Sears Holdings Management Discusses Q3 2012 Results - Earnings Call Transcript

Nov.15.12 | About: Sears Holdings (SHLD)

Sears Holdings (NASDAQ:SHLD)

Q3 2012 Earnings Call

November 15, 2012 4:30 pm ET

Executives

William K. Phelan - Senior Vice President of Finance

Louis J. D’Ambrosio - Chief Executive Officer, President, Director, Member of Stock Plan Committee and Member of Finance Committee

Robert A. Schriesheim - Chief Financial Officer and Executive Vice President

Ronald D. Boire - Chief Merchandising Officer, Executive Vice President and President of Sears Full Line Stores & Kmart Formats

Imran Jooma

Analysts

William M. Reuter - BofA Merrill Lynch, Research Division

Gary Balter - Crédit Suisse AG, Research Division

Paul Swinand - Morningstar Inc., Research Division

Gregory S. Melich - ISI Group Inc., Research Division

Kirk Ludtke - CRT Capital Group LLC, Research Division

David Gober - Morgan Stanley, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Sears Holdings Fiscal 2012 Third Quarter Webcast. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Bill Phelan. Sir, you may begin.

William K. Phelan

Thank you, operator. Good afternoon, and welcome to Sears Holdings Earnings Call. I am Bill Phelan, Senior Vice President of Finance for Sears Holdings. Joining me today are Lou D’Ambrosio, our Chief Executive Officer; Rob Schriesheim, our Chief Financial Officer; Ron Boire, who leads Merchandising at our Sears and Kmart formats; and Imran Jooma, who leads our online business and marketing efforts.

For our call today, you may follow along with the slides that are shown. Slides will be automatically advanced during the discussion and will be posted at our website.

Before we begin, I would like to remind you that today's discussion will contain forward-looking statements related to future events and expectations. These statements are based on current expectations in the current economic environment, and actual results may differ materially from those expressed or implied in the forward-looking statements.

You can find factors that could cause the company's actual results to differ materially listed in today's press release, in the presentation for today's call that is posted at the Investor Information section of searsholdings.com and in our most recent SEC filings.

In addition, our discussion will include certain non-GAAP financial measures. Reconciliation to the most directly comparable GAAP financial measures can be found in today's press release. Any reference in our discussion to EBITDA, means adjusted EBITDA as defined in the press release and presentation.

Finally, we assume no obligation to update the information presented on this call except as required by law.

I would now like to turn the call over to Lou.

Louis J. D’Ambrosio

Thanks, Bill, and let me thank everyone for joining the call today.

When we held our Annual Meeting in May, we outlined 3 priorities for our company: financial and operational discipline, core retail excellence and innovation for our customers and members, specifically, through Integrated Retail and our Shop Your Way membership program. We've made progress in each, and we'll touch on them during today's call.

For the third quarter, we had modest EBITDA growth year-over-year, led by some of our most important categories, like Appliances, Apparel and Home Services. In fact, we also had a comp store growth in Sears Apparel and Appliances. This was partially offset where we have some challenges in areas like Consumer Electronics, and Grocery and Household, which we will discuss.

We're on track to generate $1.8 billion of additional liquidity, $1.7 billion is done. These numbers far exceed the target we set during the earnings call we had in February. So the effect of these actions is that our current position, coupled with a significant reduction in near-term obligations, gives us substantial financial flexibility, and we intend to continue to take actions that create value and retain the flexibility to invest in the strategic priorities of our company.

We had significant assets: some of the best brands in retail, over 200 million square feet of real estate, more than $5 billion of inventory already paid for, and the largest Home Services business, to name a few. We're here to translate those assets into value. Our preference, our focus is to accomplish this operationally. Likewise, where it makes sense, we will optimize our assets in other ways. We will do this thoughtfully and deliberately, where it creates long-term value.

This industry, the retail industry, continues to change dramatically and rapidly. It will never go back to what it was, and we've seen the consequences for those that have not changed fast enough. There's no choice, which is why we will continue to accelerate our transformation.

We are rapidly moving to a member-based business model. Our investments are focused on our members and their experience. This is why we're investing several hundred million dollars this year alone in Integrated Retail and our Shop Your Way membership program.

More than half of our revenues at Sears and Kmart now come from Shop Your Way members. The program provides compelling benefits and conveniences, from no receipt required in returns or exchanges, guaranteed pickup in 5 minutes, personalized deals, you can engage in it further then on shopyourway.com, which brings together all these capabilities and many more in a very engaging social shopping experience, and Imran Jooma will elaborate on this later in the call.

Our members are increasingly traveling between channels and want to do this seamlessly as they gather information and shop. This is why we've been investing in Integrated Retail, and we are seeing it pay off. The total online business grew over 20% in the quarter. What's interesting is that the most significant part of this growth came from multi-channel transactions like buy online, pickup in store or order in-store for home delivery. And about half of the online business now includes interactions with another channel.

Now, of course, stores are still very important. They are a key part of the shopping system, and we are taking actions to enhance the store experience, with store redesigns, technology deployment, introducing new merchandise like our Outdoor Life shops at Sears, which are going very well. Ron Boire is leading this and accelerating these initiatives, and Ron will discuss this later in the call.

But stores are now part of a bigger shopping system, which does not necessarily need to be add-asset intensive. At the center of the system is the member, and that is our focal point of investment, and increasingly, the center of our business model.

As I conclude my opening comments, I want to note that we continue to look for ways to benefit our associates as we transform our company. You may have recently seen our changes to healthcare as we moved to a private exchange model. We are providing our associates with greater choice, and positioning Sears Holdings for compliance with upcoming healthcare regulations.

So in summary, we've made a lot of progress, including sizable EBITDA growth year-to-date, demonstrated financial flexibility and strong traction on our strategic initiatives. And we still have a lot of work to get done.

So with that, let me now turn it over to our CFO, Rob Schriesheim, and Rob's going to talk about our financial results and actions and also, the evolution of our business model with a particular focus on value creation. Rob?

Robert A. Schriesheim

Thanks, Lou. On Slide 6, as you can see, I'm going to cover our Q3 results, as well as our financial position and liquidity profile. However, the primary focus of my remarks are twofold. First, review the progress we've made against the specific actions we outlined earlier this year. And second, discuss our business model evolution as we transform to a member-centric platform. As part of that evolution, we have implemented specific actions to reduce our risk profile, enhance the productivity of our asset base and unlock value in our asset portfolio. This model leverages our ecosystem of stores, brands, online channels, social media assets, mobile applications, technology investments and it's surrounded by our Shop Your Way membership program.

