would explore options for its Kenmore appliance, Craftsman tools and DieHard batteries brands. That would extend a string of transactions, including the spinoff of the Lands’ End clothing unit and the bulk of its stake in Sears Canada.

“Right now, they’re in a bit of a Catch-22 situation in that they need to reduce the inventory to generate cash, but the less inventory they have, the less likely they are to make a sale, which further reduces the cash,”  McGinley said.

Under ESL’s proposal, Sears can seek other investors to lend it as much as another $200 million on the same terms, Sears said. The financing is expected to close in seven to 10 business days.

The terms were approved by the related-party transactions subcommittee of the board, with advice from Centerview Partners and Weil Gotshal & Manges, the subcommittee’s financial and legal advisers, according to the company.

Lampert has pledged to build a leaner retailer focused on selling through multiple channels. He’s invested heavily in the company’s digital and loyalty programs in a bid to cope with slowing mall traffic. But same-store sales, a common measure of performance, haven’t stabilized, declining in every quarter but one since Lampert merged Kmart with Sears in 2005.

The company has closed hundreds of stores and sublet some others to retailers such as Dick’s Sporting Goods Inc. The retailer closed stores in Bloomington and New Albany earlier this year. Several Indianapolis stores, including the Sears at Washington Square Mall and three Kmarts, were closed in 2014.

“The stores are incredibly large for what this has become, primarily because the sales per foot are so atrociously weak,” McGinley said.

Sears has received interest from “a variety of potential partners” for Kenmore, Craftsman and DieHard brands as well as the Sears Home Services business, the company said. “We intend to aggressively evaluate all of the potential alternatives available to these businesses,” Sears said.


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