Struggling Sears (SHLD) will likely need much more than $2 billion from a sale of tool brand Craftsman to stay afloat.
Shares of the once iconic retailer spiked as much as 19% on Tuesday on reports it's nearing a sale of Craftsman. Interested bidders, says reports, includes Stanley Black & Decker (SWK - Get Report) , Techtronic Industries Co., Apex Tool Group and Husqvarna AB. Final bids may value the brand at about $2 billion, 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.
But given how much cash Sears may burn through when the books are closed on another year of losses, the wounded retailer better pray it's also able to secure deals for Diehard and Kenmore soon if it wants to survive beyond 2017.
Fitch Ratings managing director, Monica Aggarwal, estimated Sears will burn through $1.6 billion to $1.8 billion in cash this year, fueled in large part by as much as a $1 billion loss on earnings before interest, taxes, depreciation and amortization (EBITDA). A year ago, Sears lost $837 million on an EBITDA basis, according to Fitch Ratings.
Fitch Ratings defines Sears' cash burn as cash flow from operations after taking into consideration capital expenditures and pension contributions. The result would make it eight straight years of cash burn for Sears, according to Bloomberg data.
Sears' cash and equivalents declined to a dangerously low $276 million in the second quarter from $1.8 billion a year ago. The company was forced to accept $300 million in financing from CEO Edward Lampert's investment vehicle ESL Investments in August in an effort to make it through the holidays. Sears' cash flow outlook remain bleak, too, for several reasons.
First, given the prospect for more steep losses next year, Sears will likely have another operating cash outflow. Meanwhile, Fitch estimates that Sears' interest expense, capital expenditures and pension outlays will tally $800 million, and it will need need $500 million to $650 million to fund seasonal working capital. Hence, it doesn't take a mathematician to figure out Sears needs to raise cash -- and fast.
Sears spokesman Howard Riefs didn't return a request seeking comment.
The concerning cash flow outlook has caused Fitch Ratings to sound the alarm bell on the once iconic retailer. 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 redent report.
"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 12 months, as our 'CC' rating would suggest," said Aggarwal.
Fitch joined Moody's Investors Service in voicing serious concerns about 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.
"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.