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Analysts: Sears has limited reorganization options

Sears Holdings Corp. sees a smaller store footprint at the center of its post-bankruptcy plan. That is unlikely to turn the company's financial fortunes around, though, analysts said Oct. 15.

In its Oct. 15 filing for Chapter 11 bankruptcy protection, the Hoffman Estates, Ill.-based retailer outlined a plan to trim its business to about 400 stores with EBITDA-positive operations. Ahead of the bankruptcy filing, Sears operated about 550 stores under its own name, according to S&P Global Market Intelligence.

But reaching a reorganization plan that creditors are happy with could be a Herculean feat, some analysts said, since the company has few assets to work with after years of store closures, spinoffs and shrinking budgets.

"They're kind of out of bullets at this point," Edward Jones analyst Brian Yarbrough said in an interview. Ahead of Sears' filing, Yarbrough said he was expecting the retailer to liquidate.

By paring back its store network, Sears is "just delaying the inevitable," he said.

Convincing the creditors

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Sears will eventually have to sell its reorganization plan to a slate of unsecured creditors, including Michigan-based appliance manufacturer Whirlpool Corp. and U.K. refrigerator maker Frigidaire Consolidated Ltd. Unsecured creditors are generally among the last parties paid if a company fails to reorganize under Chapter 11.

Prospects for a credible turnaround plan are dim, Yarbrough said, echoing other analysts who said Sears faces steep challenges to restructuring and emerging from bankruptcy.

Such a plan would have to address the company's disadvantages in areas such as e-commerce, he said. Rivals including Walmart Inc. and Target Corp. have been investing in online ordering, delivery and other capital-intensive services in recent quarters — something Sears cannot afford to do.

"All these technologies, they cost money," Yarbrough said. "From a systems and infrastructure standpoint, they fall further behind."

Only if a new management team takes the helm at Sears is the retailer likely to change course, GlobalData analyst Neil Saunders wrote in an Oct. 15 research note.

"Ultimately, Sears needs not just to fix its financial problems," he said. "It also needs to repair the deficiencies in terms of retail strategy."

Sears' Chapter 11 filing comes in the same year as bankruptcies at The Bon-Ton Stores Inc. and Toys R Us Inc. Both filings culminated in liquidations, Moody's Vice President Christina Boni wrote in an Oct. 15 research note, noting that "challenges to reemerging" are a "going concern."

For much of the 20th century, Sears was a retail powerhouse, selling through its mail-order catalog and a network of physical stores.

But the rapid expansion of retailers focused on low prices, such as Walmart, started to weigh on Sears' results by the early 1990s. In 2004, Edward Lampert, head of hedge fund ESL Investments Inc., purchased Sears and combined the business with Kmart.

Under Lampert, the company divested assets, such as its Land's End apparel brand and Craftsman tool line, to raise funding that kept the broader business afloat. But the company continued to burn cash, deteriorating its broader financial health.

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The company's one-year probability of default rose significantly in late 2014, soaring to above 20% from below 5% in a few months.

"We have viewed the company's capital structure as unsustainable for several years," S&P Global Ratings said in a note Oct. 15. The agency lowered its rating on Sears' debt to D after the retailer's bankruptcy filing the same day.

Under a Chapter 11 restructuring, Sears will continue to "shrink its way to profitability," GlobalData's Saunders wrote.

"We believe there is no clear path to success," he wrote.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.