Sears Holdings Falls on Financing Cutoff Speculation
On Tuesday, Sears Holding Corporation (NYSE: SHLD) traded lower by nearly 5%.
The selloff may have been prompted by a Reuters report. Reuters stated that CIT Group (NYSE: CIT) might stop lending to Sears' suppliers.
Although unconfirmed, if true, a cessation of lending to Sears suppliers may signal a deathblow for the company. If CIT Group makes that move, the financier may believe that Sears' suppliers will be unable to make good on their loans.
A similar event happened with US financials before the crisis of 2008, when Bear Stearns was thought to be low on liquidity. The bank had difficulty getting access to credit despite sufficient collateral to secure new debts. Eventually, fears about the bank's solvency led to its collapse.
CIT Group's decision may have been prompted by the company's drop in revenues due to lower sales at its Kmart and Sears stores. Last November, the company reported a quarterly net loss attributable to shareholders of $421 million with debts of $4.6 billion and cash on hand of just $632 million. Over a month after reporting the loss, the company announced that it would be closing 120 Sears and Kmart stores nationwide.
A contraction of business operations will just make it harder for Sears to earn its way out of its debts, although some creditors may feel that the company is still worth lending to because of its chairman: Edward Lampert. Last week, the stock climbed slightly on rumors that the chairman was considering taking the company private after he bought more shares in the company, according to documents filed on January 11th. In total, Lampert bought 4.46 million shares, worth around $159 million, in SHLD from his hedge fund, ESL Investments. He also bought another $12 million worth in shares from the open market.
However, creditors cannot lend on rumors alone, and Lampert's decision may have been fueled as much by hubris as by fiscal optimism. Lampert, who merged Kmart and Sears into Sears Holdings in 2005, has faced growing competition from Kohl's (NYSE: KSS), Target (NYSE: TGT), Costco (NASDAQ: COST), and Wal-Mart (NYSE: WMT), as well as specialty retailers such as Best Buy (NYSE: BBY) and Lowe's (NYSE: LOW). While Sears has been steadily closing stores for a while, the announcement a month ago that it would close 120 stores was the biggest downsizing yet. The stock hit its 52-week low a few days after, which was even lower than the stock's lowest point in the market crash of 2008.
Despite the closures, the company will not be able to contain costs to help it return to profitability--especially as it cannot close losing or low-yielding stores forever, and may be forced to close stores that turn a profit in its attempt to find cash. This is a real concern for a company that has cash worth just 13.7% of the company's total debt load. With such a small amount of cash on hand, the company is incredibly dependent on credit, which is why CIT Group's decision to cut off credit to the company's suppliers.
A loss in credit shouldn't surprise anyone. The company has seen sales decline for 18 straight quarters and has posted losses for the past three quarters. A recent report by Imperial Capital, which concluded that the company's assets are not enough to support the company's share price when it was trading in the $44 range.
Looking forward, the company may see a further fall in its share price as investors worry about a liquidity crisis, which can quickly bankrupt a cash-poor company. If CIT Group does not give the company credit, other creditors may soon follow, and the company may find itself quickly unable to pay its debts.
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