One of the ancillary benefits of this model is de-risking, a recurring theme which you'll hear from me today. By transforming our company into a more nimble, less asset-intensive business model, we can reduce the level of risk in our operational structure and balance sheet, while concurrently improving the returns on our invested capital. Our actions have positively impacted our liquidity by $1.8 billion, while unlocking value in our asset portfolio. These actions have included, first, a reduction in our fixed cost structure of over $500 million for the full year; second, a reduction in our inventory of nearly $1 billion; third, optimizing our asset structure and enhancing our management focus through the separation of Sears Hometown and Outlet stores, and the recent spinoff of 45% of Sears Canada, with the former transaction generating $446.5 million in proceeds; fourth, a sale of 14 real estate properties, generating $440 million in proceeds; fifth, a $1 billion reduction in our lease obligation since 2010. Finally, we've capitalized on an opportunity to reduce risk, related to our legacy pension obligation.

We intend to continue to be proactive in generating at least $500 million in additional liquidity over the next 12 months through selective actions that are consistent with our focus on creating long-term value. The exact form and amount will depend on specific circumstances and opportunities including market conditions. I'll speak in more detail to our business model de-risking initiatives. But first, let we speak briefly to our third quarter performance.

Beginning on Slide 7. Let's take a look at the third quarter results. On a GAAP basis, we reported a net loss of $498 million, as compared to a net loss of $410 million last year. The higher loss is primarily due to reported income tax expense. Last year, we reported a tax benefit of $91 million. This year, we have tax expense of $11 million for a swing of $102 million.

Accounting rules currently preclude us from recognizing a tax benefit on operating losses, however, it's important to note that this is not an economic loss, as these NOLs and other tax benefits remain available to reduce future taxable income. Because GAAP income includes many nonoperating items, we use adjusted EBITDA to evaluate our performance. We improved our EBITDA by $34 million in the quarter, $18 million domestically and $16 million in Sears Canada.

Regarding revenue, Sears' domestic comp-store sales' decline of 1.6% is attributable to consumer electronics. Excluding this category, our Sears Full-line store comps would have been positive.

Kmart comp-store sales were down 4.8%, and were affected by Consumer Electronics and the shift from brand name drugs to generic equivalents.

On a consolidated basis, margin rate declined 10 basis points, driven by Consumer Electronics, Grocery and Household, and Lands’ End, partially offset by improvement at Sears Canada and Apparel. Sears' domestic margin rate was up 10 basis points, Canada was up 220 basis points and Kmart was down 110 basis points.

Our expense performance remained strong as we continued to de-risk our cost structure by reducing our fixed expenses, consistent with our strategic objective of converting fixed expenses to variable expenses, and I'll speak to this further a little later.

Moving on to Slide 8. While EBITDA was up only modestly, we did generate profit improvements in many important businesses in the quarter, including Home Appliances and Sears Apparel, which both had positive sales comps and margin rate improvement. And our Kmart Apparel, Home Services and Pharmacy businesses generated profit improvement. Improvement from those businesses were partially offset by Consumer Electronics, which experienced comp sales declines as the overall industry continues to be impacted by price compression. The Kmart Grocery and Household categories experienced revenue and margin rate declines due to the competitive nature of that industry.

Another aspect of our business which performed well in the quarter is Integrated Retail at both Sears and Kmart, as online sales, including Web-to-store and store-to-Web, increased by more than 20% at both Sears and Kmart.com, as Lou noted.

On Slide 9, you will note that our third quarter was affected by several significant items which reduced net income by $287 million.

Slide 10 summarizes our year-to-date results. We have generated $271 million in EBITDA improvement over last year.

While on the topic of financial performance, let me speak to our financial position and liquidity.

As you can see on Slide 12, at quarter-end, we have $633 million of cash. In addition to these liquid assets, we also have immediate availability of $1 billion on our $3.3 billion domestic credit facility, and $400 million on our Canadian facility. On top of that, we have over $5.7 billion of equity we have in inventory. Inventory is a current asset which we can get converted to cash very quickly, or on average, in 90 days in the normal course. Taken together, we have nearly $8 billion of liquid assets, and this is at our peak borrowing period. Lastly, let me point out that we also have $1 billion accordion feature, as well as a $760 million of second lien capacity on our domestic revolver, providing further available capital resources that can be quickly accessed.

On Slide 13, as a summary of our revolver usage. Revolver borrowings are $179 million lower than last year. Letters of Credit, issued by the facility, have increased by $157 million. As you can see, we have $22 million more availability this year than last year.

Slide 14 itemizes our debt balances as of the end of the quarter. The main points are: short-term borrowings, consisting of commercial paper and revolver borrowings, are $112 million lower than last year; and total debt declined by more than $0.5 billion since last year as we, one, reduced the level of debt required to fund operations, and two, executed the spinoff of Orchard Supply Hardware, which was a deleveraging transaction since their debt transferred with the business. It's important to note that debt declined by $548 million despite the fact that we voluntarily chose to contribute an additional $203 million into our pension plan last month, as I'll discuss in further detail a little later.

As shown on Slide 15, our debt structure is firmly in place for the next few years, as our domestic revolver extends into 2016 and we have minimal term debt maturities over the next few years.

Let me close out this section with Slide 16 by summarizing our fixed payment obligations. Including share repurchases, which I recognize, obviously, are made at our discretion. As you can see in 2013, we only have $400 million of required cash outflows for debt, and capital lease maturities and pension contributions, which is much lower than recent years. As a matter of fact, it's about half of 2012 and half of 2011.

Let me move to the discussion of the actions we took to unlock value, enhance our financial flexibility and financially de-risk our company.

On Slide 18, as a reprise of the slide I showed at our shareholder meeting in May, of the actions we said we would take to capitalize on our financial flexibility while unlocking value, the estimate at the time was to generate approximately $1.7 billion of cash. As you can see by the total, on the lower right side of the slide, we expect to successfully generate $1.8 billion, even after consideration of the $203 million pension contribution we chose to make in September. To date, we have already generated $1.7 billion. Not only were these actions successful in demonstrating financial flexibility, they also served to de-risk our operations and balance sheet as we transform to a less asset-intensive business model. An important component of this model is the migration from a predominantly fixed cost base to a more variable cost base.

