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Sales at Sears are a fifth lower than in 2006 and the trend is worsening.

Chris Young/chris young The Globe and Mail

From the FT's Lex blog

It is easy to smirk at Eddie Lampert. After he pulled Kmart out of bankruptcy and merged it with Sears , he was hailed as a genius. Shares in Sears Holdings sextupled, from $30 to more than $180 between 2004 and 2007. After five years of windy chairman's letters in which he held forth on the nature of retail, Russian jobs and U.S. public policy, the stock is back near $30. Serves the arrogant Mr Lampert right? Perhaps. But Sears, which employs more than 300,000 people in the U.S. and Canada, is in a deadly serious situation.

The latest blow is news that the commercial finance company CIT will no longer finance suppliers as they wait for payment from Sears. This follows poor third-quarter results, credit rating downgrades and same-store holiday sales down more than 5 per cent year on year. Sears' 2018 bonds, which traded near par less than a year ago, are below 80 per cent of par now and yield more than 11 per cent.

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Sears states that CIT's payables amount to less than 5 per cent of its inventories and that the company has $4.2-billion of liquidity ($900-million in cash and $3.3-billion in credit lines). The first number seems small, and the latter seem large. The appearance is deceptive. Sears' inventories were $11.1-billion at the end of the last quarter. In other words, financing for something on the order of $500-million in assets just disappeared.

Sears needs all the financing it can get. That $4.2-billion in liquidity looks far less impressive when you consider that free cash flow in the first nine months of 2011 was negative $1.6-billion. Net debt has grown by $1-billion in the past year.

Meanwhile, operating profits have gone negative. Sales are a fifth lower than in 2006 and the trend is worsening. Sears needs to do much more than shut stores and cut costs, as it has announced. Whatever that something is, it will be costly. It ought to be an interesting letter to shareholders this year.

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