published Oct 5th 2016, 10:12 am, by Shelly Banjo
(Bloomberg Gadfly) — 

Is this the end of the line for Sears? Not exactly.

The slow-burning department-store chain is in talks to sell its Craftsman tool business for around $2 billion, Bloomberg News reported on Tuesday. At first glance, this seems like a desperate attempt to scrape the bottom of the asset barrel to scrounge up enough cash to keep the company going. Fitch and Moody’s recently warned investors Sears doesn’t have enough cash to stay in business. Hedge-fund operator and Sears CEO Eddie Lampert on Monday had to to pen a blog post dispelling rumors that Kmart might be shut down.

Desperate as selling off brands may be, it might just work — for now. Coming right before the all-important holiday season, when retailers need to build inventory, a cash infusion from a Craftsman sale could help give Sears another year of life. 

Once America’s largest retailer, Sears is a shadow of its 2005 self, when Lampert merged it with Kmart to form a company with $50 billion in annual revenue. Sales have tanked since then, and the company has lost money for the past five years in a row — including a loss of more than $1 billion last year, bringing its total losses over the five-year stretch to more than $9 billion.

That has prompted a string of asset sales, including Land’s End, Sears Hometown and Outlet stores, Sears Canada, Orchard Supply, and hundreds of stores spun off into real estate investment trust Seritage.  The chain still managed to bring in $25 billion in revenue last year, but its debts are heavy: It carries about $3.5 billion of funded debt, as well as unfunded pension and post-retirement obligations of $2.1 billion, according to Moody’s. Sears continues to borrow hundreds of millions of dollars from Lampert.
Sears could burn through at least $1.5 billion annually, estimates Bloomberg Intelligence analyst Noel Hebert. Plus, it faces continued debt maturities of at least $500 million over the next three years, according to Hebert. 

To generate enough cash to keep the business going, a trio of private-label brands — Craftsman tools, Kenmore appliances, and DieHard batteries — as well as Sears’ auto centers and home-services businesses are next on the chopping block.

If the Craftsman deal proves successful, it could keep the company’s blood pumping at least through the holidays — assuming Sears can secure the $2 billion it wants for Craftsman and that it’s not obligated to first pay down debt, which is backed by the value of Craftsman and other brands

Those brands are still tied pretty tightly to Sears and Kmart stores, where most of their products are sold. The same goes for Sears’ auto centers, home-services business, and a big chunk of its real estate. All partially need Sears to be a going concern in order to keep making money, at least in the short term.
That means Lampert, even if he closes a lot of stores, needs to keep the retail business going for at least a few years.

It’s also worth remembering just how many locations Sears and Kmart have: Down from a high of about 4,000 stores, the company still operates about 1,500 locations — Macy’s has roughly half that amount — and vendors and mall owners are keen to keep them open as long as they generate cash.
Liquidating the company outright would also trigger all sorts of costs associated with employee pensions and real-estate leases.

Make no mistake: Sears as we know it is certainly on its deathbed. But it could take years for the life support to run out. And as long as Lampert can keep pushing money around, taking out loans, and selling off parts of the company piece by piece, it doesn’t look like he’ll pull the plug anytime soon.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.