SHLDQ Sears Holdings Corporation (CE)

By Anne Steele 

Sears Holdings Corp.'s raised doubts in a securities filing about its ability to keep operating after seven years of losses, sending the retailer's share price tumbling and spooking some of its landlords.

In its annual report released late Tuesday, the Kmart and Sears owner said past operating results indicate "substantial doubt exists related to the company's ability to continue as a going concern." The language is typically used when there are doubts about the business' ability to meet obligations for the next 12 months. Sears quickly added that it is "probable" that cost cuts, asset sales and other actions would mitigate its problems.

The warning -- the first such for the company -- is the latest stumbling block for Sears, whose stock had dropped 39% in the 12 months through Tuesday. The shares fell 12% to $7.98 on Wednesday.

In a blog post Wednesday, Sears finance chief Jason Hollar sought to assuage investors, saying the disclosure was in line with regulatory standards and didn't reflect management expectations for the business's near-term health.

"We are a viable business that can meet its financial and other obligations for the foreseeable future," he said, adding that the company's auditors, Deloitte & Touche LLP, had given Sears an unqualified audit opinion, meaning it wasn't expressing doubt about the company's ability to meet obligations. A Deloitte spokesman declined to comment.

Mr. Hollar said the going-concern note reflects the company's 2016 performance, when Sears lost $2.22 billion and ended the year with $4.2 billion in debt. "While historical performance drives the disclosure, our financial plans and forecast do not reflect the continuation of that performance," he said.

Sears's statements may have been triggered by an accounting rule that recently took effect requiring all companies to evaluate and disclose whether there is any significant doubt about the ability to stay in business. Outside auditors were already required to do such an assessment of their clients, but there was no requirement that a company's management do its own evaluation.

The Financial Accounting Standards Board, which sets accounting rules for U.S. companies, enacted the requirement in 2014, and it went into effect for most companies at the end of 2016. At the time, the FASB said the rule was needed because there were significant differences among companies in how quickly and thoroughly they disclosed any risks to their ability to remain a going concern.

Sears said in its annual report that the new rule was effective for the company as of the end of its latest fiscal year, which ended in January.

Retailers at large have fallen out of favor with investors, and in the case of Sears they worry that its strategy of selling assets to fund losses has its limits. The company, which last month posted its seventh consecutive annual loss, has sold off large swaths of its vast real estate holdings and its Craftsman brand to stay alive while Edward Lampert, its controlling shareholder and chief executive, works on a turnaround plan.

Earlier this month The Wall Street Journal reported Sears lenders have hired lawyers in anticipation that the company will struggle to comply with its borrowing terms.

On Wednesday, some shopping center landlords said they were alarmed by the disclosure. "It has obviously spooked everybody," said Bill O'Connor, chief executive of O'Connor Capital Partners, a real-estate investment and development firm that has a few Sears stores in its portfolio.

Shares of retail real-estate investment trusts slumped in Wednesday trading after the Sears disclosure. Among the decliners, losing more than 2%, were Pennsylvania Real Estate Investment Trust, or PREIT, CBL & Associates Properties Inc., Macerich Co. and GGP Inc. Mall operators stress that department-store closures have a varying impact in different locations. Real-estate executives said lower-tier malls are likely to take a bigger hit if Sears closes stores.

Philadelphia-based PREIT said it is in discussions with potential tenants to replace some department stores, including Sears. The REIT, which has a portfolio of 24 properties, said it has pared Sears and Kmart stores in its stable to 10 from 27 in 2012. It is currently renovating four former Sears stores and one former Kmart.

In the blog post Wednesday, Mr. Hollar pointed to moves that Sears has made to improve its financial position -- including amending its credit lines, beginning a cost-saving program and selling assets -- as evidence the retailer is making progress with the planned turnaround.

--Michael Rapoport and Esther Fung contributed to this article.

Write to Anne Steele at Anne.Steele@wsj.com

(END) Dow Jones Newswires

March 23, 2017 02:47 ET (06:47 GMT)

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