Talk about awkward. Sears secured a $400 million loan this week from a hedge fund whose sole shareholder is the struggling retailer's chairman, CEO and leading investor.
The unusual agreement -- and what it signals about the overall health of Sears (SHLD) -- spooked Wall Street. Shares of the retailer plunged another 9% on Tuesday to the lowest level sine February.
"It's shady because there is clearly a conflict of interest here," said Brian Sozzi, who closely tracks the retail industry as CEO of Belus Capital Advisors.
Devil's in the details: Sears, which lost $1 billion during the first half of the year, revealed the loan in a vaguely-worded regulatory filing late Monday.
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The company said the the short-term loan is being provided by entities tied to ESL Investments, whose sole stockholder and CEO is Sears head Eddie Lampert.
ESL Investments controls 24.8% of Sears's outstanding shares, making it the No. 1 stockholder. Lampert himself is listed as owning 23.7% of the company's outstanding stock.
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The filing said the loan, which carries an annual base interest of 5% plus upfront fees of 1.75%, is being secured by 25 unspecified properties. Presumably that means some of the company's hundreds of Sears and Kmart stores.
Collateral damage: The fact that Sears didn't disclose which properties are being used as collateral is raising eyebrows. The loan even gives the lender (Lampert) the opportunity to swap out certain stores with other ones.
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As pointed out by Yahoo Finance, the $400 million loan values each store at just $16 million. That's a steep discount to the $20 million to $50 million Sears has typically been selling its stores for to other retailers and investors. It also seems cheap given the $5 billion of real-estate assets listed on the Sears balance sheet.
"We don't even know all the deal terms. Are shareholders getting a raw deal here? Did Lampert undervalue the stores?" said Sozzi.
For its part, Sears said in a statement to CNNMoney that the deal does not create a conflict of interest and is in the "best interest of the company."
Even if the deal terms are fair for Sears shareholders, the fact the loan is needed doesn't bode well for the company's sales metrics, especially as it heads into the critical holiday period.
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Last month, Sears revealed its ninth straight quarterly loss amid deep discounting. The company was forced to raise $500 million earlier this year by spinning off Lands' End (LE).
"The loan tells you the company is having another challenging start to the third quarter. They are going to enter the holiday season with zero momentum," said Sozzi.
Sears said the loan "allows us additional financial flexibility, particularly as we enter the holiday season." The company said it wants to be "proactive" in showing vendors and others it will "continue to generate liquidity needed to invest in our business and meet all of our financial obligations."
Cash concerns persist: Despite the cash infusion, Sozzi said he still believes Sears is barreling towards some sort of wind down by 2017 due to a cash crunch.
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He's not the only one worried about a possible restructuring. Last week, Fitch Ratings slashed its credit rating on Sears further into junk territory due to cash-burn concerns.
The ratings company cited the deep plunge in profitability and "lack of visibility to turn operations around."
Many shareholders blame Lampert for the company's struggles.
"He will go down as the man who ruined a national icon in Sears," he said.
