SEARS CANADA INC. BANKRUPTCY CASE STUDY FILED ON 06/22/2017

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1 SEARS CANADA INC. BANKRUPTCY CASE STUDY FILED ON 06/22/2017 CreditRiskMonitor s warning of Sears Canada Inc. s ( Sears Canada ) bankruptcy risk was determined by a combination of factors: Monthly Average FRISK score Page 2 Company Report Detail 3 FRISK Deep Dive 4 Adjusted Price Volatility 5 FRISK Stress Index 6 Peer Analysis 7 Quarterly Performance Ratios 8 Quarterly Leverage Ratios 9 Quarterly Liquidity Ratios and Rates of Return 10 Annual Statement of Cash Flows 11 News Alerts: A Timeline of Concerning Headlines 12 About This Report/Contact CreditRiskMonitor 13 1

2 MONTHLY AVERAGE FRISK SCORE CreditRiskMonitor s FRISK score has been warning of financial stress at Sears Canada (TSE: SCC) for more than a year. The company ultimately filed for bankruptcy on 6/22/2017. BANKRUPT The FRISK score is accurate in predicting the risk of corporate failure/bankruptcy over a 12-month horizon. All FRISK scores are recalculated every night for each subsequent 12-month period. The FRISK score s timely ability to warn of bankruptcy risk helps subscribers stay ahead of financial trouble in their portfolios. While the percentage risk of bankruptcy varies at each FRISK score level, nearly all public companies that eventually go bankrupt enter the FRISK "red zone" prior to their bankruptcy. A FRISK score of 5 or less is an important warning sign. 2

3 COMPANY REPORT DETAIL The FRISK score is the best method available to monitor public company bankruptcy risk. Payment performance, captured by the Days Beyond Terms (DBT) index, is not an effective indicator of financial stress for publicly traded companies since they often continue to pay on time right up until their bankruptcy filing. 3

4 FRISK DEEP DIVE Broader Retail (Department & Discount) Industry (shown in gray) Declining FRISK score falls deeper into the red zone The FRISK score relative to the broader Retail (Department & Discount) industry raises an additional red flag signaling heightened risk relative to peers, as well. Immediate attention was required. Crowdsourcing has enhanced the accuracy and timeliness of the FRISK score since it was added. Crowdsourcing is modeled through what is known as the Activity Score. The Activity Score collects and analyzes data patterns from thousands of CreditRiskMonitor subscribers, including financial professionals from more than 35% of the Fortune By integrating crowdsourcing, market sentiment, credit agency ratings, and financial information, the FRISK score now has a 96% accuracy rating for predicting financial distress over a 12-month timeframe. Learn more about CreditRiskMonitor s crowdsourcing method. 4

5 ADJUSTED PRICE VOLATILITY TSE: SCC One of the inputs of the FRISK score is a company s stock price volatility, adjusted for dividends, over the course of a year. Incorporating this information allows us to capture the wisdom of markets on a daily basis. This ensures our subscribers are getting the most up to date view of the risks they face since stocks tend to be more liquid and faster moving than bond prices and ratings. 5

6 FRISK STRESS INDEX The average probability of failure for SIC code 5311 (Department Stores) has increased 573% since Sears Canada was among the weakest names in the industry as evidenced by its FRISK score of 1. 6

7 PEER ANALYSIS Sears Canada demonstrates bottom quartile ranking in key financial ratios (shown in red) vs. its Retail (Department & Discount) industry peers. CreditRiskMonitor can drill down to show a ranking of a company s competitors, which can help provide alternate suppliers or new customers. 7

8 QUARTERLY PERFORMANCE RATIOS Recurring operating and net losses Poor interest coverage ratio & negative free cash flow 8

9 QUARTERLY LEVERAGE RATIOS Total debt in relation to tangible net worth had increased significantly, indicating heightened risk at Sears Canada Total liabilities to equity ratio continued to worsen. 9

10 QUARTERLY LIQUIDITY RATIOS AND RATES OF RETURN Meager cash and quick ratios Unable to generate any positive returns 10

11 ANNUAL STATEMENT OF CASH FLOWS Negative cash from operating activities 11

12 NEWS ALERTS: A TIMELINE OF CONCERNING HEADLINES Sears Canada announced that its Chief Financial Officer decided to leave the Company. 4/15/2016 Canada NewsWire Sears Canada Announces Departure of Chief Financial Officer Q filing - Net income decreased 248% to (C$46)MM compared with net income of C$31MM in the prior year period. 5/8/2017 CRMZ News Service Sears Canada Inc -- updated financials available Sears Canada Inc. hired bankruptcy and insolvency advisor. 6/14/2017 CRMZ News Service Brick & Mortar Meltdown: Sears Canada Hires Bankruptcy Advisor Q filing - Quarterly net loss of C$144MM compared with net loss of C$64MM in the prior year. 6/15/2017 CRMZ News Service Sears Canada Inc -- updated financials available The Company's stock price fell as much as 30% as it was preparing to seek court protection from creditors. 6/21/2017 CRMZ News Service Sears Canada Plunges After It's Said to Near Creditor Protection Sears Canada Inc. filed for bankruptcy. 6/22/2017 Canada NewsWire Sears Canada Seeks Creditor Protection to Pursue Restructuring Plan 12

13 ABOUT THIS REPORT/CONTACT CREDITRISKMONITOR CreditRiskMonitor has been researching public company credit for more than 15 years and counts over 35% of the Fortune 1000 as customers. Its proprietary FRISK score is highly accurate in predicting bankruptcy risk over the coming 12-month period. CreditRiskMonitor s Bankruptcy Case Studies have been designed to educate subscribers about methods they can apply to assess bankruptcy risk using CreditRiskMonitor s proprietary scores, robust financial database, and other analytical tools. Request a Personal Demo and Risk Assessment Read more Bankruptcy Case Studies, High Risk Reports and other resources Contact us at: