NEW YORK Sears Holdings (SHLD.O) shares fell more than 5 percent on news that CIT Group (CIT.N) will no longer provide loans to Sears' suppliers to finance their shipments to the struggling chain.
The news on Thursday triggered fears that other lenders to Sears' suppliers could follow a similar path, making it harder for the retailer to do business.
"It could start a snowball effect for Sears," turnaround expert Gene Baldwin of CRG Partners said.
When CIT or other lenders refuse to finance Sears' suppliers, Sears may have to draw on its line of credit to pay for goods up front, Baldwin said. If too many vendors seek prepayments, banks may be pressured and cut back on lines of credit for Sears, making it harder for the retailer to purchase inventory.
The news of CIT's decision comes just weeks after the operator of Sears department stores and the Kmart discount chain posted dismal holiday sales numbers, and decided to close as many as 120 stores.
"We disagree with their action," Sears spokeswoman Kimberly Freely said in an email to Reuters. "In fact, we'd point out that other (lenders) are approving shipments to Sears Holdings and CIT's payables represented less than 5 percent of inventories."
A Bloomberg report citing unnamed sources said late Wednesday that CIT, the business lender run by Wall Street executive John Thain, will no longer approve credit for orders after Wednesday. CIT spokesman Curt Ritter said it does not comment on specific customers.
Sears, which has seen sales decrease every year since hedge fund manager Edward Lampert formed it with the merger of Sears and Kmart in 2005, also pointed out that it "has more than adequate liquidity and ample resources at our disposal."
Investors will get some clues as to Sears' future when it reports its annual results on February 23. Lampert typically publishes a letter to shareholders around that time.
Sears' shares recovered somewhat and were down 2.3 percent, or 69 cents, at $32.21 in afternoon trading.
The retailer, home to brands including Craftsman tools and Kenmore appliances, is feeling pressure from the economy, aggressive competition and its own reputation for run-down locations and poor customer service.
A Sears Holdings' collapse was not seen as likely in the near future, but that could change if key vendors demand cash on delivery, decide to ship in smaller quantities, or ask for letters of credit, bankruptcy experts have told Reuters.
MOUNTING WORRIES, HARSHER TERMS
CIT and other finance companies, known in the industry as factoring companies, provide short-term loans to manufacturers while they are waiting to be paid by those receiving their goods or services. Apparel is one key category for which credit is often provided by factoring companies.
When a factoring company pulls credit to suppliers, it could trigger a similar reaction from others, some said.
"Though CIT's factoring is only 5 percent of Sears business, I have asked smaller factors what they are thinking, (and) if everyone jumps (the) same way CIT did, then Sears will have a problem," Munir Mashooqullah, founder and president of apparel supply chain management firm Synergies Worldwide, said.
One factor, whose firm provides cash-flow services, has turned down many requests from Sears' vendors in the past six months because of the retailer's problems.
Sears may have to pay cash on delivery in some cases if it wants vendor deliveries, this person said, noting that such a development would hurt Sears' cash flow.
"When the factoring community starts pulling back , in order to get goods, they have to provide vendors with better terms," this person said, noting that factor defections could snowball otherwise.
Factors want to see evidence Sears is fixing its business, said the person who spoke on condition of anonymity, not wanting to jeopardize relations with Sears.
A different factor, also declining to be identified, agreed that Sears would likely have to pay vendors more quickly and offer shorter payment terms to keep factors on board.
(Reporting By Dhanya Skariachan and Phil Wahba in New York, Tom Hals in Wilmington, Delaware, and Nivedita Bhattacharjee in Chicago; Editing by Dave Zimmerman and Maureen Bavdek)