Amid signs that Sears (SHLD) may be leaking the idea that it's nearing a sale of a major asset, the motive is clear: the struggling retailer is trying to signal to jittery suppliers that Sears will have enough cash to pay for holiday shipments.
For Sears, it's essential to make sure that shelves at its namesake chain and Kmart are stocked during the holiday season with items ranging from wool sweaters to dolls. Shares of the once iconic retailer rose as much as 19% on Tuesday on reports it's nearing a sale of tool brand Craftsman. Interested bidders, says reports, include Stanley Black & Decker (SWK) - Get Report , Techtronic Industries Co., Apex Tool Group (which manufacturers Craftsman tools) and Husqvarna AB.
Final bids may value the brand at about $2 billion (compared with Sears' $1.3 billion market cap), and are reportedly due at the end of the month. Sears put its three best-known brands -- Craftsman, Diehard and Kenmore -- up for sale in late May in an effort to raise cash.
News of the sale arrives after a blog post from embattled Sears CEO Eddie Lampert, where the money manager turn retail exec fiercely denied Kmart was nearing an end. The news of a possible sale also comes after reports of some suppliers voicing concern about shipping holiday products to Sears amid fear of not getting paid due to the retailer's poor cash situation.
"The mood in the toy industry is upbeat after two strong years of growth and a good start to 2016," wrote BMO Capital Markets analyst Gerrick Johnson in a note out on Monday. "The only concerns in the toy industry are minor ones: whether to ship to a troubled Sears/Kmart organization and if Hanjin shipping containers will be unloaded on time."
Johnson's analysis arrives after a visit to the Dallas Fall Toy Preview last week, where he met with management teams from private toy companies. He then traveled to Los Angeles to meet with larger toy makers Jakks Pacific (JAKK) - Get Report and Mattel (MAT) - Get Report . Johnson notes that Sears likely represents about 2% of the U.S. toy industry at retail.
Spokespeople at Hasbro (HAS) - Get Report and Mattel (MAT) - Get Report didn't return a request for comment on whether they have reduced holiday shipments to Sears. Sears spokesman Howard Riefs hasn't returned numerous requests for comments on the current state of Sears.
It would be hard to blame toy makers for approaching Sears with caution right now, even with the prospect that it will raise $2 billion in cash.
Sears has "significant default risk" within the next 12 to 24 months, triggered by years of weak store traffic and high levels of debt, Fitch Ratings said in a report recently.
"Default risk means most likely a bankruptcy, or a Chapter 11 filing," said one of the report's authors, Sharon Bonelli, in a phone interview, meaning that the company will either have to liquidate to pay back its creditors, or reorganize in bankruptcy court and hope to stay alive by emerging as a smaller entity. At issue for Sears, which is battling declining cash flow amid a prolonged stretch of losses, is repaying some $2.8 billion in high yield bonds and institutional term loans coming due in the next few years.
Sears' "restructuring risk is high over the next twelve months, as our 'CC' rating would suggest," said Monica Aggarwal, managing director of Fitch's retail team. Aggarwal's team estimates Sears will burn through an eye-popping $1.6 billion to $1.8 billion in cash this year. The result would make it eight straight years of cash burn for Sears, according to Bloomberg data.
Sears' cash and equivalents declined to $276 million from $1.8 billion a year ago.
Fitch joined Moody's Investors Service in sounding the alarm bell on Sears. Moody's recently slashed its speculative-grade liquidity rating on Sears one notch to SGL-3 from SGL-2. The new rating reflects the likelihood that Sears will continue to need outside financing to stay in business, and that it may require covenant relief to maintain orderly access to funding lines.
Sears was forced to accept $300 million in financing from CEO Edward Lampert's investment vehicle ESL Investments in August.
"We recognize the risks associated with relying on these sources and continued shareholder support to finance its negative operating cash flow which is estimated by Moody's to be approximately $1.5 billion this year," said Christina Boni, a Moody's vice president.
Meanwhile, the sell-off in Sears shares has accelerated since the company released its disastrous second quarter results on Aug. 25 -- shares are down about 14% -- as investors question the chain's viability.