The Morning Brief: Sears Takes More Losses, Borrows from ESL

Sears Holdings reported yet another horrendous quarterly loss. The fading mass retailer also disclosed that its largest investor, Edward Lampert’s ESL Investments, agreed to make another financial commitment to prop up the company. In the second quarter, Sears said it lost $395 million, nearly double the $208 million deficit it reported a year ago. Adjusted for significant items, the current loss is closer to $217 million compared with $256 million a year ago. Sears also disclosed that Bay Harbor, Florida-based ESL agreed to provide $300 million of additional debt financing secured by a junior lien against inventory, receivables and other working capital.

“We continue to face a challenging competitive environment,” Lampert said in a press release. Sears also reported cash proceeds of $176 million from the sale of real estate properties and other asset sales in the second quarter.

“During the first half of 2016, we have demonstrated our ability to finance our transformation strategy with the levers available to us through our portfolio of assets and businesses,” added Rob Schriesheim, Sears’ chief financial officer, in a press release. “The sale of assets, combined with the previous closing of the $750 million term loan, together with the $500 million secured loan facility, provided us with over $1.4 billion of financing during the first half of 2016. We have continued to demonstrate our flexibility in the third quarter of 2016 with the announcement of the recently received offer to provide $300 million of additional debt financing.”

Shares of Sears on Thursday fell a little more than 4 percent to $14.07, and are now down nearly a third for the year-to-date.


William Ackman’s Pershing Square Holdings has sliced one-third of its loss in less than two months. The activist hedge fund, managed by New York-based Pershing Square Capital Management, is now down 15.5 percent for the year through August 24 after being down as much as 22.6 percent as recently as the first week of July. However, it still has a long way to go to get back to even for the year, and it must climb nearly 50 percent to get back to its high-water mark before it lost more than 20 percent in 2015.



Shares of hedge fund favorite Mylan Laboratories fell a little less than 1 percent after surging more than 3 percent earlier in the day. The market was reacting to the drug company’s announcement that it would provide a series of discounts for some customers of its EpiPen, which treats severe allergies. The company had drawn widespread criticism in recent days after it was reported that the price for the EpiPen had surged in recent years. At the end of the second quarter, the stock was the second-largest U.S. stock holding of John Paulson’s New York-based Paulson & Co., which in turn was the company’s third-largest investor. The stock is the eighth-largest U.S. listed long of David Einhorn’s New York-based Greenlight Capital.


Shares of hedge fund favorite St. Jude Medical fell 5 percent on Thursday after short specialist Muddy Waters Research targeted the cardiovascular medical device maker, according to Yahoofinance. Muddy Waters believes St. Jude’s cardiac pacemakers will be recalled. As a result, the firm says there is a “strong possibility” that “close to half” of St. Jude’s revenue could disappear for two years, according to Yahoo. At the end of the second quarter, at least 22 hedge funds included the stock among their top-ten holdings, according to an analysis by Goldman Sachs, including San Francisco-based Farallon Capital Management.


Oops! San Francisco-based ValueAct Capital Management on Thursday disclosed that it purchased a million shares of one of its long-time activist holdings, Allison Transmission, for between $199 and $204 per share. The purchases, which took place from August 17 to August 24, lifted the activist’s stake in the maker of automatic transmissions for large trucks to 5 million shares, or 8.5 percent of the total outstanding.

The night before, however, ValueAct made a similar filing, erronously announcing that it was selling, not buying. In the accurate filing on Thursday, ValueAct said Allison shares are undervalued and that it plans to have conversations with management and the board to discuss ways to boost the stock price. Among the topics: Alliance’s business, management, board composition — including whether it makes sense for a ValueAct employee to become a director — operations, capital allocation, asset allocation, capitalization, dividend policy, financial condition, mergers-and-acquisitions strategy, overall business strategy, executive compensation and corporate governance.