Sears still has plenty of levers to pull to avoid bankruptcy

A shopper exits a Kmart store scheduled for closing.
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Every round of store closings sends the same whispers echoing through Wall Street — how much longer can Sears hang on?

Yet despite the latest chatter about the chain's inevitable demise, sparked this time by news it will shutter 64 more Kmart stores in mid-December, analysts say the company has plenty of levers to pull to stay afloat this Christmas and beyond.

They include a robust real estate portfolio estimated to be worth roughly $4.5 billion; the prospect of additional cash infusions from CEO Eddie Lampert's hedge fund ESL Investments; and a potential sale of its Kenmore, Craftsman and DieHard brands.

That's not to say the company isn't edging closer toward a potential bankruptcy. Sears has $3.5 billion in long-term debt on its balance sheet, and is expected to report a $1.5 billion loss in operating cash flow this year, according to Moody's. That's on top of a $2.2 billion deficit last year, the ratings agency said.

The once-venerable department store chain also owes a minimum $596 million in pension contributions for 2016 and 2017 combined, and has a total unfunded pension and post-retirement obligation of $2.1 billion, according to Moody's.

The firm last week downgraded its speculative-grade liquidity rating on Sears, saying it's uncertain about Kmart's long-term viability.

"They continue to work on the gap and reduce costs, but challenges still remain," Christina Boni, a vice president and senior analyst at Moody's, told CNBC.

In a presentation for investors at the end of its second quarter, Sears said it had raised $9.1 billion in liquidity from 2012 through the three-month period ended in July.

Its financial maneuvers include last July's $2.7 billion sale of 235 Sears- and Kmart-branded stores to Seritage Growth Properties, a real estate investment trust Lampert spun off from the retailer.

Sears maintained leases at the majority of those properties; but under its agreement with Seritage, it maintained the option to exit an unprofitable store by paying an amount equal to one year's rent.

On Friday, Seritage filed a report with the Securities and Exchange Commission saying the retailer had exercised its right to terminate the leases at 17 unprofitable stores.

"We have been strategically and aggressively evaluating our store space and productivity, and will be accelerating the closing of unprofitable stores as we have previously announced," Sears spokesman Howard Riefs said in a statement.

The aggregate base rent at those 17 stores is roughly $5.8 million, or just below 3 percent of the chain's annual base as of June 30, according to the filing. Sears will continue to pay rent until it exits the stores, which is expected to occur in January. Riefs declined to say how much the decision would save the company or how much revenue the stores generate.

Previously, the company has said the amount it pays in rent to Seritage and through joint ventures with General Growth Properties, Simon Property Group and The Macerich Co. will decline over time. In the second quarter, it incurred an additional $48 million in rent expense.

Separately, a source familiar with the situation told CNBC that Sears plans to close 64 total Kmart stores, including the 17 listed in the SEC filing, in mid-December. Riefs said the company would provide an updated store count in its next quarterly filing.

Sears has already slashed its store base by more than half over the past five years. The company operated 4,010 locations in 2011, including 1,338 specialty stores that were spun off as Sears Hometown and Outlet in 2012. That number shrank to 1,672 in 2015, according to the company's latest annual filing with the SEC, and 1,592 as of its latest earnings report in August.

Sears owned 414 of those locations, the majority of which were under its namesake brand, as of its latest report. Based off its recent transactions, Debtwire senior analyst Philip Emma estimates the rest of its real estate holdings are worth some $4.5 billion.

The company also has the option to proactively give leased space back to property owners. It's used this tactic before, like when it sold back its Ala Moana lease in Hawaii to owner General Growth Properties for more than $200 million, Emma said.

Sears is also in talks to potentially sell off its Kenmore, Craftsman and DieHard brands, as well as its Sears Home Services businesses. The company told investors last month that it has received interest "from a variety of potential partners."

Yet for Emma, who likened the dwindling asset-rich business to that of now-defunct grocer A&P, Sears' tactics are simply a matter of "kicking the can down the road."

"You're running against the clock eventually," he said, noting that all of Sears' secured loans and bonds mature in a three-year window beginning in July. "Absent a miraculous turnaround in operations, Sears will need to continue engaging in a series of transactions to meet maturity obligations."

Most recently, the company said it had raised an additional $300 million loan from ESL, secured by a junior lien against its inventory, receivables and other working capital.

The company's nearest big maturity, which lands in July, is a secured loan facility of $500 million that it should be able to refinance, Emma said. And a look at the debt market shows investors are not forecasting an imminent bankruptcy, Emma added, saying the yields have not yet reached the mid- to high-teen levels typically associated with imminent distress.

Holders of the company's stock haven't been so lucky. Shares of Sears, whose revenue cratered from $41.6 billion in 2011 to $25.1 billion in 2015, were trading below $12 on Tuesday, compared with roughly $43 five years ago.

Sears, which is frequently ridiculed for failing to invest in its store fleet, has repeatedly said it is shifting into a member-centric model that focuses on its loyalty shoppers, best stores and top categories. In May, it opened a small, 10,000-square-foot store dedicated to appliances, in Fort Collins, Colorado.

"As we have stated publicly we continue to focus on the funding of our transformation while meeting all of our financial obligations," Riefs told CNBC in a statement.

In its latest investor presentation, Sears said it is focused on profitability, and generating positive adjusted EBITDA in the second half. Though this metric improved by $35 million in the second quarter, it deteriorated $1.56 billion from 2011 through 2015, according to its latest annual report.

"I don't know what they're referencing that would result in that," Emma said. "Never say never, but it seems fairly abrupt to go from the kind of numbers they've been [reporting] to all of a sudden doing a whole lot better."