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Another Sears loss in the books, as iconic retailer looks 'set to sink'

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Things aren't getting any better at Sears (SHLD) — in fact, they're getting worse.

The once-venerable department store chain on Thursday reported a wider third-quarter loss than the prior-year period as sales continued to slide.

The results were the latest indication that revenue and operating performance at the iconic retailer continue to deteriorate, despite its efforts to get rid of underperforming stores, lessen its dependence on categories that are struggling in its shops and make money from its real estate footprint.

"In the movie 'Titanic,' there is a line where, realizing chaos is about to ensue, one character helpfully notes, 'It's starting to fall apart. We don't have much time,'" Conlumino analyst Neil Saunders said. "Such a sentiment could well be applied to Sears. The analogy with 'Titanic' is also apt; not least because while Sears was once a titan of U.S. retail, it now looks set to sink."

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Sears, which has reported just two profitable quarters since April 2012 , lost an adjusted $3.11 a share during the quarter ended Oct. 29. That compares with a loss of $2.98 one year ago.

Revenue fell 13 percent to $5.03 billion. The Thomson Reuters consensus forecast, which includes just one analyst, had called for Sears to report a loss of $4.06 a share on $4.95 billion in revenue.

Sales at its established stores declined 7.4 percent, including a 4.4 percent dip at Kmart and a 10 percent drop at Sears. That was slightly worse than the 5.3 percent decrease that was expected.

The stock fell slightly lower in late morning trade.

In a news release outlining its results, Sears CEO Eddie Lampert reiterated that the company remains "fully committed to restoring profitability to our company." He also addressed criticisms the company has faced from outsiders, saying he understands their concerns regarding Sears' continued operating losses.

"While many observers have acknowledged the significant asset base of our company, we understand the concerns related to our operating performance and are committed to transforming our company through our Shop Your Way membership program and our integrated retail investments," he said.

But Saunders countered that none of these efforts have led to better results.

"On the contrary, the trends have worsened with the weakest comparable performance so far this year," he said, adding that the retailer's losses also continue to widen. Sears' adjusted results exclude items including closed store and severance charges, and pension expenses.

Sears, which has been selling off stores and other assets in search of becoming profitable, has raised roughly $9.4 billion in liquidity from 2012 through third quarter 2016. The company had $258 million in cash at the end of the fiscal third quarter, and $174 million available under a credit facility.

The chain, which said in May that it was exploring strategic alternatives for its Kenmore, Craftsman and DieHard brands, as well as its home services business, said it is still evaluating opportunities.

Analysts had expected Sears' third-quarter results to show a further deterioration, with Debtwire's Philip Emma telling CNBC "there isn't anyone that's going to be surprised if the numbers are really, really bad."

Signs of ongoing troubles were popping up ahead of Thursday's report, causing many to once again question when the chain might potentially file for bankruptcy.

Sales in Lands' End (LE)'s retail business, which generates 89 percent of its revenue from Sears stores, fell 15.6 percent in its recently ended quarter. What's more, two Sears executives departed the chain a week before its report.

Sears said Thursday that is has "passed the peak" of its inventory needs for the holiday season and continues to meet its payment obligations to vendors. The company has been financing much of its inventory amid concerns about its long-term viability.

In October, when toymaker Jakks Pacific (JAKK) said it had halted shipments to a major retailer, BMO Capital Markets analyst Gerrick Johnson told CNBC that he couldn't imagine that customer being anyone other than Kmart. At a toy fair in Dallas around that time, Johnson said three or four vendors had asked the analyst whether they should ship product to the chain.

Without specifically naming Jakks, Sears CFO Jason Hollar said in a statement that "there are occasionally disputes over prices, allocations of product and other terms through the course of negotiations."

Fitch Ratings said last month that Sears should be able to fund its holiday inventory through borrowings on its credit facility, but warned that its restructuring risk remains "high" over the next 12 to 24 months.

At a national real estate conference in New York City this week, chatter swirled that late 2017 would be the earliest date Sears would file for bankruptcy, so that it could protect the $2.7 billion in assets it sold to Seritage Growth Properties (SRG) and through joint venture deals last year.

Those people formed this thesis upon a piece of the U.S. bankruptcy law called "fraudulent conveyance," which would give Sears shareholders a two-year window to go after Seritage's assets if the department store chain were to file for bankruptcy. The two-year anniversary of that spinoff falls this summer.

However, Chuck Tatelbaum, director of the Tripp Scott law firm and chair of the bankruptcy and creditors' rights department, explained that two-year window wouldn't necessarily apply for Sears. Individual states have longer statutes of limitations on that piece of the bankruptcy code — meaning if Sears were to file for bankruptcy in its home state of Illinois or in Delaware, the statute of limitations would instead be four years.

In any case, Sears will face additional pressure over the summer, as all of its secured loans and bonds mature in a three-year window beginning in July, Emma said. Sears' short-term borrowings totaled $618 million at quarter's end. It has $3.7 billion in long-term debt.

Through the company's downturn, Lampert has remained constant in his message that the maneuvers he is making will eventually return Sears to profitability. That includes dismissing reports that Kmart was shutting down.

"Our significant asset base gives us the wherewithal to fund our business, but we don't intend to use our asset value to support losses," he said in a blog post refuting those reports in October.

The company had 1,503 stores at the end of the quarter, including its Kmart brand. That's down from 1,592 as of July 30.

Sears' store count includes the closure of 68 Kmart stores and most of the 10 Sears locations that were announced in April. It does not include the 64 more Kmart stores it will close in mid-December or any other locations that could be shuttered during the current quarter.

Sears said it will continue to close unprofitable stores as their leases expire. Roughly 80 percent of its leased Kmart stores come up for renewal in less than five years, as do nearly half of its leased Sears stores.



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