Lampert's lifeline renews debate over Sears fate

It's Eddie to the rescue once again at Hoffman Estate-based Sears.

Hedge fund manager Edward Lampert has been all things to the iconic American company: the architect of its merger with Kmart, its chief executive officer and marketing guru, and its biggest shareholder. With his latest $300 million loan to the perennially money-losing retailer, he's also helping it survive.

The capital infusion announced Thursday will help provide funds for the all-important holiday season and reassure lenders and vendors nervous about more than $9 billion in losses since 2012. Sears Holdings Corp. has raised cash by selling and spinning off assets such as stores and its Lands' End clothing business. But those funds are merely offsetting the more than $6 billion the company's operations have consumed since 2012, according to Matt McGinley at Evercore ISI.

"This all comes down to cash burn," said McGinley, one of the only Wall Street analysts still covering the company.

Bloomberg Intelligence analyst Noel Hebert also points to signs indicating that suppliers are demanding faster payments, putting more strain on the company's cash.

"Just navigating holiday 2016 would be problematic" without Lampert's help, he said.

Sears representatives didn't respond to an e-mail seeking detailed comment on the company's plans.

Merger Dreams

Things were supposed to be different when Lampert merged Sears Roebuck & Co. and Kmart Holdings Corp. in 2005. Investors bet on the company's underlying real estate value, sending the shares above $100 at one point - they trade at about $14 now - and Lampert touted the potential of combining and streamlining two well-known brands. But sales never picked up, declining in every quarter but one since the merger, and the company tried various strategies and cycled through four CEOs until Lampert took the helm in 2013.

The big property windfall did come in 2015, when Sears spun off 235 stores into a real estate investment trust, a transaction that raised $2.7 billion. The merchant has also steadily reduced its store count through other sales and closures. It operated 1,592 units as of July 30, compared with almost 3,500 at the time of the merger.

Sears also says it's cut debt and expenses and still has ample liquidity and assets, including $5.9 billion in inventory and short-term financing capacity. In May, it announced that it would weigh options for its DieHard battery, Craftsman tool and Kenmore appliance brands.

Few Options

But choices are narrowing. And while reducing inventory is a good move to conserve cash, stores look barren and fewer goods also mean fewer potential sales, McGinley said. He estimates that stores hold only about 61 percent of the average inventory found in a big-box retailer, saying the company would have to spend as much as $4 billion to return to normal stock levels.

The chains' productivity already trails that of competitors, at about $145 a square foot for Sears and $114 for Kmart, compared with $420 at Wal-Mart Stores Inc., McGinley said.

Sears said Thursday that it ended the quarter with $276 million in cash - $176 million of that from store and other sales. While the second quarter is usually when cash balances ebb for retailers, that compares with $1.8 billion last year, when the company was still flush with proceeds from the REIT spinoff.

Lampert, 54, and his hedge fund owned about half of Sears's shares as of July 29, according to data compiled by Bloomberg. He's loaned about $1.4 billion to the company in the past couple of years, Hebert estimates. That's in addition to commercial paper, or short-term borrowing, that he's funded, including $100 million at the end of the second quarter.

Lampert held about $673 million of the retailer's debt, Hebert said, compared with $417 million held by its second-largest shareholder, Fairholme Capital Management.

He now has few options other than to steadily shrink the company, McGinley said. While the retailer is burning billions in cash now, liquidating the company would trigger costs for lease-termination fees, pensions and other obligations, he said. That's in addition to Lampert's equity losses.

"It would cost you billions to shut this thing down," he said.