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Associated Press
The appliances and clothing that Sears Holdings Corp., parent company of both Sears and Kmart, lost four times as much in the year’s first quarter as analysts had expected.

Sears cash burn imperils turnaround plan

– Sears Holdings Corp., which reported a quarterly loss more than four times analysts’ estimates last month, will exhaust its cash within five months at its current burn rate, endangering a turnaround plan based on asset sales.

The retailer, controlled by hedge-fund manager Edward Lampert, had $471 million in cash and equivalents on May 4, its lowest level since 2002.

The cash burn at Sears, which posted a $279 million loss in its first quarter, puts pressure on the retailer to boost asset sales as it seeks to improve income with a customer rewards program.

The parent of Sears and Kmart now has less than half the nine months of cash remaining at J.C. Penney Co., the retailer that last month ousted its chief executive officer and replaced him with his predecessor, according to data compiled by Bloomberg.

“The Sears story is similar to the J.C. Penney story,” said Jon Sablowsky, head of trading at Brownstone Investment Group in New York, which trades Sears debt. “You have a mediocre retailer which is fortunate to own a lot of real estate. But if they sell all the assets and aren’t able to turn the business around, that’s when the music stops.”

Sears used up $773 million of cash in the last three months, the most for a first quarter since at least 1995, bringing its deficit to $1.32 billion over the past year. That’s about $200 million wider than J.C. Penney’s shortfall and makes Sears the U.S. department store closest to exhausting its cash.

Sears spokesman Chris Brathwaite declined to comment on the cash balance.

Sears, which has an anchor store at Fort Wayne’s Glenbrook Square, has sold stores and spun off smaller-format locations and a portion of Sears Canada since the start of last year as it emphasizes its Shop Your Way loyalty program and online services.

Lampert, the billionaire who engineered the merger of Kmart Holding Corp. and Sears, Roebuck & Co. eight years ago, took over as CEO in February with a $1 annual salary. He and his RBS Partners fund hold about 55 percent of Sears shares, Bloomberg data show.

“Eddie Lampert … sitting on a ton of real estate assets, is not going to let the company go bankrupt because that will destroy Eddie Lampert,” said Howard Davidowitz of Davidowitz & Associates Inc., a retail consulting and investment banking firm based in New York. “There is no risk of default anywhere.”

The rewards program is becoming increasingly important as Sears tries to revive sales, which have declined for 25 straight quarters on a trailing 12-month basis.

More than 60 percent of Sears’ sales now come from Shop Your Way participants, and annual sales per member have increased by about 8 percent, Lampert said during a May 23 teleconference with analysts and investors.

Discount chain Kmart acquired Sears Roebuck in 2005 in a $12.3 billion takeover that Lampert said would create a company with the geographic reach and scale to compete with Wal-Mart Stores. Sears’ brands include DieHard and Kenmore appliances and Lands’ End apparel.

Sears has closed 110 stores since last year, Brathwaite said in an email, and the retailer has $7 billion of assets that can be converted into cash in the near term.

But shoring up the balance sheet on its own won’t keep Sears in business, Brownstone’s Sablowsky said.

“Ideally what they’re going to do is use the proceeds and reinvest into their business, provide the consumer with a more attractive offering and more attractive pricing,” Sablowsky said.

“If that doesn’t work, then their whole strategy of liquefying the business is not going to work.”