PREVIEW-Weak US economy leaves Sears with few options-sources

* What: Sears Holdings Q3 earnings

* When: Dec. 2

* Analysts see few options for improving performance

* Shares fall more than 10 percent on Tuesday

By Karen Jacobs

ATLANTA, Nov 25 (Reuters) - Shares of Sears Holdings Corp (SHLD.O), down about 65 percent in the past two months, may have further to fall if the weak U.S. economy further dampens sales at its Kmart and Sears, Roebuck stores.

The retailer, controlled by hedge fund manager Edward Lampert, is expected to report a third-quarter loss of 44 cents a share on Dec. 2, compared with a profit of 1 cent a share a year earlier, according to Reuters Estimates.

Some analysts expect the losses to keep piling on for the department store and discount retailer even after the holiday shopping season, which is expected to be one of the worst in years.

Deteriorating results, coupled with a global financial crisis, could hurt Sears' access to much-needed cash, analysts said.

Sears Holdings said in a statement that it has been prudent with capital and that it is working to improve its business. It said a $4 billion credit facility provides about $1 billion in available credit, even at peak borrowing levels, and that it expects to completely repay borrowings under the facility in December.

"Sears Holdings has consistently maintained a strong capital structure with more than adequate liquidity," the company said in its statement.

But Sean Egan, managing director of Egan-Jones Ratings, an independent credit ratings firm, said not only is Sears poised to lose additional sales as consumers spend less and shop at rivals like Wal-Mart Stores Inc (WMT.N) for basic goods, but a contracting economy makes the company less of a real estate play.

Hedge fund manager Lampert gained favor before the 2005 merger of Kmart and Sears for making Kmart shareholders rich by selling off real estate.

"There will be trouble, a lot of trouble for Sears going forward," Egan said. "The issue is whether or not management recognizes the true state of affairs and takes actions to protect the company and its stakeholders."

Egan said the retailer's best hope for surviving tougher times could lie in merging with another company as the weak economy limits what can be done to turn around results.

"For example, raising capital in the capital markets is fairly difficult right now," Egan said. "Selling stores is difficult now. Squeezing more dollars out of the operation is difficult in this environment."

CASH IS KING

Investors will be looking to see if the company's cash position is holding up. Sears had $1.5 billion in cash as of Aug. 2, down from $2.6 billion a year earlier and $1.6 billion in February.

A 62 percent profit decline in the second quarter followed a surprise first-quarter loss, and same-store sales at Sears and Kmart stores have fallen for more than two years.

"The only thing keeping Sears alive right now is their cash," said Don Delzell, an independent research analyst and consultant who works with retailers and consumer-goods companies.

But Morgan Stanley said in a research note on Tuesday that while it expects third-quarter results to be worse than Wall Street estimates, it does not believe Sears is vulnerable to the point of filing for bankruptcy. It added that the retailer has plenty of availability under its revolving credit pact.

"It would take Sears Holdings' largest vendors to pull back terms dramatically to actually bring the company into Chapter 11," Morgan Stanley analyst Gregory Melich wrote. "We do not believe Sears' largest vendors are there yet."

Sears' shares, which currently trade in the $30 range, closed above $100 as recently as Sept. 19.

Some say that included in the stock decline is a growing realization on the part of investors that real estate sales and other strategies Lampert may have considered no longer look as feasible in the current U.S. economy.

"Now that we've seen the real estate market dry up ... it makes it a harder case to say that there is this value in its assets," said Kim Picciola, a Morningstar analyst.

Hedge fund chief William Ackman disclosed this month that he sold shares in Sears Holdings and some other companies because the companies had controlling shareholders. In a filing with the U.S. Securities and Exchange Commission, Ackman's Pershing Square Capital Management said it slashed its stake in Sears to 501,000 shares from 6.7 million.

In the week following Ackman's disclosure on Nov. 13, Sears Holdings shares touched new 52-week lows for at least four days.

Shares of Sears Holdings were down 10.61 percent, or $3.75 at $31.58 on Nasdaq on Tuesday. (Reporting by Karen Jacobs; Editing by Toni Reinhold)