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100: That's the Number of Stores Sears Holdings Plans to Add to a Growing List of Closed Stores

Sears Holdings Corp. Reported Another Quarter of Dismal Earnings, Will Shutter 72 Stores Soon, Other Asset Sales in Offing
May 31, 2018
Sears Holdings Corp. is ramping up Sears and Kmart store closings again this year, announcing Thursday that 100 more sites will go dark as it struggles to recapitalize and right-size its footprint and merchandising.

On a pre-recorded first-quarter conference call, Sears Holdings CFO Rob Riecker said the action to board up more stores was a "difficult, but necessary" one to help it turn around years of slumping sales and losses. The company said it has tagged 100 unprofitable stores for closing - 72 of which will be shuttered in the "near future." Those closings will be announced later Thursday; the remaining in coming weeks.

"Continuing to evaluate our store network and other initiatives will allow us to optimize our cost structure and enhance our liquidity, while staying focused on our best members, best categories and best stores," Riecker said.

At the end of the first quarter, the company operated 894 stores, compared with 1,275 stores a year prior. Earlier this year, Sears said it would close 166 stores by year-end 2018, and auction off another 16 that will be sold to the highest bidder in a sale-leaseback arrangement. Last week, a number of published reports said that Sears was quietly peddling another 40 Sears and Kmart stores in 24 states. Sears has not confirmed that, and it’s unclear if Thursday’s announcement included those 40 stores.

Eddie Lampert, CEO of Sears Holdings, said in a rare and recent interview with CNBC that store closings were part of a balancing act. "We're not liquidating just to liquidate," he told CNBC. "We're liquidating...to get capital to put into our pension plan. As opposed to erring on the side of, 'This store might work.' If it's not working, we've invested the time, so we've got to close it because we are now jeopardizing this [store] over here."

It is likely, too, that more stores will be "recaptured" by Seritage Growth Properties, the publicly traded real estate investment trust that Lampert set up in 2015 when he sold 225 wholly owned Sears Holdings properties and 24 joint-venture sites to the REIT. He is the chief executive and largest shareholder of the REIT.

The sites were sold on a sale-leaseback arrangement that allowed Seritage to take back certain properties when desired. To date, Sears Holdings said it has received recapture notices on 64 properties and has exercised its right to terminate leases on 65 other properties, according to the earnings release. On an adjusted earnings basis before interest, tax, depreciation and amortization are subtracted, or EBITDA, Sears Holdings Corp.’s rent obligations to Seritage tumbled nearly 29 percent to $32 million in the first quarter, the company said. SHC expects that to continue to fall "due to the structure of the leases...as space in these stores is recaptured," the release said. Seritage has already started mixed-use redevelopment on some of those sites, turning them into higher-rent locales with entertainment, dining and wellness and fitness locations with limited retail.

This latest round of Sears store closings comes after another disappointing quarter for the one-time home of "Where America shops," its long-time moniker. On Thursday, Sears Holdings posted a first-quarter loss of $424 million, or $3.39 a share, compared with a gain of $245 million, or $2.29 a share last year. Revenues sunk nearly 30 percent to $2.89 billion from $4.19 billion a year ago. About two-thirds of the declines could be attributed to fewer stores open this year compared with last year, as well as an income tax bump in the year prior. More store closings will continue to pressure topline sales.

Same-store sales, a key industry metric of sales at stores open longer than a year, cumulatively dropped 11.9 percent, with a 13.4 percent pullback at Sears stores and a 9.5 percent drop at Kmarts. Again, fewer open stores helped contribute to those declines.

Interest expenses nearly doubled as a percent of revenues to 5.7 percent from 3 percent amid a hefty debt load. It’s likely they will continue to rise as the Federal Reserve ups interest rates, putting yet more pressure on the bottom line.

Riecker called the quarter "challenging," but said the company is pushing its Shop Your Way membership program to step up sales as well as implementing smaller store formats. The company also will continue to look to asset sales to help bolster cash flow and pay off debt.

Riecker noted on the recorded call that the Sears Holdings Corp. board’s special committee was exploring the sale of the Kenmore brand and related assets, the Sears home-improvement products business and the Sears PartsDirect business of the home services division. Part of the review includes evaluating the April 20 letter from ESL Investments, Lampert’s hedge fund, to purchase all or parts of those assets.

"We do not intend to comment further on the process at this time," he said.

Riecker did not mention the May 25 letter ESL sent to the board, imploring it to allow ESL to add third-party partners to its potential purchase proposal. However, the earnings release did include Lampert’s comments about the integrated online and in-store strategies, restoring positive adjusted EBITDA and continuing to look for opportunities to unlock asset value in businesses and real estate.

"This includes exploring third-party partnerships involving several of our businesses, such as Sears Home Services, Innovel, Kenmore and DieHard, and gaining further momentum around our new smaller store formats that blend brick-and-mortar and online experiences," Lampert said in the earnings release.

"We believe these initiatives, among others, will help us to strengthen the company and better position it for the future," he added.


Jennifer Waters, Chicago Reporter  CoStar Group   
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