There are 4 key areas where we have financially de-risked our profile, specifically, our lease obligations, our investment in inventory, our fixed cost base and settling a portion of our legacy pension obligation.

Looking at Slide 19, given the amount of real estate we control, we are one of the country's largest real estate companies. We have over 200 million square feet of real estate space, and this represents a valuable asset for us as evidenced by recent real estate sales.

While we own many of our locations, over 700 large stores, we do lease about twice as many locations. As such, rent is a significant annual fixed cost and commitment. An important aspect of our portion of real estate leases is its maturity. This is important for 2 reasons. First, most of these leases were entered into many years ago, and as such, we enjoyed below market rents for a significant number of locations. And second, we're in the option periods for most leases, which provides us with the opportunity to decide whether to stay or leave that location every few years.

A typical large store lease would have a 20 or 25 year initial term, and then a series of five-year renewals. We are in the renewal period for most leases, so we have the opportunity to cost effectively exit marginally performing stores every few years. So as you can see from the chart on Slide 19, our operating lease obligation has declined by more than $3 billion over the past several years and by almost $1 billion since just 2010, thus reducing our rent obligation.

Moving to Slide 20. Since last year, we have focused on enhancing our efficiency and improving our return on capital employed by reducing our inventory investment by $1.4 billion. $400 million occurred to the Sears Hometown and Outlet stores transaction. $1 billion was generated through store closures and productivity improvements as planned. While we have reduced our inventory investment, we have not reduced our customers’ choices. On the contrary, the capability of the marketplace at sears.com demonstrates the power of leveraging technologies and is one of the reasons we have been heavily investing in these capabilities for several years. We can exponentially increase our customers’ choice while simultaneously lowering our capital base and de-risking our business model by reducing our investment in traditional real estate and inventory assets.

In looking at Slide 21, another method to reduce the level of risk for an enterprise is to reduce its fixed costs. We consider fixed costs to include rent, utilities, management payroll and traditional forms of marketing like circulars and television. Note that some of these costs are presented in the cost of sales, buying and occupancy line on our income statement. This year, we have successfully reduced these fixed costs by $430 million through the third quarter, and expect to realize a more than $500 million reduction for the full year. This compares to our initial objective outlined at our Annual Meeting of $200 million.

As shown on Slide 22, we also took the opportunity that was presented to us to reduce our pension risk. We voluntarily elected to contribute an additional $203 million to the pension plan in order to get to 80% funded status, which allowed us to offer a lump sum settlement to a portion of our pension plan participants. As shown on Slide 23, we believe that the lump sum settlement is beneficial, as it reduces pension plan risks as outlined. Accounting rules require us to recognize a noncash special charge to earnings per pension expense due to settlement. Also note, the lump sum amounts will be paid from the pension plan assets, not by the company.

As shown on Slide 24, we completed a number of strategic transactions in 2012, which explicitly demonstrate the inherent value in our portfolio of assets. First, we sold 14 stores in 2 separate transactions for $440 million in proceeds, which demonstrates the underlying value in our real estate portfolio.

Second, the Sears Hometown and Outlet store rights offering was a very successful transaction. It closed on October 11 and generated $446.5 million in proceeds for Sears Holdings. It was structured to allow all shareholders to participate on the same basis and to maintain their ownership level in the new company. It provides our shareholders with greater flexibility in providing a choice of securities they may own, and it maintains the Sears Hometown volume in our ecosystem, as we continue to procure product for them, and as such, we experience no loss of volume or purchasing power or reduction in operating scale efficiencies.

Third, our most recent transaction was a spinoff of a 45% interest of Sears Canada to our shareholders, which was completed 2 days ago, leaving us with a 51% controlling stake. Again, the benefits of this transaction include great focus by Sears Canada and Holdings on their respective businesses, greater choice for investors, and increased capital markets and trading liquidity for Sears Canada common shares.

There are 2 reporting items related to Hometown stores that I should make you aware of. The first one relates the reporting of historical results, because we'll continue to provide many services to Sears Hometown, we are deemed by the accounting rules to still have "continuing cash flows" with Sears Hometown. As such, we are precluded from presenting Sears Hometown as a discontinued operation. The results through October 11, 2012, will still be included in historic financials.

The second reporting item relates to reporting ongoing activity with Hometown stores. Our financial statements from October 11, 2012, forward will include all of our transactions with Hometown stores. We'll continue to procure product for them, we'll also provide various administrative services for them.

Accordingly, we'll report sales for all products sold to Hometown and for services performed for them. However, as the products and services are generally provided to them at our cost, there will be minimal, if any profit on these sales with one notable exception, as we will earn royalties on all Kenmore, Craftsman and DieHard sales in Sears Hometown and Outlet Stores. This will result in a lower overall reported margin rate for Sears Holdings, and we'll disclose the amounts in the future for transparency.

Moving to Slide 25. The Sears Canada and Orchard Supply transactions were technically dividends and resulted in adjustment to Sears Holdings' share price because they distributed ownership of Sears businesses to shareholders. While no specific price adjustments was made in connection with the Sears Hometown and Outlet store transaction, it was a distribution of rights to all shareholders, which provided value.

Our primary objective is to create value through improved operating performance, as we execute on our strategic vision on a proactive basis. However, as we have stated in the past, we are also committed to unlocking value in our asset portfolio as we consider the optimal structure consistent with our evolving business model.

On Slide 25, we illustrate the adjustment to Sears Holdings' share price, to take into consideration the recent trading values of the businesses which were separated, consisting of Sears Hometown and Outlet stores, Sears Canada, and Orchard Supply Hardware Stores. As you can see, the combined adjustment value is about $10 per share at current trading prices. This process has been consistent with our commitment to transform the company and unlock value.

With that, let me turn it over to Ron Boire.

Ronald D. Boire

Thanks, Rob. Good afternoon.

I've now been at Sears Holdings for about 10 months, and I'm continually impressed by the products and capabilities our company provides.

Today, I'm going to discuss 3 areas in which we are driving action. First, improving the merchandise assortment. Second, enhancing the customer experience. And third, winning the 2012 holiday season.

We continue to focus on the cornerstone brands within our portfolio, such as Kenmore, Craftsman and DieHard, the pillars on which our brand strategies are built. In addition to these strategic brands, we are sharpening our assortment, have launched important product lines and brands, many exclusively available at Sears and Kmart.

