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Sears Holdings says transformation on track


The retail industry is accustomed to weak same store sales at Sears and Kmart, but the magnitude of the decline the company experienced in the first quarter was large even by its standards.

Same store sales declined 14.5% at Sears and 7% at Kmart during the first quarter ended May 2. The company said the decline was driven by, “more efficient and targeted promotional and marketing spend, and a focus on sizing certain categories, such as consumer electronics, to better fit member needs, that together generated higher margins and increased profitability year-over-year. Revenues were also impacted by port issues on the West Coast.”

The comp decline coupled with store closures and the separation of the Sears Canada and Lands’ End businesses caused the company’s total revenues to fall by $2 billion to $5.9 billion. A net loss of $303 million, or $2.85 a share, while massive, was less than a prior year loss of $402 million, or $3.79 a share. The magnitude of the loss is less severe when viewed more narrowly in terms of EBITDA (earnings before interest, taxes, depreciation and amortization) and adjusted to exclude non-recurring expenses. Adjusted EBITDA was a negative $141 million company compared to a negative $171 million.

Undaunted by the ongoing comp declines and lack of profits, Sears Holdings’ chairman and CEO, Edward Lampert, maintains that the company’s master plan is intact.

"During the first quarter, we made significant progress in our transformation from a traditional, store-network based retail business model to a more asset-light, member-centric integrated retailer leveraging our Shop Your Way platform,” Lampert said.

Shop Your Way is the name of the company’s loyalty program whose members now account for nearly three fourths of sales at Sears and Kmart stores.

“As our improved EBITDA results over the last three consecutive quarters demonstrate, we are successfully enhancing our margin rates and EBITDA performance as we become more efficient with our promotional programs and the use of Shop You Way to replace more traditional forms of marketing with targeted and personalized digital interactions,” Lampert said. “With the completion of the joint venture transactions with three leading shopping mall owners and operators, and the advanced formation of the Seritage REIT, we will become more productive with our physical store space. This will position Sears Holdings for long-term success consistent with our focus on our best stores, rewarding our best members and pursuing our best categories to transform Sears Holdings into a leading integrated retail membership-focused company leveraging our Shop Your Way platform."

A key aspect of Sears Holdings’ transformation involves unlocking the value of real estate assets through creative deals that give the company greater liquidity.

“We continue to make progress towards the formation of Seritage Growth Properties, a public real estate investment trust or REIT, and its subsequent purchase of properties from the company,” said Rob Schriesheim, Sears Holdings’ CFO. “We expect that we will be declared effective by the SEC this week, and are targeting to launch the rights offering on Friday, June 12, 2015, which, if successful, will result in $2.6 billion in cash proceeds to Sears Holdings. When combined with the previously announced joint ventures, this will total $3 billion in cash realized.”

We expect to utilize a portion of the proceeds from the REIT transaction to pay down our existing revolver borrowings. Had the REIT transaction closed in the first quarter, Shriesheim said the company would have had cash balances of $2.3 billion and availability under its credit facility of more than $1.1 billion.

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