Inside This Issue - News
Sears scaling back
April 2nd, 2012
HOFFMAN ESTATES, Ill. – Sears Holdings Corp. will close an additional 62 stores beyond the 120 closures announced in December.
In addition, the company has disclosed that its largest shareholder has agreed to take on some of the risk assumed by an unnamed financial institution that insures the retailer’s suppliers.
Most — 43 — of the additional closings will be of Sears Hometown specialty stores that are primarily independently owned. The outlets, which average 8,500 square feet, offer appliances, consumer electronics, lawn and garden equipment, and hardware. In addition, 10 Sears Hardware Stores will be shuttered as well as all nine remaining The Great Indoors outlets, which are big-box home decorating outlets that average 142,000 square feet. As of January 28, Sears operated 986 Hometown units and 96 Sears Hardware units.
The company had previously announced that it plans to spin off the remaining Hometown outlets along with 116 Outlet Stores and some Hardware stores during the third quarter of fiscal 2012 through a transfer to electing shareholders. The move is anticipated to generate between $400 million and $500 million.
The latest store closing plans follow an earlier management decision to shutter 60 Kmart locations and 34 Sears broadline stores during the first half of fiscal 2012.
The successive rounds of store closures reflect a significant decline in Sears’ retail business during 2011, which saw revenues fall $1.1 billion, or 2.6%, to $41.6 billion, a result not only of a smaller store base but of lower same-store sales at both Sears and Kmart. As a result, the company booked a fourth quarter loss of $2.4 billion, while red ink for the year totaled $3.14 billion.
While the company has described the spin-off as intended to “unlock value,” some analysts view it as an effort to raise badly needed cash. At the end of fiscal 2011, Sears’ balance sheet showed $754 million in cash, down 45% from the $1.36 billion on hand a year earlier.
In fact, in mid-January reports emerged that CIT Group Inc., a lender to suppliers, had stopped financing loans to vendors waiting for payment from Sears. Since many retailers take as long as three months to pay suppliers, the latter often have to rely on such funding to continue operations.
According to Women’s Wear Daily, Sears has, since January, been troubled by factoring problems related to its trade receivables, many of which are concerned with apparel.
According to Sears’ Form 10-K, its annual report filed with the Securities and Exchange Commission in March, the company’s largest shareholder, ESL Investments Inc. moved to reassure Sears’ vendors about the riskiness of their business with the retailer.
ESL agreed in late January to acquire from an unidentified financial institution an undivided participating interest in a certain percentage of its rights and obligations under trade receivable put agreements with certain vendors. ESL, which holds 62% of Sears stock, is a hedge fund owned by Sears chairman Edward Lampert.
Under the put agreements, if Sears were to declare bankruptcy the financial institution would purchase those vendors’ accounts receivable related to their business with the retailer. ESL has the option to purchase up to 80% of the rights and obligations related to the unnamed institution’s future receivable put agreements with Sears vendors.
As of January 28, ESL had a participation interest totaling $93.3 million in the unidentified institution’s put agreements related to Sears.
A spokesman for Sears said, "We do not speak for ESL, but we see this as a sign of ESL’s continued confidence in our company."
While analysts are divided about the value of Sears’ real estate assets, the company has recently created a new senior management position to realize additional value from those assets. David Lukes has been hired as president of real estate development, with the task of redeveloping certain real estate, including sites no longer used as retail stores. He joined Sears from Mall Properties Inc., where he served as president and chief executive officer.
Lukes’ position supplements and does not replace that of Jeff Stollenwerck, president of Sears Real Estate, which handles the company’s traditional real estate functions.
"We have a very strong real estate team at Sears Holdings, and that team will only be stronger with the addition of an executive of David’s caliber," said Lou D’Ambrosio, president and CEO of Sears Holdings. "David’s hiring allows us to expand our capabilities to include the enhancement and redevelopment of appropriate properties."