Sears is teetering on the edge of bankruptcy and Kmart could be its first casualty

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  • Sears' sales are down 45% since early 2013, its debt load has spiked to over $4 billion, and the company is losing well over $1 billion annually.
  • To meet its obligations, Sears has been selling off valuable brands and properties.
  • Now its pool of assets is dwindling, increasing the risk of a bankruptcy, analysts say.
  • Kmart, in particular, is at risk of shutting down, as it loses market share fast.

Wall Street analysts have made the same prediction every year for nearly the last decade: Sears is imminently going bankrupt. But the retailer has managed to stay afloat with loans from its CEO, the sale of valuable real estate, and the slow dismantling of its exclusivity over some big American brands.

This year is no different. Sears' pool of assets is shrinking and its core business is showing no signs of improvement, making the possibility of a bankruptcy or restructuring seem more likely than a turnaround at this point, according to Christina Boni, vice president at Moody's Investors Service.

"Continuing to fund shortfalls is becoming more challenging, particularly as Sears continues to bleed its asset pool," Boni told Business Insider. "This increases and elevates the risk of a bankruptcy."

The company's latest effort to prove critics wrong comes from recent deals to sell its DieHard and Kenmore brands on Amazon.

Kmart is a different story. Analysts say the discount chain, also owned by Sears Holdings, is in danger of shutting down entirely. Kmart faces intense competition from successful discount retailers, not to mention Walmart and Amazon. As the business dwindles, Sears has been shutting down Kmart stores far more rapidly than its namesake stores, and laying off full-time workers at the stores that remain open .

Sears said it remains focused on improving its performance and enhancing its liquidity, and that it expects to reach positive adjusted earnings before interest, taxes, depreciation and amortization next year.

"Our Chairman and CEO Eddie Lampert stated at the May 10, 2017 Annual Shareholders' Meeting that 'We are fighting like hell' and doing everything in our power for Sears and Kmart to succeed. That remains true," Sears spokesman Howard Riefs said. "This year we executed a strategic restructuring program that achieved our annualized cost savings target of $1.25 billion through the simplification of our organizational structure, streamlining of operations and closure of under-performing stores.

"Moving forward, we will continue to sharpen our focus on our best Sears and Kmart stores, best categories, and best members, as we will build on the momentum of our actions to date and be better equipped to support our continued transformation."

Sears is losing money as sales tumble

BI Graphics_Sears Chart 1 copy Business Insider/Skye Gould

Sears is hemorrhaging money. Sales are down 45% since early 2013, its debt load has spiked to over $4 billion, and the company is losing well over $1 billion annually.

To meet its obligations, Sears has been selling off brands and properties and its CEO, who owns almost half the retailer's shares, has been lending the company money to pay off its debt. The company has also delayed an upcoming loan repayment to give it more time to turn business around.

In search of new sources of revenue, Sears announced a deal this week to start selling its DieHard-branded products - such as car batteries, jump starters, and tires - on Amazon's website. The retailer also started selling its Kenmore-branded appliances on Amazon this year.

The Amazon deals followed the outright sale of Craftsman, another Sears brand, to Stanley Black & Decker for about $900 million to be paid out over three years.

Kmart Business Insider A Kmart store in Eureka, California.

The deals should give the company access to new customers and revenue. But the strategy is also a major blow to Sears' stores, which had previously sold those brands almost exclusively along with Sears.com.

Sears' stores are already under pressure from plunging sales. Same-store sales at the company's Sears and Kmart stores fell 17% and 13%, respectively, in the most recent quarter.

The company has closed nearly 400 Sears and Kmart stores since the beginning of the year, and it's planning to close another 63 stores in January.

The January closures will leave Sears with 1,041 stores, down from 3,510 just six years ago.

Investors have applauded Sears' efforts to rapidly close unprofitable stores. But sales have shown no signs of rebounding.

"Despite its significant efforts to reduce its stores, it has not materially improved its weak operating performance to date," Boni wrote in a recent research note.

Kmart's business in particular is at risk, given its "meaningful market share erosion and estimated reduction of stores in excess of 30% this year," Boni said.

Two years ago, Kmart had 941 stores. After the upcoming round of closures, it will have just over 500.

BI Graphics_Sears Chart 3 Business Insider/Samantha Lee

Boni said Kmart is succumbing to the rapid growth of discount stores like Dollar General, which opened 1,000 stores this year, and the growing competitiveness of other major players like Walmart, which has been investing billions of dollars in price reductions, grocery improvements, and higher wages for employees.

Kmart's relative weakness in food sales is particularly concerning because a strong grocery offering drives shoppers to visit more often and increases the chances that they will purchase items in other categories, she said.

"Kmart is going more head-to-head with the Walmarts and Targets of the world, w hich means it has to do well in food business," she said.

Lampert addressed concerns about Kmart's business last year, saying, "there are no plans and there have never been any plans to close the Kmart format."

"In fact, we've been working hard to make Kmart a more fun, engaging place to shop, powered by our integrated retail innovations and Shop Your Way," he wrote in a blog post. "To report or suggest otherwise is irresponsible and is likely intended to do harm to our company to the benefit of those who seek to gain advantage from posting these inaccurate reports."

Sears suppliers cancel contracts and Lampert blames the media

eddie lampert Reuters Sears CEO Eddie Lampert (left).

Some Sears suppliers have exacerbated the retailer's problems this year by threatening to cancel contracts and demanding new payment terms for orders .

Amid these problems, merchandise inventory at Sears has fallen to $3.4 billion as of October 28 from $5 billion the previous year. Sears has attributed the decline to its transformation to an online-oriented business model.

Lampert responded to the supplier troubles earlier this year by blaming the news media in a rare interview and publicly threatening to sue two of its top tool vendors.

The conflict with one of the vendors, One World Technologies, was later resolved out of court .

Along with suppliers, several top executives at Sears have also fled the company within the last year.

Among the departures since last December were John Moore, formerly Sears' head of retail services, Alasdair James, Kmart president and chief member officer, Jeffrey Balagna, formerly Sears' executive vice president, Joelle Maher, formerly Sears' president and chief member officer, and Jason Hollar, Sears' former chief financial officer.

The company also lost its second-largest shareholder and board member, Bruce Berkowitz, in October. Berkowitz, the chief investment office and founder of hedge fund Fairholme Capital Management, has long been one of Sears' and Lamperts' biggest cheerleaders. The company's stock tumbled more than 15% immediately following his departure.

A spokesperson for Fairholme told Bloomberg at the time that Berkowitz left the board because he had achieved his objective there.

"Mr. Berkowitz believed that his board service would enable him to better communicate Fairholme's perspective in substantially greater depth and detail than would otherwise have been the case," the representative said. "Mr. Berkowitz believes that he has achieved that objective."

Sears is expected to continue closing stores in 2018

Going forward, Sears is expected to continue to look for ways to cut costs and monetize its assets by closing additional stores - particularly Kmart locations - and focusing more on its online business, called Shop Your Way.

"Our Shop Your Way membership program and Integrated Retail Strategy remain a key focus for us in order to meet the needs of our members," Lampert said in a recent statement.

But analysts seem skeptical that Sears, once the nation's largest retailer, can make a comeback.

Neil Saunders, the CEO of GlobalData Retail, an industry research firm, said Sears will either undergo a dramatic restructuring or fall into bankruptcy next year.

"At the end of the day, the business is not sustainable," Saunders said. "Sales continue to tumble, losses continue to mount, and there is no sign that the finances are improving. Put simply, the business as it stands is not viable."

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