Sears’ Cost-Cutting Initiative Is Credit Positive, but Core Problems Remain
On Friday, Sears Holdings Corp. (Caa2 stable) said that it will carve out $1 billion in annual costs through a comprehensive restructuring in an effort to shore up its liquidity and monetize assets in the midst of ongoing operating losses. Sears intends to reduce corporate overhead, integrate its Sears and Kmart operations and improve its merchandising, supply chain and inventory management to accomplish its goal. Although reducing costs is credit positive, Sears continues to whittle away its asset base with the goal of shoring up its liquidity. We believe that Sears must still stabilize its poor sales performance if it is to stem its significant operating losses and fund its business internally. Sears announced on 5 January that it would reduce its asset base with approximately $1 billion of planned real estate sales, issue a $500 million real estate loan facility and sell its Craftsman brand for approximately $900 million, which will help meet its funding requirements in 2017. The company also continues to pursue the monetization of its Kenmore and DieHard brands. These actions will give Sears adequate liquidity, even if operating losses again approach the $1.5 billion projected for 2016. Nonetheless, we view the continued depletion of its asset base as credit negative because it shortens the time frame the company has to improve its business. The retail environment remains challenging for even top-tier department store operators, which means Sears faces a particularly high hurdle in its efforts to staunch losses, even with its aggressive measures. Sears will continue to have sizable assets after executing its plans, but its debts are significant, with about $4.6 billion of funded debt, as well as unfunded pension and post-retirement obligations of approximately $2 billion. Furthermore, the viability of Sears’ Kmart franchise is uncertain, given its meaningful market share erosion. The company’s announced closure of 150 stores (108 Kmart stores and 42 Sears stores) is an effort to reduce store space and increase productivity.
