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Fitch Says Sears’ Already Bad Business Could “Potentially Worsen”

Sears keeps promising shareholders it’s in the midst of a turnaround that will see its business better and more efficient, but Fitch Ratings doesn’t seem to see any signs of a comeback.

The ratings agency is holding firm on the “CC” rating it gave Sears last September, which means highly vulnerable and is just two levels away from a default designation. When it initially gave the retailer the downgrade, Fitch said Sears’ cash wouldn’t carry it through 2016.

Now Fitch is saying it expects Sears’ EBITDA (earnings before interest, tax, depreciation and amortization) to be in the negative $600 million dollar range this year—and the number could approach $800 million to $1 billion next year. A revenue decline close to 20 percent is also likely because of the retailer’s reported 10 percent dip in comparable store sales.

The negative sales figures are projected to continue in the negative mid-single digit range in 2016 and 2017, with a high single digit hit to the top line as the retailer shutters stores.

Cash burn has been a big problem for Sears, and the continuously ailing retailer has been selling off its assets (read: stores) to increase liquidity. Fitch said Sears’ cash burn could reach $1.1 billion this year and could “potentially worsen” in 2016.

The retailer racked up $3.1 billion in liquidity through August this year, $2.7 billion of which came from its sale-leaseback deals through its real estate investment trust Seritage Growth Properties. So far, Sears has sold 235 of its properties and leased back a 50 percent interest.

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Sears believes Fitch is painting an overly bleak picture of its business, however.

In an emailed rebuttal to Crain’s, a Sears spokesperson said, “Fitch is entitled to its opinion. However, we think they’re missing some very key points when it comes to our business.”

The spokesperson pointed out Moody’s more favorable rating in August, when it moved the retailer from negative to stable, and though Sears acknowledged its poor same store sales, it said they were only so because the company is cutting expenses to increase profitability.

In its latest quarterly report released in August, Sears said its comparable store sales declined 10.8% in the period, including a 7.3% decrease at Kmart and 14 percent loss at Sears.

Sears chairman and CEO Edward S. Lampert said, “The second quarter marked our fourth consecutive quarter of improved results,” meaning losses shrank from $298 million to $200 million year over year.

“During the quarter we completed many of the objectives we laid out to transform Holdings from a traditional, store-network based retail business model to a more asset-light, member-centric integrated retailer leveraging our Shop Your Way platform,” Lampert added. “The successful completion of these actions has positioned Sears Holdings for long-term success and is consistent with our strategy to focus on our best stores, reward our best members and pursue our best categories as part of our transformation.”

Further, as Sears’ CFO Rob Schriesheim explained, the company completed its rights offering and sale-leaseback transactions, plus completed an amendment and extension of its asset-based credit facility.

“We have substantially enhanced our financial flexibility and achieved our objective of reducing our reliance on inventory as a source of financing,” Schriesheim said.