It is difficult to paint a scenario where Sears Holdings actually returns to free cash flow (FCF) neutral or generative state when its sales continue to decline and footage shrinks, according to analysts at Evercore ISI.

Evercore ISI analysts Greg Melich and his colleagues in the reported titled “Sears Holdings: A Brief Update from the Bridge of the Titanic” added that they may be optimistic under the assumption that Sears Holdings burn rate improves from an average of $(1.5) billion over the past three years to only $(1) billion this year.

The analysts also noted that the $2.7 billion cash inflow from the sale of real estate eliminated the possibility of a liquidity event that they thought would otherwise happen in the second quarter.

According to them, if Sears Holdings reduces its 2018 debt maturity from $2.25 billion to $1.25 billion, it is a “positive sign that the management believes its current burn rate will improve to the extent that its current cash pile won’t be needed to fund operating losses.”

“We are less sanguine and assume that SHLD is out of cash in 2019 without additional asset sales,” said Melich and his colleagues.

Sears Holdings SHLD

Sears 2Q financial performance update

Melich and his fellow analysts made the comment after Sears Holdings issued an update to its second quarter financial performance that showed double-digit declines in comparable store sales.

The retailer’s comparable store sales declined 10.6% in the second quarter including a 13.9% and 6.9% drop in Sears Domestic and Kmart, respectively. Sears Holdings expected its adjusted EBITDA to improve in the range of $(189) million to $(248) million, better than its $(289) million adjusted EBITA in the same period last year.

The analysts noted that Sears Holdings’ improvement in EBITDA was “notable, but it highlights a nearly Sisyphean task of attempting to transition from a traditional retailer to a store-light model.”

Sears continues to exit/ reduce exposure in difficult to compete categories

Melich and his colleagues observed that Sears Holdings continues to exit or reduce its exposures in categories where it is experiencing difficulty to compete such as apparel and consumer electronics.

The analysts estimated that the retailers’ comparable store sales would fall at around 10% run rate until the end of the year. According to them, the decline in its comparable store sale in 2016 will likely be due to the following:
1.) Some normalization in decline from cycling the exit of categories (a positive or neutral event)
2.) Combined with the drop in sales related to ~180 Seritage Sears locations that will shrink its footprint by half
3.) Compounded by continued sales drop related to customers transitioning to other retail formats