The firm represents Target Canada in its insolvency proceedings.
The shares of Toronto-based Sears Canada plunged as much as 50% early today, from very little to even less, to C$0.50 at the low point before recovering some and ending down 24% for the day at C$0.87, on its bumpy ride to zero.
The company announced in its first quarter results that there are “material uncertainties” about its “ability to continue to satisfy its obligations,” that it has doubts about its ability “to continue as a going concern,” and that lenders weren’t willing to keep it afloat for the next 12 months.
It further announced that it hired one of Canada’s leading bankruptcy and insolvency advisory practices – the same law firm that is representing Target Canada in its insolvency proceedings.
Sears Canada was partially spun off from Sears Holdings in the US, which still holds a 12% stake, and whose CEO Eddie Lampert owns a 45% stake in part via his hedge fund, ESL Investments.
The earnings report was relentlessly bad. In Q1 ended April 29, revenue plunged 15% year-over-year to C$505 million and gross margin dropped 5.6 percentage points to 22.6% as everything spiral down in the wrong direction.
It blamed “increased clearance activity in the stores,” along with “increased brand exits, merchandise receipt delays, and store remodels,” as well as massive discounts to get the stuff out the door.
It booked a net loss for the quarter of C$144 million, or C$1.42 per nearly worthless share, up from a net loss of C$63.6 million a year ago.
Then the report explained how, why, and when it would run of money. Sears Canada had C$164.4 million in cash at the end of the quarter, down from C$235.8 million at the end of Q4. This includes C$125 million “(before transaction fees)” in borrowed money and C$57 million it received from the sale of real estate that closed in the quarter.
On June 5, it drew $33 million, thus “effectively” maxing out its revolving credit line. And then it uttered the fatal words:
[T]he ability of the Company to continue as a going concern is dependent on the Company’s ability to obtain additional sources of liquidity in order to implement its business plan. Based on management’s current assessment, cash and forecasted cash flows from operations are not expected to be sufficient to meet obligations coming due over the next 12 months.
In order to address the need for additional liquidity, the Company had expected to be able to borrow up to an additional $175 million (before transaction fees) secured against its owned and leased real estate as part of the second tranche of its existing term loan. Based on the current status of negotiations with the lenders, the amount that the Company expects to borrow under the second tranche has been reduced to an amount up to $109 million (before transaction fees).
That, and the lack of available alternative sources of liquidity (through real estate monetizations, asset sales or otherwise), which may not be available in a timely manner, mean there are material uncertainties as to the Company’s ability to continue to satisfy its obligations and implement its business plan in the ordinary course. Accordingly, such conditions raise significant doubt as to the Company’s ability to continue as a going concern.
The lender of the C$109 million is private-equity firm KKR. Worried about throwing good money after bad? Now Sears Canada is looking at “strategic alternatives” that “may include a financial restructuring.” And “to assist the Company with this process,” it has hired BMO Capital Markets, as a financial advisor, and Osler, Hoskin & Harcourt LLP, as a “legal advisor.”
Osler’s Insolvency & Restructuring Group is “Canada’s leading multi-disciplinary practice offering top-tier legal expertise in all aspects required to resolve the most compelling business challenges,” as the law firm says. It already represents Target Canada in its insolvency proceedings commenced in 2015 when it shuttered its 133 stores and 7 more locations it hadn’t even occupied.
“In light of these developments,” Sears Canada canceled its annual meeting that was scheduled for tomorrow. And “as a result,” Jeff Stollenwerck, a SVP at Sears Holdings, “has resigned as a director effective today.”
This is what a meltdown looks like. Sears Canada operates 95 department stores, 29 Sears Home stores, 71 Hometown stores, 16 Outlet stores, 69 Sears Travel offices, and 32 Corbeil appliance stores.
“It’s going to be quite a show if this ends up in a bankruptcy,” Alan Marcovitz, president of mall landlord Westcliff Group, told the Globe and Mail. The firm sits on seven Sears leases.
So which Sears is going to pull the ripcord first? Sears Holdings in the US had warned in March that it had “substantial doubt” it would be able to “continue as a going concern” as it might not be able to cover its obligations over the next 12 months. It blamed a recent accounting rule that forced it to make this disclosure, and that it didn’t reflect management’s views.
But its ingenious strategy of cost-cutting and store-closing its way out of trouble is on track to lead to zero. Read… Sears Revenues Plunge, to Hit Zero in 3 Years, Shares Jump