A few highlights include, together with Outdoor Life Magazine, we have created an exclusive brand that is housed in nearly 800 Outdoor Life shops at Sears stores nationwide. These shops feature a compelling assortment of casual and performance apparel, geared towards men and the outdoor lifestyle, while offering function and comfort at a value.

Outdoor Life is off to a great start, exceeding our plans by double digits, with categories like flannel, up over 40%. Merchandise improvements like Outdoor Life have resulted in 5 consecutive quarters of comp-store sales growth for Sears Apparel.

Last month, our consumer electronics team launched Alphaline, our exclusive Sears Holdings brand of quality, high-quality consumer electronics, headphones and accessories. Sold at both Sears and Kmart, Alphaline was crafted to offer incredible styles and performance at a great value. We are experiencing double-digit increases in the Alphaline categories since their launch.

Last quarter, we also launched Tempur-Pedic mattresses in select stores nationwide. With the addition of one of the biggest names in mattresses, we have built on our already strong business and added a product line that our members are responding to. We've also expanded our mattress space in 150 of our Sears locations, which is producing comp-store sales increases of over 10% for the category.

As the nation's number one fitness retailer, we have exclusively offered NordicTrack equipment to our customers and members. This year, we became the exclusive national retailer of Sole, of Sole equipment in Full-line Sears stores. We're also proud of this year’s fitness flagships, which offer our customers and members a complete fitness destination. These new launches are in addition to our strong celebrity brands such as Sandra Lee, Sofia Vergara, the Kardashian Kollection , Jaclyn Smith and Selena Gomez, just to name a few.

While having the products our customers want is crucial, we are also improving the in-store presentation in key categories as we previewed at our Annual Meeting. For example, we are refreshing our Apparel departments nationwide in creating features shops in areas such as Laura Scott, men's denim and men's workwear. We have improved the layout of many stores and reflowed the stores to promote relevant product adjacencies.

We're rolling out a major refresh this fall that will continue into next year. It's also important that this is not a major remodel of the store. We can make these changes in a very cost-effective way, at roughly $250,000 per store. This illustrates our ability to efficiently transform the in-store experience at Sears.

Our Integrated Retail strategy leverages capabilities of our online store and store base in ways that our competition simply cannot. For example, our customers can buy online and pick up in the store, including curbside pickup. Additionally, nearly half of our Sears stores utilize iPads with mobile checkout to drive content shopping experiences in appliances, consumer electronics, fitnesses -- fitness and other consultative areas. We also offer e-receipts with purchase.

We're consistently focused on offerings that are responsive to how our customers want to shop, which integrate the physical and digital worlds. Our products and our Integrated Retail experience are coming together this holiday season. We have great exclusive products available such us Barbie Holiday 2012 Collector Brunette Doll, and the Hot Wheels Dune Racer in our toy departments at Kmart. Also in Kmart, customers can find a stylish collection from Sofia Vergara, who has recently expanded into the activewear category. In tools, Craftsman launched new innovation in the Bolt-On platform, a powerful modular tool platform that saves money and space, while having all of your tools in one place.

In Consumer Electronics, our members and customers can find great gifts under $20 like our new headphone line from $5 to $20, and $5 iPod and iPhone cases. And we continue to expand our seasonal and holiday business at Sears and Kmart, and we're thrilled with the launch of Sandra by Sandra Lee holiday collection at Kmart.

We know our members value convenience, so we've extended our holiday hours this year to better serve our customers and members. Both Sears and Kmart will not welcome members and customers in store on Thanksgiving Day this year.

And our Kmart stores are better prepared to take care of the customers' layaway needs, with enhancements like checkout express and free layaway.

Within the Sears format, we started our hiring for holiday earlier this year to ensure access to the best associates, to serve our customers and member better. And we have improved our holiday visual presentation, improved store navigation and we have stronger merchandise statements that show our customers cross merchandising opportunities that bring to life our tagline, “This is how to gift. This is Sears.”

Now let me close by giving you a timely example of the way our products and capabilities come together to offer our members value.

Many people were impacted by superstorm Sandy. We felt we needed to help and help with speed. We were able to leverage the diversity of our products, as well as our strong logistics network to quickly deliver over 125 truckloads of supplies to the impacted areas. We also identified our Shop Your Way members that lived in the path of Hurricane Sandy and provided them with up to $20 worth of points. These points were available immediately to purchase whatever members needed from Sears and Kmart. Millions of dollars where redeemed by our members to assist in their short-term needs.

Now, Imran Jooma will continue the discussion of how we are focused on our members, who are at the core of everything we do.

Imran Jooma

Thank you, Ron, and good afternoon.

As you heard from Lou and Ron today, we are very committed to serving, delighting and rewarding our members and customers with experiences that best serve their needs. By investing in technology earlier on and developing key capabilities, we are now able to offer both targeted and unadvertised offers to our members. New this holiday season, our members will receive both targeted and advertised offers like: 5% back end [ph] points for all purchases made on the Sears credit card; early access to Black Friday special, almost 5 days in advance; free gift with purchase, such as a tote bag, with offers such as double and triple points on a future purchase; free check cashing at Kmart; free and 2-day shipping by signing up for a Shop Your Way MAX program.

For added convenience and to save time, members and customers can take advantage of the seamless online and offline connection that Lou referenced as part of our Integrated Retail strategy. Such as, buy online, pickup at store, that is backed by a guarantee of being ready in 5 minutes or less.

In approximately 700 sales locations, we also offer the curbside pickup option for added convenience. And new this holiday season, members can return and exchange an item without a receipt, that is also backed by a guarantee of 5 minutes or less.

By listening and acting on our customers’ and member feedback, we have also improved our layaway offering this year by making it free. For the first time, we have removed layaway service fee for holiday shopping. We are also offering layaway on day after Thanksgiving items, including door busters, as well as online and mobile purchases.

Customers can also have layaway contracts initiated in stores shipped to their home. By offering these great values, and by creating these extraordinary conveniences for customers and members, we expect to increase the demand for our products and services and drive profitable sales.

We are also focused on providing a very large assortment of products through our endless aisles online. We have expanded our offering to now provide over 50 million products from thousands of marketplace sellers. These items can also be ordered from inside our stores through our in-store terminals and iPad devices that are used by our store associates.

Throughout the holiday season and beyond, you will see how our marketing and advertising will create awareness of the breadth and depth of product offerings. One example being our beats and connecting slide TV commercial that highlights that we are the only retailer that carries the top 10 brands in appliances. These TV commercials have received over almost 5 million views on YouTube and continue to garner positive customer feedback.

