Sears/Kmart: We’re still in business, growing?
Sears Holdings continues to lose money –- lots of it –- and same store sales declined again during the holidays, but the severity of the company’s losses have diminished, which has Chairman and CEO Edward Lampert believing further improvement is coming as the company transforms to what he calls “a leading integrated membership-focused company.”
What exactly that means isn’t always clear, but for now it means that Sears Holdings is losing less money than it had previously, and with new liquidity options at its disposal those who have forecast the company’s imminent demise have again been proven wrong.
Now it is never a good thing when the best thing that can be said about a retailer is that its performance wasn’t as bad as the prior year, but Sears Holdings will take what it can get. The company did lose $159 million, or $1.50 a share, in the fourth quarter ended Jan. 31, but that’s a big improvement from the prior year’s fourth quarter when it had a loss of $358 million, or $3.37 a share the prior year.
For the full year, the company said its net loss totaled $1.7 billion, or $15.82 a share, compared to a prior year loss of $1.4 billion, or $12.87 a share.
Despite the still sizable losses, Lampert assesses the company’s performance in terms of its adjusted earnings before interest, taxes, depreciation and amortization, or adjusted EBITDA. By that measure, Lampert characterized the fourth quarter results as a significant improvement, with adjusted EBITDA of $125 million reversing a prior year loss of $68 million.
"While we clearly believe that we can improve upon these results, we are pleased with the positive trend that started in the third quarter, and we currently expect this level of improvement to carry forward into our full year 2015 results,” Lampert said. “We believe that the changes we are making to focus on our best stores, reward our best members and pursue our best categories will help us continue to transform Sears Holdings into a leading integrated membership-focused company."
Participants in the company’s membership program known as “Shop Your Way” accounted for 72% of eligible sales at Sears and 74% of sales at Kmart, according to the company. Despite Lampert’s optimism around Shop Your Way, the productivity gap between Sears and Kmart stores and their chief rivals continues to widen.
For example, same store sales at Sears’ 746 domestic stores fell 7% while comps at Kmart’s 979 stores declined 2%. The comp declines contributed about $313 million to an overall revenue decline of $2.5 billion caused by two key events. The de-consolidation of the Sears Canada business and the separation of the Lands’ End business caused revenue to decline to $8.1 billion from $10.6 billion. Meanwhile, Kmart’s long-time rivals Walmart and Target experienced same store sales growth of 1.5% and 3.4%, respectively, on selling space that is already more highly productive than Kmart’s.
The widening gap is even more pronounced as Sears’ rivals Home Depot and Lowe’s, where the companies reported stunning same store sales increases of 8.9% and 7.4%, respectively, at U.S. stores. The top performing categories at Kmart were apparel, toys, jewelry and seasonal with declining categories including consumer electronics and grocery and household. Kmart’s comps would have increased by 2.8% if it excluded consumer electronics, grocery and household goods. Sears stores were negatively affected by consumer electronics.
Excluding the impact of consumer electronics, Sears comps would have decreased 4.6%, primarily driven by decreases in Sears Auto Centers and apparel. As doubts persist about whether Sears and Kmart can ever generate meaningful top line sales growth to drive true profitability, the company sought to reassured investors of its liquidity position and options available to further enhance financial flexibility.
According to Sears Holdings CFO Rob Schriesheim, the company’s actions in 2014 generated $2.3 billion in liquidity and it continues a transition to a capital structure that is more flexible, long-term oriented and less dependent on inventory and receivables.
“We have proven that Sears Holdings is an asset-rich enterprise with multiple levers to generate continued financial flexibility, while creating shareholder value,” Schriesheim said. In 2014, that meant closing 234 Kmart and Sears Full-line stores, the majority of which were Kmart stores, in addition to the Sears Canada and Lands’ End transactions.
Sears Holdings ended the year with approximately $800 million in availability under its credit facility, $250 million in cash and the possibility creating a real estate investment trust that would unlock the value of some of the company’s best store locations.
“We are continuing our efforts to develop Sears Holdings as a membership company, without the significant asset intensity of its traditional retail business,” the company said in a statement. “To this end, we announced in November that we have been exploring the formation of a Real Estate Investment Trust (REIT) to purchase some of our properties and to manage them like a pure real estate company. While we can offer no assurances that such a transaction will be consummated, we have made progress and are proceeding towards its formation and separation, which is projected to occur in May or June of this year.”
The company said it is targeting between 200 and 300 Sears and Kmart stores to be sold to the REIT with expected proceeds to Sears Holdings in excess of $2 billion.