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Kmart and Sears Warn They May Not Be Able to Stay in Business

Sears Holdings Disclosure: "Substantial Doubt" Exists Regarding Our Financial Position
East Brunswick Kmart
The Kmart outpost in E. Brunswick said it was in its last 9 days of operation on March 25, 2017. Dave Schatz

NEW BRUNSWICK, NJ–Two American paragons of retail, Sears Roebuck & Company and Kmart said historical income from operations reflected “substantial doubt” over their ability to stay in business, according to a March 22 regulatory filing.

Twelve years ago, the two titans merged to form Sears Holdings, the parent company which now finds itself in debt.

That debt has so far added up to $4.2 billion, and Sears Holdings said it doesn’t know if it can obtain the badly needed cash to meet its business obligations.

However, the company says it expects to save a billion dollars on the cost side as a result of the “strategic transformation” restructuring plan it announced in February.

“We acknowledge that we continue to face a challenging competitive environment,” wrote the company, acknowledging that it cannot surely predict whether their efforts will keep their stores open or not in the future.

The Kmart in East Brunswick has been holding a "Store Closing Sale" and is in its final days of operation, amid Sears Holdings announcement last month that it would shutter another 150 Sears and Kmart outposts.

According to signage, the Kmart will close in the very beginning of April. But no Sears outposts in the Garden State are on the chopping block right now.

"The store is dead. No one came in after hearing all the media on Wednesday [March 22]," said one Sears associate in New Brunswick after working thru closing time the following day. She added that none of the departments were busy on March 23, and 24.

Sears Holdings' debt has increased by $1.2 billion during the past year, on top of the $3 billion that was owed just one year ago.

“Our historical operating results indicate substantial doubt exists related to the Company's ability to continue as a going concern,” Sears Holdings wrote in its annual report.

“If we continue to experience operating losses, and we are not able to generate additional [cash] ... while not expected, we may not be able to access additional funds under our amended Domestic Credit Agreement and we might need to secure additional sources of funds, which may or may not be available to us.

Sears Holdings has posted seven years of consecutive losses, as revenue has decreased amid the backdrop of declining mall traffic, the increasing popularity of internet shopping, and a trend toward consumer spending on experiences rather than goods.

Indeed, the company's Chairmand and CEO Edward Lampert secured $1 billion in funding recently from his own ESL Investments hedge fund.

Sears Holdings has also raised cash by selling off large pieces of the real estate it owns, as well as its Craftsman tool and lawn equipment brand.

In other moves, the company created a real estate investment trust (REIT) for many stores.  As we reported, the Hub City outpost on Route 1 is already a Real Estate Mortgage Investment Conduit.

Moreover, Sears has also reduced its footprint of United States stores by more than 30%, trimmed its ownership in Sears Canada, and sold its Lands' End clothing brand.

“Not only are sales down, but the pace of decline has accelerated sharply,” said GlobalData Retail managing director Neil Saunders in a recent note about the company.

“Some of this is the result of store closures across the year – something we believe is sensible … in light of changing patterns of demand. However, much of the dip is also attributable to a slump in the number of shoppers visiting Sears and Kmart.”

Saunders added that consumers were not buying as much during visits to Sears and Kmart stores.

“Sears has ended its fiscal year with a set of results that can only be described as dire,” said Saunders, asserting that Sears is not delivering the right merchandise to its customers.

“On the contrary: its product mix, its store environments, and its customer service, are actively deterring consumers from visiting," wrote Saunders.

The expert also said that Kmart was in a similar position.

Years ago, this set of circumstances would be more than sufficient to cause major problems, said Saunders, but in today’s high-pressure and competitive retail environment, he said that he believes "these things will prove fatal."

Sears Holdings' issuance of unprecedented financial warnings reportedly stems from a 2014 accounting rule that didn’t actually affect the company until January when its most recent fiscal year ended.

Compliance with the rule means that managers at all public companies must disclose significant doubt related to their abilities to stay in business.

Still, the company insisted on March 22 that it was taking actions to minimize financial uncertainty.

“It is very important to reiterate that Sears Holdings remains focused on executing our transformation plan and will continue to take actions to help ensure our competitiveness and ability to continue to meet our financial obligations,” said the company's Chief Financial Officer Jason Hollar said in the statement.

Hollar added that the warning was disclosed due to a regulatory compliance requirement, and that the company remains confident in its financial position and will stick with its “transformation plan.”

Sears Holdings' stock took a beating on March 22, decreasing about 20%.