We continue to build member relationships on shopyourway.com. This enables us to understand member preferences at a granular level and provide a more personalized and relevant shopping experience. On this exclusive site, members can access all our products, including the marketplace items that I referenced earlier: promotions, coupons, sweepstakes and other offerings such as points look up, in a single place.

Members can not only aggregate products, services and content into catalogs and wishlists but also share them with their friends and engage with friends and celebrities that are curating content as well.

I encourage you all, if you have not visited shopyourway.com recently, to take a few minutes to engage with it, so that you can see for yourself all of the fun and benefit it has to offer. The result is not just a more personalized shopping experience but in fact, a more social shopping experience. We believe this represents the evolution of Shop Your Way from a loyalty program into a true membership program that is centered around rewarding, delighting and serving our members.

This concludes our formal remarks. Let me now turn this over to Bill Phelan.

William K. Phelan

Thanks Imran. Operator, I think we're ready to take questions now.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Bill Reuter of Bank of America Merrill Lynch.

William M. Reuter - BofA Merrill Lynch, Research Division

You guys really focused on the value of your assets here, I was wondering if you could provide a little more color on some of the assets that you guys are going to plan on trying to monetize next year and generate the $500 million.

Robert A. Schriesheim

Yes. Bill, consistent with our prior comments, we're obviously focused on creating long-term sustainable value through operating performance. As we continue with our evolution, we're moving to a more -- as we described nimble, less asset-intensive business model, and as we move through this process, we're continuously evaluating our asset structure and whether a specific assets and/or businesses are better managed within the current Sears Holdings as a configuration or outside of it. In my prepared remarks, I didn't indicate that there would necessarily be asset sales. Cash can be generated through multiple means, but in any case, the primary objective is how we can best create economic value. During the past year, we obviously took advantage of our underlying asset base and financial flexibility, as well as actions focused on improving productivity to create value through actions that also generated cash proceeds. In summary though, the objective is creation of value. It's not to generate cash for the sake of cash, since we don't believe we have the need for additional cash. I guess I'd point out that, look, our asset book value is $22 billion, so $500 million is only about 2%. It's not as if it's anything significant. Beyond that, I won't offer any specifics, other than to say, we demonstrated this past year, we'll be very disciplined about how we use our assets and allocate our capital to invest in our transformation. And also, we consider all of our obligations and commitments, as well as we manage our business transformation. Companies moving through transformations make decisions all the time about how to allocate and reallocate capital as they execute on their strategic vision, and certainly, history in business is replete with examples, in the retail world and outside of the retail world, of companies going through transformations who choose to remove capital from older business models and reinvest it to promote their strategic vision, which is basically what we're doing.

William M. Reuter - BofA Merrill Lynch, Research Division

Okay. One more on that, I guess your inventory levels are so far down from where they were last year, I'm curious how you feel about where they are at this point, whether you guys still think that you can reduce your inventories and generate capital there or alternatively, maybe, what do you want to invest more in, if you thought you're missing out on some sales?

Robert A. Schriesheim

Yes. So you're right, we're down about $1 billion year-over-year, excluding show in inventory. I point out about 1/3 of that is associated with store closings. The other 2/3 is associated with more effective inventory buys, more efficient management of our supply chain, more efficient management of our assortment. Ron, Imran, Lou, myself are all very focused on return on capital employed, and obviously, as we move towards a more member-centric models and Integrated Retail, our investments in traditional retail real estate inventory assets will likely decline. I guess I'd also point out that we -- with marketplace, where we carry 50 million items, those items are carried by third parties. So going forward, that's another reason how -- another way we manage our inventory. I'll let Ron comment.

Ronald D. Boire

Yes. From a standpoint of being ready for holiday, we're comfortable, I think if you still look at our inventory, inventory turnover versus what we -- I think we'd like it to be, and what some best in class competitors may be, we have opportunity. So when we look at whether it's key categories like appliances, apparel, tools or jewelry, we feel we are in stock. We have made big bets on the items in categories that we think will drive profitability for Q4. And frankly, I'm looking for even greater inventory productivity through a more focused assortment, through assortment optimization, and much more localized assortments as we get better and better with understanding our Shop Your Way members' buying patterns and use that data to be more effective in delivering what they want and where they want it at a store and customer level. So I'm comfortable with where we are right now.

William M. Reuter - BofA Merrill Lynch, Research Division

Okay, and then just lastly, it sounds like asset sales are not really the focus here, but do you feel that you have additional real estate that there would be value, and you guys could monetize if you made that decision that you wanted to do that?

Robert A. Schriesheim

Obviously, we've demonstrated we a got a lot of value in our real estate. We only sold 14 properties, we're continuing -- we continuously evaluate the footprint of our ecosystem, and we always continue to evaluate our stores. We're approached all the time. We listen most of the time, things don't make sense. Sometimes, if something is worth more to somebody else then it is to us, we'll obviously opportunistically take advantage of that.

Operator

Our next question comes from Gary Balter of Crédit Suisse.

Gary Balter - Crédit Suisse AG, Research Division

I have a question on the results and then something on the liquidity of cash flow. Given, you talked about how you would have been positive without Consumer Electronics, which is an admirable job on the sell-side and on the appliance side, why were then results, like they look weak, relative to that because you would've expected better EBITDA, at least from the Sears division. and then part B, will be what's happening at Kmart? And how do you turn that around, from an operating point of view?

Ronald D. Boire

So Gary, this is Ron. So thanks for the question. First on Kmart, Kmart was definitely impacted by Consumer Electronics, and there's, I think 2 factors in Consumer Electronics. One is, currently, the industry is in the cycle where, A, innovation has slowed with the exception of, frankly, mobile, and what's going on in the mobile, in wireless space. And B, there is price compression in the balance of the industry, namely a few names in television sets. And I think we also have not -- we did -- we weren’t well positioned coming into this year. You may know we have a new leader of that business who appears [ph] to have brought in the spring, who's both making operational improvements in Consumer Electronics, as well as looking at the strategic position of the category for the brand. Secondly, in the Grocery and Household business, for Grocery in particular, we feel that we're not as well positioned as we'd like to be in that category. We're thinking about that position, convenience versus traffic, and how that category should be repositioned within the Kmart format. And we actually just, this month, hired a new leader for that business, Ryan Vero, who we're working with diligently to understand the grocery component of the grocery household, drug and pharmacy sector for us and in particular, to create the new operating strategy for us around grocery.

