Sears sales tumble as investors grumble
Sears Holdings keeps finding new ways to generate cash and gain financial flexibility, but selling merchandise is not among them.
The retailer’s share price sank to a new low of less than $20 on August 3 as the company reported second quarter same store sales fell 13.9% at Sears stores and 6.9% at Kmart stores as of July 25. The company’s second quarter ended August 1 and it expects to report complete results on or around August 20. Year to date, same store sales have declined 14.2% at Sears and 7% at Kmart. The sales decline would have been less severe – “only” 12.5% at Sears and 5.4% at Kmart – if the consumers electronics category is excluded.
Despite the continued weak sales trends, through a series of real estate moves and some financial engineering Sears Holdings expects post a second quarter net profit of between $155 million and $205 million, or between $1.46 and $1.92 per share.
The key driver of the profitability was a real estate transaction executed on July 7 in which Sears Holdings completed a rights offering and sale-leaseback transaction with Seritage. As part of the transaction, Sears Holdings sold 235 real properties to Seritage along with a 50% interest in joint ventures with each of General Growth Properties, Inc., Simon Property Group and The Macerich Company, which together held an additional 31 properties. Sears Holdings received aggregate gross proceeds from the transaction of $2.7 billion. The properties currently operated as Sears- and Kmart-branded stores were then leased back to Sears Holdings.
As a result of that deal, Sears Holdings expects to realize a $1.4 billion gain, of which $510 million will be reported in the second quarter with the other $900 million deferred and recognized over the term of the leases. The deal also means Sears Holding will see a $240 million tax benefit if the second quarter.
Without the benefits of the transaction, Sears Holdings said its adjusted earnings would range from a loss of $189 million to a loss of $249 million. Sear’s Holdings characterized the adjusted loss as a positive since it will be the fourth consecutive quarter in which the size of the loss was less than the comparable period the prior year.
The other area where the company provided an update was its balance sheet. The company said it expects to have total cash and revolver availability of approximately $3 billion at the end of the second quarter comprised of $1.8 billion in cash plus availability under its domestic credit facility of $1.2 billion.
While Sears Holdings provided a detailed look at its financial position and liquidity as it commence a tender offer for a $1 billion debt offering, the company had little to say about its strategy to increase sales.
“Consistent with our objective to enhance the financial flexibility of our capital structure, we intend to continue our focus on executing our transformation from a traditional store network-based retail business model to an asset-light, member-centric retailer,” Sears Holdings said.