Sears is running out of ways to address its cash drain.

Even before Sears Holdings Corp. said this week it's considering selling Sears Canada, the retailer had already been divesting real estate and pieces of its business such as Lands' End to raise the cash it needs to fund operations. That's left Sears, which faces operating losses of more than $1 billion a year for the foreseeable future, with fewer attractive assets left to sell to keep plugging the gap, according to International Strategy & Investment Group LLC.

“After Sears Canada, you look at what remains and there's not a whole lot before you get to the scrapping and junking,” Louis Meyer, a special situations analyst at Oscar Gruss & Son Inc. in New York, said in a phone interview. “This is like a long-term liquidation sale, and Sears is trying to spin off or sell anything that has value.”

Sears may divest its $746 million remaining stake in its Canadian stores, possibly as a sale of the whole unit. Pension funds, retailers, or private-equity firms may take a look, said Desjardins Securities Inc. Sears's remaining units would include its core store chains Sears and Kmart, a reinsurance unit, and an auto-repair business. The more it sells, the less there is to generate cash or borrow against the next time funding needs arise, said David Stowell, a professor of finance at Northwestern University's Kellogg School of Management.

Chris Brathwaite, a spokesman for Hoffman Estates, Illinois-based Sears, said in an e-mailed statement that the retailer “is embarking on a transformation of its business, from simply being focused on selling products in a traditional store network, to serving our members—wherever, whenever, and however they want to shop. As part of this transformation, we've continued our efforts to simplify and focus our company, while simultaneously creating long-term value for our shareholders.

''Through these efforts and through other initiatives, we believe we have demonstrated the financial flexibility we have to fund our transformation and to create long-term shareholder value,'' he said. ''We have met our maturing obligations, and we believe we've positioned ourselves to give our transformation time to bear fruit.''

Sears was at one time the largest U.S. department-store chain, profitable and generating cash. When it split off financial businesses such as Allstate Corp. and Discover credit cards to become purely a retail chain, investors cheered. Now, every analyst who rated the company as of this year says investors should sell, according to data compiled by Bloomberg.

Shares of Sears fell 0.2 percent to $39.27 at 10:13 a.m. New York time today.

Canada Stake

Forget price-sales ratios and peer-group comparisons: Any valuation of the shares based on traditional metrics is flawed because what matters now is how much the remaining pieces can fetch, said Matt McGinley, a New York-based analyst at ISI. The stock is being propped up by Chairman and Chief Executive Officer Edward Lampert and his hedge fund, which own almost half the shares, he said.

Sears's Canadian operations, which were spun out in 2012, last year announced plans to cut almost 800 jobs and sell store leases to raise cash as it tried to stop a streak of 20 straight quarters of declining year-over-year revenue.

Major landlords, pension funds, or private-equity firms may have an interest in Sears Canada, according to Keith Howlett, an analyst at Desjardins in Toronto. The sale also could give Macy's Inc. or Kohl's Corp. an opportunity to expand in the country, he wrote in a May 14 report. On the other hand, Target Corp., which is larger than Macy's and Kohl's, has struggled with its own expansion into Canada.

''Sure, there will be plenty of lookers, but I don't think they're going to get too many bidders,” McGinley of ISI said in a phone interview. “Given the issues Target has had, the appetite for a U.S. retailer like Macy's to go into Canada is probably quite limited. My hunch is it's unlikely they get a bid for Sears Canada and probably wind up spinning this out to shareholders.”

Jim Sluzewski, a spokesman for Cincinnati-based Macy's, said the company doesn't comment on speculation. Jen Johnson, a spokeswoman for Menomonee Falls, Wisconsin-based Kohl's, didn't respond to a phone call or e-mail seeking comment.

'Challenging' Changes

The Canadian stores are just the latest chunk of Sears to be divested. Earlier this year, the retailer spun off its Lands' End clothing brand, which has declined 19 percent since becoming a listed stock. Sears has also said that it's considering alternatives for its auto-center business. Some investors have eyed the reinsurance unit as another possible spinoff.

Lampert wrote in a May 9 blog post that Sears's recent moves are part of the retailer's “transformation.”

“Turnarounds are challenging, but transformations are even harder because not everyone sees the direction you're heading in or your destination,” Lampert said. “After spending our annual meeting with shareholders, associates, and other partners, however, I am hopeful that looking carefully at other companies' transformations sheds more light on the actions we are taking and why.”

He cited Apple Inc. and General Dynamics Corp. as other companies that have gone through transformations.

Collateral Question

The problem with divesting asset after asset is that eventually you run out, said Northwestern's Stowell. If losses continue to mount, Sears has to find cash somewhere, and debt providers aren't going to lend to Sears if there aren't high-quality assets to back the debt, he said.

“To me, a big question is collateral,” Stowell said in a phone interview from Evanston, Illinois. Selling assets “jeopardizes cash flow to support the debt. At some point, it's just a zero-sum game, and they may not have the ability to raise additional financing if all their assets are already encumbered.”

Sears's free cash flow has been negative for six of the last eight quarters, according to data compiled by Bloomberg. At this rate, if operations don't improve or it doesn't obtain additional financing, Sears will burn through its cash in less than nine months, the data show.

“We continue to view Sears as a struggling retailer in the process of undergoing a slow, orderly liquidation,” Evan Mann, an analyst at Gimme Credit LLC, wrote in a May 14 note. “Although near-term sources of liquidity remain adequate, we remain skeptical regarding the company's longer-term credit prospects.”

Insurance companies that provide protection to Sears suppliers have scaled back policies in recent months, said people with knowledge of the matter, who asked not to be identified because the matter isn't public. Such policies reimburse manufacturers if a retailer is unable to pay for their goods. With less coverage, vendors may decide to sell smaller quantities or even stop supplying products to Sears. Suppliers find it harder to get coverage for Sears than any other chain, one person said.

Howard Riefs, a spokesman for Sears, said May 14 that the company's ties with vendors are strong and it hasn't seen any disruption in the flow of products.

CEO Lampert “has been very clever in sustaining this company far beyond what most people thought it could survive, but at some point there is no more wiggle room,” Stowell said. “I only hope the company figures out a solution, but there's no apparent miracle cure that I see, and it's a bit of a race.”

When Sears merged with Kmart in 2005, Lampert said it would create a company with enough scale to compete with Wal-Mart Stores Inc. Instead, Sears is reminiscent of defunct retailers Bradlees and Caldor, Meyer of Oscar Gruss said.

It can continue to try to sell off real estate, though some of it may not be seen as desirable locations, and it's also difficult to find buyers for big-box stores as retailers cut down on square footage, Meyer said. Selling Sears Canada, which had a total market value of $1.46 billion yesterday, is just another attempt to get cash in the interim, he said.

“It's like stripping airplanes in the desert for parts,” Meyer said. “At first, a few parts are taken out and nobody really notices, but towards the end they really start gutting out the big pieces. Right now this is a liquidation game plan, and you know how that's going to end up.”

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Sears Struggles With Cash Drain

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