Louis J. D’Ambrosio

Yes, and it's Lou. Rob, why don't you just give a quick perspective on, the kind of the relative profit contribution between Sears and Kmart even with the situation with Consumer Electronics.

Robert A. Schriesheim

Yes, I think, Gary, if you look at the press release on Page 5, which is probably what you're doing, you can see that year-over-year, for the third quarter, Sears’ domestic EBITDA improved by about $50 million from a negative 114 to negative 63. Kmart obviously declined by about $30 million. And a large part of that decline was actually driven by Consumer Electronics.

Gary Balter - Crédit Suisse AG, Research Division

In both -- '12, I guess, there has been a decline.

Robert A. Schriesheim

Well, yes, it's mostly in Kmart, but Consumer Electronics was down in both.

Louis J. D’Ambrosio

Yes, so you had --

Robert A. Schriesheim

And gaming is a big part of Kmart in Consumer Electronics.

Gary Balter - Crédit Suisse AG, Research Division

Okay. Ron, in that, confirm then before I get to the liquidity question, how do we figure out the SHOS [ph] impact? Like what are those numbers? Because you said they're still included in here.

Robert A. Schriesheim

I'm sorry, the impact of SHO?

Gary Balter - Crédit Suisse AG, Research Division

Yes, sorry, we call it SHOS because it's definitely [indiscernible].

Robert A. Schriesheim

At this point, what we can say is they're in the financials through October 11, of 2012, and they're going -- they're technically not going to be a discontinued operation, so the results will remain in our financials through October 11, 2012. Going forward, what we'll do for transparency, as I said, is show them -- is show the results as a segment.

Gary Balter - Crédit Suisse AG, Research Division

As a segment or it's completely discontinued, if you don't own it?

Robert A. Schriesheim

No, it technically cannot be -- as I said in my comments, it technically cannot be characterized as a discontinued operation because of the degree of continuing cash flows we have ongoing between ourselves and SHO. So it's not going to be characterized as a discontinued operation. So that's why it will remain in the historical financials.

Gary Balter - Crédit Suisse AG, Research Division

Okay. And then, just on the liquidity, to follow-up and then I'll get off. Could you give us some guidance for 2013 in terms of CapEx, pension costs and interest expense as we start building our model?

Robert A. Schriesheim

Yes, sure. As you know, in general, our policy is we don't provide guidance. I'm not going to alter from that, except on -- as it relates to pension, as a result of the voluntary contribution that we made, it reduced -- it will reduce our pension cash contribution by about $70 million, from $420 million, which was initially anticipated to about $350 million. In addition, obviously, as an ancillary benefit of that, while we don't know yet, there'll be some degree of reduction in cash, cost and expenses associated with active participants who might choose to avail themselves of the program. And that's what I'm willing to give as guidance.

Gary Balter - Crédit Suisse AG, Research Division

Okay. And is that 350 something we should be thinking about for future years, the '14, '15, '16, because before you did this, there was going to be a step up?

Robert A. Schriesheim

Yes, the problem we have, obviously in answering that question is it's highly dependent upon the regulatory environment, and on interest rates as well. It's very sensitive to interest rates.

Gary Balter - Crédit Suisse AG, Research Division

Okay. And then part 3 of that and then I'm off. You generated, as you said, $1.8 billion in cash through inventory, some of the asset sales, et cetera, anything else to your [indiscernible] the sale of SHOS [ph]. Yet when you look at the -- at the balance sheet, the debt is pretty much the same. The cash is pretty much the same, not exactly, obviously, but the worst, and you could see -- let’s say those obviously have played a role, you paid some of that down, and pension costs played a role, but essentially it’s saying that even with this you’re not generating a lot of free cash. So how do you think about that?

Robert A. Schriesheim

Well, the way I look at it is pretty simply. I look at the balance sheet, and when I look at the balance sheet on a reported basis, debt's down by $550 million. And the debt's down by $550 million, despite the fact that we made a $203 million contribution to the pension -- $203 million additional contribution to the pension on top of the $300 million normal. So it's $500 million total pension contribution. So debt's down by $548 million, despite the fact that we made a total pension contribution of $500 million. We reduced expenses by -- what will be $500 million and the total cash generated will be about $1.8 billion. So I think that's how the numbers hold together, it's pretty factual.

Operator

Our next question comes from Paul Swinand of Morningstar.

Paul Swinand - Morningstar Inc., Research Division

Just to follow-up on Gary's last comment, maybe if the cash flow statement was available on the actual 8-K, that might be helpful, I mean, we can all look at the balance sheet, but it's quicker to do the cash flow. Would you consider doing that in the future?

Robert A. Schriesheim

Yes, we'll consider doing it in the future. We've been very, very transparent in our SEC filings. I think we're as transparent or more transparent than most companies I know, in most industries, so I don't think we have any aversion to doing that. Certainly, you'll be seeing the cash flow statements in our Q that's going to be filed. So it's all going to be out there, there's nothing to hide.

Paul Swinand - Morningstar Inc., Research Division

Understood. Just making it a little quicker for us. Just again, a little following up, sort of what was, Gary was saying, I realized your comments that the Grocery business got a little tougher, I've heard that. But in another hand, that business hasn't really changed much. Can you drill down a little more what changed in the quarter? I mean Target and Walmart have had groceries for a long time. I don't know that the footprint of them has really changed much. It’s not like it has never been a competitive category, and it's not like you haven't competed there effectively before. What changed in the quarter that made it actually be a negative?

Ronald D. Boire

Yes, so I think -- this is Ron, I think there's a couple of things. First, we were -- the previous 4 quarters had been investing significant incremental…

[Technical Difficulty]

Operator

All right. And we'll move onto the next question --

Ronald D. Boire

We accidently muted here. I think a couple of things, first in the previous 4 quarters, we were investing in incremental advertising, primarily in the form of the wrap on our flyer in Grocery as we determined the strategies between traffic and convenience for the category. As we comp that, also the competitive set changed a little bit as one of our largest competitors and maybe the biggest guy in the country started to significantly increase the advertising exposure they gave to the Grocery and Household category. I also think we probably made some bets in the category around grocery versus household that, in retrospect, as we look at the numbers, didn't pan out. And so we need to think about our mix there. And the third thing is, there was some COGS increases that began to flow through the income statement in that business for the past 6 to 8 months that had become material over the last quarter. So a variety of things. And as I said earlier, we have also -- Ryan Vero has just joined us, in fact, his first full day in the building was yesterday, as we look to revitalize that business and reestablish the appropriate strategic direction for the grocery portion of our Grocery, Drug, Pharma businesses. So I think we understand what's going on there, and I think we have some strategic decisions to make about the positioning of Grocery in particular, in that business unit.

