Will This Be the Last Christmas for Sears?

If Sears Holdings' (NASDAQ:SHLD) condition gets any more dire, it may soon unravel beyond anyone's control. Despite the repeated short-term cash infusions Chairman and CEO Eddie Lampert has used to keep the retailer afloat, this may truly be the last Christmas the once-venerable retail sees.

There hasn't been much to smile about at Sears or Kmart and the latest reports of trouble aren't going to make the situation any less dour.

Not much Christmas cheer

Late last month, it was conjectured that JAKKS Pacific (NASDAQ:JAKK) had stopped sending inventory to Kmart after the toymaker cryptically said on its quarterly earnings conference call with analysts that the product pipeline to a major retailer experiencing financial difficulties had been shut off. Sears did nothing to quell the speculation after its CFO posted a blog entry that failed to affirmatively rebut the accusation. Like the Sherlock Holmes dog that didn't bark in the nighttime, Sears' failure to say the report was untrue was highly suggestive of what the situation really was.

And now comes word that other vendors are also bailing on the retailer. Business Insider reports that insurance brokerage Arthur J. Gallagher & Co. says at least a half dozen of its clients have "significantly" reduced their shipments to Sears because they fear it is going bankrupt and one has halted shipments altogether.

Too many times to the well

For more than a year, concern has risen the retailer might go under, even though Lampert has taken measures to quell such thoughts. Time after time, the hedge fund operator has steeped forward to loan Sears money or take other extraordinary actions to ensure vendors would keep sending stock to the retailer.

Earlier this year, for example, Lampert reportedly accelerated payments to suppliers to keep them happy, paying them within 30 days rather than the more typical 60- or 90-day time frame. He's also closed down underperforming stores, sold off businesses to raise cash, and arranged short-term loans, most recently this past August when his ESL Investments hedge fund extended Sears $300 million in financing. It was a move largely seen as a means of calming rattled nerves among vendors by showing them Sears still had the financial wherewithal to pay them heading into the Christmas season.

Instead, it may have had the opposite effect. Believing the only way Sears can keep its doors open is if it is constantly receiving steady streams of outside cash, suppliers are now taking measures to protect themselves in the event of an implosion. They're either halting shipments or dramatically reducing the amount they are sending through.

The cupboards are bare

And Sears' finances are desperate. Net sales fell 9% from the year-ago period as comparable store sales were down 3.3% at Kmart and 7% at Sears. Worse yet, net losses widened to $395 million, or $3.70 per share, from $208 million, or $1.84 per share. And there's no indication it's going to get better, even with additional stopgap cash infusions, not least because it has a massively unfunded pension liability, the bill for which will eventually come due.

Although the fair value of its pension plan assets last totalled almost $3.2 billion, its pension obligations amount to nearly $5.3 billion, leaving it with a huge, $2.1 billion deficit. So far, it has used unrealistic assumptions to contain the damage (assumptions that are perfectly legal and often used by other companies as well), but that can only go on for so long before the weight of it all sends it crashing down. The tab eventually has to be paid.

A ghost of its former self

All of which is not to say Lampert hasn't tried to change Sears' direction, but after suffering for so many years under his benign neglect, it amounts to too little, too late. His efforts at building a digitally savvy enterprise is noteworthy and may have even been successful had he started sooner, but now even his Shop Your Way member loyalty program is merely a series of initiatives laid over a retailer that gets progressively smaller each year.

Costs are mounting, sales are falling, and many of its most valuable assets have been stripped away. There are a few that remain, like the Kenmore, DieHard, and Craftsman brands, that could serve it, but even their ability to influence the whole has diminished. And Lampert may sell them off, too.

In the past, I've said it was likely Sears Holdings was enjoying its last Christmas, and though the prediction was premature, the day is fast approaching and the loss of vendors is the herald it may be here at last.

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