Sears Gets Downgraded
-- Home Textiles Today, 4/4/2005
New York — By Don Hogsett
Clearly apprehensive about the challenges facing the newly combined Kmart and Sears operations, all three major debt rating agencies have downgraded Sears' credit rating to junk bond status, citing challenges to profitability and the task of making both retail nameplates relevant to consumers.
Standard & Poor's retail analyst Gerald Hirschberg took the Sears, Roebuck rating down to BB+ from BBB, and assigned a BB+ rating to the new Sears Holding Corp., with a negative outlook.
The downgrade, he said, “reflects an increase in business risk for the combined company, as both Sears and Kmart will continue to be challenged to improve store productivity and profitability. Each business has struggled with intense competition over a number of years from companies like J.C. Penney Co., Kohl's Corp., Wal-Mart Stores and Target Corp., moreover, difficulties in integrating different corporate cultures while trying to make Sears and Kmart stores more relevant to consumers in terms of convenience, merchandising and value.”
On the upside, S&P noted, “cross-selling opportunities could enhance future sales for both companies. For example, Craftsmen, Kenmore and DieHard merchandise from Sears can be sold in Kmart stores, while Kmart's offerings of Martha Stewart brand items could bolster the home fashions assortment of Sears stores. In total, management believes that cross-selling opportunities and the conversion of Kmart stores into Sears stores could add $200 million in incremental annual profits over time.”
Additionally, Hirschberg said, “management believes that it can achieve annual cost savings of about $300 million through improved scale, supply chain improvements and administrative and other operational efficiencies. These cost-saving synergies are expected to be more easily achieved than the incremental sales.”
Moving in locks step, Moody's and Fitch similarly took Sears' ratings down. Fitch Ratings cut the senior unsecured rating on Sears down two notches to BB, its lowest investment-grade rating, from an earlier BBB-minus. Fitch described the outlook as negative. Moody's Investors Service took Sears down two steps to Ba1, its highest junk rating, from an earlier Ba2, and said the outlook is stable.
