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Analysis: Sears is broken operationally and financially

The news that some lenders have urged Sears to file for Chapter 7 bankruptcy, which involves the liquidation rather than the restructuring of the business, confirms our view that Sears is a firm without any real inherent value.

The latest financials show that group liabilities outweigh assets by some $4.4 billion. Not only has this imbalance been present for many years, but it has progressively worsened over time. A restructuring involving further asset sales would do little to fill this hole. Certainly, the process may allow Sears to pay down some debt and reduce liabilities, but it would also further weaken the asset base of the company. Ultimately, this puts Sears in a dangerous catch 22 situation from which there is no real escape.

If the company was profitable at the operating level there may be some hope that after restructuring it could rebuild its assets and pay down further debt. However, this is not the case. The latest numbers show that in the half year to August, the company made a huge operating loss of $419 million. In our view, this is a company that is bro-ken operationally as well as financially.

All of this is underscored by the continued erosion of the brand image of both Sears and Kmart, which have suffered from years of underinvestment. From our data, this is still causing a severe erosion of customer numbers and the amount existing customers spend when they shop. A substantial investment would be required to reverse this position - something Sears is just not in a position to undertake.

The prognosis is gloomy, just as it has been for many years. Over this time Sears has been expert in restructuring and playing for time with various financial machinations. However, at some point, the music has to stop. We believe that time is now.
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