Sears Clipped By Moody’s (SHLD)

Moody’s Investors Service has had a pretty active day for downgrades, with Sears Holdings Corporation (NASDAQ: SHLD) being the latest of the active companies to get a credit or debt rating downgrade.  The corporate family and probability of default ratings for Sears was cut to ‘Ba2’ from ‘Ba1’ and its speculative grade liquidity rating was cut to SGL-2 from SGL-1.  More importantly, the retail giant’s outlook is stable.

Moody’s said this downgrade is based primarily on the continuing decline in the company’s operating performance, which Moody’s said has caused leverage and interest coverage deterioration.  The company remains challenged in certain product segments.  The company’s Ba2 rating considers its formidable position in hardlines and in related service segments and its respectable spot in home electronics and the grocery and consumables segments.  It further notes the 73% stake in Sears Canada.

The continued weak spot is in the apparel business.  Moreover, it has weak operating margins, and its historically shareholder-friendly financial policy.

The outlook being listed as stable is based upon the strength of Sears’ hardlines brands and the support those brands provide to the struggling soft lines.  The SGL-2 downgrade of the speculative grade liquidity rating is listed as mostly from the upcoming March 2010 maturity of the $4 billion asset-backed revolving credit facility.  But Moody’s also noted that it expects that Sears will be able to fund virtually all of its cash flow requirements from internal sources and only minimal borrowings under that $4 billion credit revolver.

We recently featured Sears as one of the retail and consumer stocks which could double from recent lows.  This downgrade technically takes it further into junk-bond territory.  But it also now has credit downgrades removed for now since that stable rating was included rather than a “negative” outlook.

Either the market is looking way out to better times or the market has figured how worthless some of these credit downgrades are.   The “stable” downgrade has helped there with this.  Sears closed up almost 7% at $42.88.  Its 52-week trading range is $26.80 to $112.80.

JON C. OGG