Sears to Raise $1 Billion by Selling Divisions, Stores

Hoffman Estates, IL—In the wake of its fourth quarter loss of more than $2.4 billion, Sears Holdings said today it hopes to raise $1 billion from spinning off its Hometown and hardware store businesses, selling stores and reducing inventory.

“We’re taking immediate actions to restore the strength of our company,” Lou D’Ambrosio, ceo, said. “These actions are targeted to improve operations, unlock the value of our assets and portfolio, and accelerate our strategy around integrated retail.”

For the quarter ended Jan. 28, Sears swung into a loss of $2.4 billion, or $22.63 a share, compared with a profit of $374 million a year ago. The results included an accounting charge of $2.5 billion, or $23.17 a share, with only $95 million in cash. The charge was related to deferred tax assets, impairment of goodwill and store closings and severance. Excluding these charges, company earned $58 million, or 54 cents a share.

The company, which operates Sears and Kmart, reported that the costs cuts it announced in December, including shuttering about 100 stores, said the cost cuts the company will be at the high end of the $100 million to $200 million of its projection.

When the company announced the cuts it indicated that its holiday sales were off, so it was no surprise that net revenue for the quarter declined 3.8% to $12.48 billion—the fifth consecutive quarterly decline.

Comparable store sales fell 4.1% at Sears’ domestic division while Kmart posted a 2.7% drop in comparable store sales. Gross margin narrowed to 24.5% from 27.9%.

‘Unlock the Value of Our Portfolio’

The results were below analysts’ average estimate for earnings of 78 cents on sales of $12.44 billion.

Since the beginning of the year, Sears has been plagued with rumors that Edward Lampert, its chairman, whose ESL Investments, a hedge fund, holds majority share in the retailer, was planning to take the company private. Then CIT Group Inc., a major factoring company, reportedly refused to extend further credit to Sears’ vendors.

Sears responded that CIT only represented less than 5% of its vendors and that it is still in good shape financially. At the end of its fiscal year, Sears held more than $3.2 billion in liquidity, access to another $1 billion as part of its credit facility and another $760 million in second lien capacity, Rob Schriesheim, chief financial officer, said.

Upon news of its new strategy, shares of the company surged ahead in early trading. As part of the deal, Sears Holdings will sell 11 stores to General Growth Properties for $270 million.

By spinning off its outlet, Hometown and hardware-store divisions, account for some 1,250 locations, through a rights offering Sears said it expects to raise another $400 million to $500 million. And reducing inventory by $580 million should garner another $350 million.

D’Ambrosio denied that the latest moves reflected financial constraints. “This is to unlock value in our portfolio. It’s important to distinguish between our short-term earnings issue and the strength of our assets and liquidity,” D’Ambrosio said.

“The actions of the asset sales and business separations of the outlets and hometown stores is management showing the Street that it can pull liquidity levers if it so chooses,” said Paul Swinand, analyst at Morningstar.

 

 

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