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Kmart, Sears face ‘substantial doubt’ about finances as losses grow

The parent company of Sears and Kmart issues a warning about the company’s finances. (Sandy Huffaker/Bloomberg News)

After years of mounting losses, the parent company of Sears and Kmart says there is “substantial doubt” about its financial viability.

“Our historical operating results indicate substantial doubt exists related to the company’s ability to continue as a going concern,” Sears Holdings said Tuesday in its annual report.

The biggest question, the company said, is whether it can raise enough cash to stay afloat. It has $4.2 billion in debt, up from $3 billion a year ago.

Why are Macy’s and Sears in distress?

Sears Holdings is the parent of Kmart and Sears, Roebuck, & Co.  It was formed after the March 2005 merger between the two companies, both of which are American retail icons dating back to the late-19th century. The decline of suburban shopping malls and the rise of online retail have dealt a double-whammy to the businesses. In recent years, the parent has shuttered dozens of stores and sold off some of its brands.

Sears Holdings hasn’t turned an annual profit since 2010. Last year, it reported losses of $2.2 billion. Annual revenue, meanwhile, declined 12 percent to $22.1 billion.

Last month, the company said it was planning a “strategic transformation” by trimming $1 billion in annual costs. It also recently announced plans to close an additional 150 Kmart and Sears stores, and sold its Craftsman brand of tools and lawn equipment to Stanley Black & Decker for roughly $900 million.

“We believe the actions outlined today will ensure that Sears Holdings becomes a more agile and competitive retailer with a clear path toward profitability,” Edward S. Lampert, the company’s chief executive, said in February.

Sears to sell Craftsman tool brand and close 150 stores, many of them Kmart locations

But six weeks later, the company’s tune has changed.

Sears executives said they are trying to raise cash by financing debt and selling off real estate, but warned that those efforts may not be successful.

“We acknowledge that we continue to face a challenging competitive environment,” the company said. “We cannot predict, with certainty, the outcome of our actions to generate liquidity.”

The warning is another setback for Lampert. His hedge fund, ESL Investments, has provided the company with up to $1 billion in financial support. Nevertheless, Sears Holdings shares have steadily fallen over the last decade under his leadership, contributing to a decline in his net worth from more than $3 billion to just over $2 billion, according to estimates by Forbes magazine.

Shares of Sears plunged nearly 13 percent Wednesday morning after the announcement.

In a statement released Wednesday, Sears Holdings chief financial officer Jason Hollar, said that media reports had failed to include “the actions we are taking to mitigate” financial risks.

“It is very important to reiterate that Sears Holdings remains focused on executing our transformation plan and will continue to take actions to help ensure our competitiveness and ability to continue to meet our financial obligations,” Hollar said in the statement.

In addition to $1 billion in funding from Lampert’s ESL Investments hedge fund, Sears expects this year to save $1 billion in costs from a restructuring.

“Despite the risks outlined we remain confident in our financial position and remain focused on executing our transformation plan,” Hollar said in his statement.

Staff writer Thomas Heath contributed to this story.

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