Feb 27, 2015
With cash tight,
Sears REIT deal takes on new importance
Feb 27, 2015
Weak sales and tight cash levels at Sears Holdings Corp have added urgency to Chief Executive Eddie Lampert's plan to generate cash by spinning off stores into a trust.
The retailer announced on Thursday that it would go ahead with the plan to sell 200 to 300 stores to a real estate investment trust in May or June, raising at least $2 billion. It was the first time it put a figure or timetable on the move.
Some investors were disappointed that Sears didn't announce a definitive launch for the REIT, floated as an idea by the company in November. They were also spooked by weak sales during the holiday season and its cash balance, which halved from a year earlier to $250 million, a level one analyst called "grossly inadequate" for a retailer of its size.
The stock slid 4.8 percent to $36.05.
"Everyone knew they were sort of running out and that's why they are going to do the REIT. They need the money and that's really the only other place they can raise a significant amount," said Chad Brand, head of Seattle-based Peridot Capital Management, which holds Sears bonds.
Sears says it has ample financial resources to meet its obligations, with $1.2 billion in available liquidity including a revolving credit line. Outside of the REIT, it has indicated it could sell other assets, such as its auto centers business, and is cutting subleasing deals with retailers to raise cash.
Still, a lot is riding on the REIT. While most analysts say it should be able to pull it off, there are some complicating factors such as setting fair purchase and leasing terms and working around U.S. tax rules designed to prevent small groups from having voting control of a REIT. This is an issue because Sears is closely held by a few large investors, including Lampert and his hedge fund.
Sears has yet to disclose a cash flow statement, expected when it files its annual report. Brand estimates that it burned through about $1.2 billion in the fiscal year ended Jan. 31, including operating losses, pension costs, capex and interest.
At that rate, $2 billion from the REIT could tide Sears over for two years while it shrinks its store network further and pursues its "asset-light" strategy centered on growing its online business and a loyalty program called ShopYourWay.
There are other options besides the REIT. For an immediate infusion of cash it could draw down on the revolver. It could also unload assets or sell stock or loans in deals anchored by Lampert, as it did multiple times last year.
'BURNING THE FURNITURE'
But conditions are tight. On Thursday it announced that it would repay half of one such financing, a $400 million loan to Lampert's hedge fund, and extend the remaining $200 million until June 1 or until it can close on the REIT deal.
And while its earnings showed some improvement in the latest quarter, with a measure of profit excluding pension and other costs turning positive for the first time in two years, the outlook remains uncertain. On a net basis it booked its eleventh straight quarterly loss and sales fell sharply at Sears stores.
Evan Mann, a credit analyst at Gimme Credit, said the company would need to sell other assets if it can't launch the REIT as planned this year.
"A billion dollars probably isn't going to be enough for the year," said Mann, referring to the available liquidity. "My assumption is they are going to keep burning the furniture to keep the store open." (Reporting by Nathan Layne; Editing by Cynthia Osterman)
$1 = £0.65
© Thomson Reuters 2023 All rights reserved.