Louis J. D’Ambrosio

Yes, Paul, it's Lou. What I would add, too, is exactly as you said. I mean, we had very good progress in some of our most important businesses of Appliances, of Apparel, of Home Services. There are 2 businesses, which we are doing a lot of work in right now. Consumer Electronics and Grocery and Household. We're looking at everything from the market, to our execution, to the fundamental business model. When I say the fundamental business model, I mean for us, for us, what should that business be? Given the space we have, how we execute, what our go to market is, leveraging our Shop Your Way membership, what type of alliances or partnerships do make sense, et cetera. It's an open discussion. I think we're having the right discussion. We have 2 very good new leaders now, leading each of those businesses, so we could get those businesses, not only in a kind of a 1, 2 quarter fix, but sustainably, put both of those businesses in the right business model, so we can have kind of a longer-term value creation based on how we should run those businesses. Not the way our competitors are, not necessarily different from all of our competitors are, but for our set of assets, what should those 2 businesses look like? Have traction on some, but these 2, we're going into very deeply right now, and I believe that the thoughtfulness and the actions will translate into better results.

Paul Swinand - Morningstar Inc., Research Division

Okay, it's fair enough. And then I wanted to drill down on the Appliances, I know -- your comments said that, that category was up. I know if you've been watching the industry numbers or some of the manufacturers' results the -- most of the increase has been pricing and mix. We've been talking about when is this going to turn, will it be like autos, is there some pent-up demand. But I guess from my standpoint, I still haven't seen that it's really turning. Is there anything you can add that this business is actually getting better and it's not just a bump along the bottom here, or?

Ronald D. Boire

Yes. Paul, this is Ron. I think we have been focused on fixing the fundamentals in our business, that is, improving the customer experience, both from the selling environment, the integrated selling environment, as I spoke about in my comments. Appliances is one of the tips of the spear on our Integrated Retail strategy as we have, in about half of our stores, we use iPads in the selling experience, which is a -- we think a material improvement in the selling experience, as well as the transparency for customers. So I think where we're seeing our results is in optimizing our business model, and improving how we engage with our customer and then how we leverage some of the strategic assets that we've developed over the last couple of years around Integrated Retail, and around how we talk to our Shop Your Way Rewards members. From a market share standpoint, our market share's been up in a couple of the quarters recently, and flat in a couple of quarters. So we're pleased with how we're optimizing the model, but your question is, do we think that this thing suddenly turns. I don't think we have a strong point of view that that’s going to happen. We are prepared as the industry improves, and as housing hopefully improves in the coming months and years, to leverage our leadership position, and we think the work that we're doing around how we communicate with customers, how we handle the customer experience, both online and in an integrated way in the store, puts us in a material competitive advantage.

Louis J. D’Ambrosio

Yes, and it's Lou. I would add to that, to Ron's point, we're not waiting for the housing market to turn, to continue to improve what we're doing in Appliances. And as you said, Paul, through a combination of pricing, through a combination of go-to-market execution, importantly, to getting the value prop right, we've seen, in each of the quarters this year, improvement in profitability in that business. So if we execute that business well, and we continue to have a value prop from a pricing, from a marketing, from a merchandising perspective, that works will with our members, we'll be all that much better when the housing market accelerates, but surely, we're not waiting for that to look for continued progress in that business.

Paul Swinand - Morningstar Inc., Research Division

Okay, fair enough. And one quick question, I'm not sure if you can disclose it, and then I'll get off. But on that appliance service site, you did mention that -- and it sounds like maybe you've got some new offers, some new ways of going to market, but can you just say that's a very profitable business, right?

Louis J. D’Ambrosio

You're talking about the Home Services?

Paul Swinand - Morningstar Inc., Research Division

Yes.

Louis J. D’Ambrosio

Yes. The Home Services is a profitable business for us. And I think --

Paul Swinand - Morningstar Inc., Research Division

And you're growing it -- sorry to interrupt, but your growth, you said it was up, so that's -- is that contributing to the comp? Are you growing sales in that?

Louis J. D’Ambrosio

We talked about improved profitability in that business and the improved profitability there is coming from a couple of different areas. One is we continue to enhance the efficiency and the logistics. So as we bring trucks out to fix customer calls, to make sure that through the information we have, for a Shop Your Way membership and so forth, we have the right information so that the truck went out the first time, has the right part on the truck. Secondly, we continue to enhance the algorithms within our call centers so that when calls come in, we're more effectively able to prioritize them based on those calls that are most important to customers and those calls as it relates to our business model. So it's the combination of the efficiencies we're driving, as well as the more -- the greater effectiveness we're having, in terms of being able to deliver the right solution the first time out, which is driving the profitability growth in that business.

Paul Swinand - Morningstar Inc., Research Division

Okay, great. And is there any way to leverage that further, like to partner with another appliance group or another retailer or?

Louis J. D’Ambrosio

Yes. Look, what I'll say is whether it's their Home Services business or whether it's the brand's business, et cetera, we have enormous assets. Our focus is creating value with those assets. In most situations, that focus is in -- is within our portfolio. Where there are opportunities to leverage those assets outside of the portfolio, we will do that, but we will do it very thoughtfully, we will do it very deliberately. Whether it's something with the brands and what -- and we've been approached by several people in terms of wanting to do brands deals with us, in some of those situations where it made sense for our members and where it made sense for our business model, we did it. Same thing for services. There is the opportunity to leverage. We do have the largest, in-home services business in the world. We do have the opportunity to leverage that across other environments, and we have to make sure that the puts and the takes of doing that make sense for our shareholders in creating long-term value. So there's a wide openness, Paul, to those types of things, but there's also a, I would say, an appropriate discipline in doing those things. And that's the way we're running to play.

Operator

Our next question comes from Greg Melich of ICI Group.

