Fitch Ratings Lowers Sears Holding (SHLD) IDR to CC; Cites Decline in Profitability, Cash Burn

Fitch Ratings has downgraded its long-term Issuer Default Ratings (IDR) on Sears Holdings Corporation (NASDAQ: SHLD) and its various subsidiary entities (collectively, Sears) to 'CC' from 'CCC'

KEY RATING DRIVERS

EBITDA Materially Negative: The magnitude of Sears' decline in profitability and lack of visibility to turn operations around remains a significant concern. EBITDA for Sears Holdings Corporation (Sears or Holdings) is expected to be negative $1 billion in 2014 (with LTM EBITDA through Aug. 2, 2014 at negative $860 million) and potentially worse in 2015, after turning negative $337 million in 2013.

Fitch expects top-line contraction of around 9% to 10% in 2014 due to estimated domestic comparable store sales (comps) of negative 1%-negative 2%, loss of Lands' End business (4.3% of 2013 consolidated sales), and ongoing store closings. Gross margins are expected to contract another 200 bps to 22%, on top of the 220 bps contraction in 2013. Fitch does not expect any catalysts in the business that will stem the rate of decline.

Cash Burn Significant Concern: Sears needs to generate a minimum EBITDA of $1 billion annually between 2014 through 2016 to service cash interest expense, capex, and pension plan contributions. Given Fitch's projections for EBITDA to be negative $1 billion or worse, cash burn (prior to any working capital benefit) is expected to be around $2 billion or higher annually. In addition, Sears needs an estimated $600 million to $700 million in liquidity to fund seasonal holiday working capital needs.

Funding Options May Not Be Enough to Support Operations Beyond 2016: Given the significant cash burn in the business, Sears injected $2 billion in liquidity in 2012 and $2.5 billion in 2013 through cuts in inventory buys, asset sales, real estate transactions and the issuance of a $1 billion five-year first lien secured loan in October 2013.

Through the first half of 2014, Sears has generated $665 million in proceeds, including a $500M exit dividend from the separation of Lands' End and another $164 million from real estate transactions.

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