Sears Holding Corporation (NASDAQ: SHLD) has been closing many of its Kmart and

Question

Sears Holding Corporation (NASDAQ: SHLD) has been closing many of its Kmart and Sears stores during 2016 and 2017. The stores it is closing have not been profitable for Sears and it is looking to improve profitability with the store closures.

Sears’ fiscal year-end is the Saturday closest to January 31. Below are its statement of cash flows for the most recent three years. (Statements have been condensed and adapted for educational use.)

In January 2017, Sears sold its Craftsman brand for $900 million to Black & Decker, the manufacturer of power tools and accessories. That same month, a hedge fund affiliated with the CEO of Sears loaned Sears $500 million. Sears also has plans to sell about $1 billion of real estate assets in 2017.

Discussion Questions - Using its statements of cash flows, answer the following questions about Sears.

1. Why do you think Sears has a year-end around January 31, rather than using a calendar year-end of December 31?

2. What do you notice about the company's net income over the past 3 years?

3. Over the past 3 years, has Sears generated cash from its primary business operations? If not, where has their cash come from?

4. Describe what investing activities Sears has been involved in over the past three years based off the company's cash flow statements. Are investing activities an overall source or use of funds for Sears? What does this imply?

5. What category of activity on the statement of cash flows would the sale of the Craftsman brand be considered for 2017

6. What category of activity on the statement of cash flows would the loan from the hedge fund be considered for 2017?

7. What category of activity on the statement of cash flows would the sale of Sears real estate holdings be considered for 2017?

8. After analyzing the company's cash flow statement, what is your impression of the company's future?

Sears Holding Corporation Statements of Cash Flows (in millions) Year Ended Jan 30, 2016 Jan 31,2015 Feb 1, 2014 Operating activities: Net income (loss) Adjustments to convert to cash basis (1,128) (1,039) (2,167) (1,810) 423 (1,387) 7 (1,109) Net cash from operations Investing activities Sales of property and investments Purchases of PP&E; Other investing activities 424 (270) 173 327 2,730 (211) 995 (329) Net cash used in investing 2,519 664 Financing activities: 1,025 (80) 994 (83) 238 (14) (233) 902 (38) 419 609 1,028 Proceeds from issuance of debt Repayments of debt Other increases (decreases) in debt Dividends paid for Sears Canada Other financing activities (1,405) 1,091 (50) (27) 484 285 (364) Net cash provided(used) by financi? Effect of exchange rates Net change in cash Cash, beginning of year Cash, end of year (12) 250 238 (778) 1,028 250

Explanation / Answer

1.Sears is into retail business with peak-season physical & online sales in the holidays such as December. So, concentrating on sales, may lead to inadequate support to the finance & accounts department , for closing the accounts & finalisation as well as full and final details from various sections to aid the account closure. Hence the one month-gap adopted by the company. 2..The company has made loss in all the 3 years 3..No. Cash has been increasingly used-up in operating activities, in all the 3 years --as seen from negative cash flows in those years. Cash was generated by the investing activity in all these years ,specifically ,sale of property & investments. 4.. The company has been involved in sale of property & investments in all 3 years ---which was source of cash for it--meaning cash inflow (generation of cash) to the company 5..Sale of the Craftsman brand will be considered as cash inflow under the INVESTING cash flow category. 6..Loan from the hedge fund is a cash inflow(source of cash) under the FINANCING category 7..Sale of real estate holdings as cash inflow under the INVESTING cash flow category. 8..Cash flow patterns of the company can be summarised as follows in a table: Fiscal Yr CFFO CFI CFF 2014    - + + 2015    - + + 2016    - +    - As seen from the above, the company does not generate cash from regular operations at all, in all the 3 years--- this despite supporting by selling property & investments & increasing issue of debt ,in the first 2 years. Cash has bben increasingly used-up in operations ,old debt repaid & new debt acquired in 2017. This suggests an unusual pattern in which the company does not generate adequate cash from its core operations for which the business was formed but also uses up cash generated by selling its long-term assets & also incurs debt, which increase the interest expenses---- to the already cash-strapped company. The fact that long-term assets are consistently sold to finance regular operations and to settle debt----signifies that the Company is ceratinly in financial distress,in all probability to impending liquidation The company seems to have failed , despite restructuring & distress sale of its assets.

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