Sears takes another $40M from CEO's hedge fund

Dive Brief:

For the second time in a month, Sears Holdings turned to CEO Eddie Lampert’s hedge fund, this time tapping it for $40 million, according to a filing with the Securities and Exchange Commission. The filing represents an amendment to a revised Oct. 4 loan agreement.
In that earlier filing, the company said it recently borrowed $100 million and can borrow an additional $100 million from subsidiaries owned by Lampert’s fund, ESL Investments, between now and Dec. 1. Sears has so far borrowed $499.4 million through a real estate-backed loan dating back to January. The new $100 million requires Sears to put up additional properties or other assets as collateral.
The latest filing comes in the same month that Sears Canada announced it would seek court approval to liquidate and major Sears investor Bruce Berkowitz, chief investment officer at investment management firm Fairholme Capital Management, and president and director of Fairholme Funds, announced he is stepping down from Sears Holdings’ board of directors effective Oct. 31.

Dive Insight:

Rather than rebuilding store traffic and sales, Sears for years now has relied on financial moves to keep it going (including a series of loans from Lampert’s hedge fund), Greg Portell, lead partner in Retail Practice at consulting firm A.T. Kearney, told Retail Dive earlier this year.

"Successful transformations make some big cuts and some big move and growth reemerges. Here after three or four of those little cuts where they haven’t been able to get growth going, we start to lose faith," Portell said. "There is certainly a place for financial reengineering. But when Sears goes back to it numerous times it is an indicator they don’t have a real business solution."

The most recent loans are further evidence of the murky relationship between Lampert, his hedge fund and Sears, as many increasingly see bankruptcy as inevitable for the once-powerful retailer. Lampert is also the chairman of Seritage Growth Properties, the real estate investment trust established two years ago, and ESL Investments owns 43.5% of Seritage's limited partnership units and 7.9% of its voting power, according to CNBC. Meanwhile, as Sears sells much of its valuable real estate to the REIT, it faces rent on those same locations.

But the ongoing release of these loans may be critical at this time of year. As Sears and Kmart stores stock shelves for the holidays, liquidity is a must, especially amid reports that suppliers are wary and struggling to get insurance on their shipments. Supplier pullbacks are a bugaboo for any retailer and sometimes even a cause of bankruptcy, as with Toys R Us.

In recent months, however, Sears has actually made some headway in taking stress off its books. Earlier this year it finally eked out a positive profit after months of cost cutting and asset sales, and two years of reporting quarterly earnings losses. The company followed that up in August with another loss (though smaller than the year-ago period) and a steep decline in both total and same-store sales.

"Against such weak financials, Sears has been monetizing assets and securing credit lines to ensure it can stay afloat," GlobalData Retail Managing Director Neil Saunders told Retail Dive in an email earlier this year. "However, this financial wizardry is not fixing the underlying problems; it is merely kicking the can further down the road. The bottom line is that as a retail proposition Sears is fundamentally broken. And its long and painful slide into oblivion shows no signs of abating."