Gregory S. Melich - ISI Group Inc., Research Division

It's Greg from ISI. I have 2 questions. One on the merchandising strategy, another on the financials. The Shop My Way reward program, could you give us some insight, given that's such a key driver to improving EBITDA as to how many members you have, what their frequency is, what their percentage of your sales or profitability, anything that you could give to help us understand how that is such a key part of driving EBITDA?

Robert A. Schriesheim

Yes, I'm not going to get into specifics about number of members. In the past, we said tens of millions, and it's definitely into the tens of millions. What I will say is that over half of the business that we do at Sears and Kmart now come from our Shop Your Way membership program. So it's an extremely important part of the business and we do find that members shop more frequently. We find that they do more core shopping. So if we look at the average number of categories that our members engage in versus nonmembers, it's larger. We believe a big benefit we have is the breadth of our portfolio, in that Shop Your Way program, it's not just a Sears program or a Kmart program or Lands’ End program, it's a Shop Your Way program, which takes advantage of this massive portfolio we have. So if you go to Sears and you buy a refrigerator, and then you want to use the points and tick away if you're able to get 5X or 10X points, to then use those points to buy a T-shirt at Kmart, you could do it, if you want to do something then at Lands’ End. So it's the breadth of this portfolio which we believe is one of the compelling benefit in addition to everything that Imran spoke about, in terms of the conveniences, the value, the shipping, the shopyourway.com, engaging capabilities, et cetera. So we said more than half of the business now is from [indiscernible]. We said well into the tens of millions, and we're seeing greater engagement from our members. I think those are the key data points that we've been -- or that we're ready to discuss at this point.

Gregory S. Melich - ISI Group Inc., Research Division

Great, and then on the financial side, really, 2 parts. You mentioned that with the SHO spin, that you'll still get some profit, some -- I guess the royalty is from Kenmore and some of the other brands. Could you help us understand how much of the $120 million of EBITDA at SHO is actually from those royalties? And then a last one would be how much does your working capital need go up intra-quarter? In other words, between the end of the quarter and peak, during holiday, how much cash do you need?

Robert A. Schriesheim

So the first question, no, we're not going to, we don't disclose what we earn as far as royalties on those brands from SHO. They're a separate publicly traded company now, so I’d encourage you to look at their financial statements. Can you repeat the second question, please?

Gregory S. Melich - ISI Group Inc., Research Division

Yes. So working capital, we can see where you are now with the balance sheet at the end of the quarter. But obviously, during the quarter, there can be changes in working capital needs, like buying inventory ahead of holiday. I'm just curious if there's a working capital need between when the quarter ended and then before Christmas, and then how much that is, $500 million? $1 billion?

Robert A. Schriesheim

Well, I will never comment on the specifics. But our peak borrowing needs, working capital investment, et cetera, is behind us.

Gregory S. Melich - ISI Group Inc., Research Division

It was before the end the quarter, or it's before where we are today?

Robert A. Schriesheim

Well, without getting into specificity, our peak borrowing needs happens around the end of the third quarter.

Operator

Our next question comes from Kirk Ludtke of CRT Capital Group.

Kirk Ludtke - CRT Capital Group LLC, Research Division

I was wondering if you could help us quantify how the asset intensity of the business will change as your business model changes. And if you could put some -- a time frame on that, that would be very helpful.

Louis J. D’Ambrosio

It's Lou, let me start on that, and then I'll turn it over to Rob. We're not going to give specifics, but what I will tell you is that the focus of our investments, the focus of our business model is the member. And the member travels across different channels: the store, mobile, online, et cetera. So surely, we will have investments in these different areas. But you're no longer kind of required to have to have as large of an asset intensity to have a relationship with a member. So you go from let's say, a transaction at a store to a relationship with a member. And when we look at the assets that we have in our portfolio, many of those assets will continue as is, and we will continue. And some of them frankly, we're going to be doubling down on and investing in further. But when you look through the lens of the member first, it does kind of allow you to move away from some traditional paradigms of, well, if you want to get into this business, here's how many stores you need and therefore, here's how much square feet you need, and so forth. So that's the lens and the thoughtfulness with which we're evaluating on the various elements of our business model and assets. And you'll see that continue to play out. Rob?

Robert A. Schriesheim

Yes, I don't really have -- I think that's a pretty well -- you've taken together what's the answer that I think it was Bill Reuter who asked off the bat. We're certainly not going to give any time frame other than the fact that I did indicate that we would generate at least about $500 million over the next 12 months, but -- and we do think, as part of our business model evolution, to a more member-centric model, will become less asset intensive. But beyond that, I think everything we've given you today gives you a pretty good visibility of where we're heading.

Louis J. D’Ambrosio

Yes, that's exactly right, Rob. And the last thing I'll add to that is, we're not going to do anything with the assets to raise cash, let's say, if we're not generating value. I mean, we're here to take these assets and to create value. And as we said, the focus is to do that operationally. Likewise, if there's an opportunity for long-term value creation through other uses of that asset, which still is consistent with this strategy we have in running our company, then that's exactly what we'll do.

William K. Phelan

I think we'll take one more question.

Operator

Our next question comes from David Gober of Morgan Stanley.

David Gober - Morgan Stanley, Research Division

I just had a couple of questions on the physical footprint. And Rob, you really highlighted the optionality that exists in the lease portfolio. I was just wondering if you could give us any color on maybe the percentage of stores that are underperforming in your view, or maybe in a different way of asking the question of how do you see the physical footprint over time. Have you found that as the Shop Your Way Rewards program has gained traction that sales transfer better when you do close a store? And does that make you think about the footprint differently over time?

Robert A. Schriesheim

Well, what does make us think differently about the footprint is -- it's always a difficult consideration when you close a store. It involves exiting a community, because we don't like to do that. As a result of all of our online assets and the Shop Your Way Rewards membership program and driving to a more member-centric strategy, if we do make the decision to exit a marginally performing store, we're not literally exiting a community because we still can provide those customers that we serve choices through online means. As far as what our footprint is going to look like with any degree of specificity, that's not something we're prepared to talk to. As far as how the stores are performing, we've done, I think, a good job this year in terms of evaluating the store performance, and we'll continue to do that, going forward. I don't know if Ron has anything he wants to add on this. Okay, Ron anything to say about the stores?

Ronald D. Boire

No, I think you covered it well, Rob. And I think the point on community is important and the more we, A, become an integrated retailer with kind of the strength that we're building on being able to touch a customer in multiple ways very effectively and B, understand where our members are, it also helps us look differently at the store economics. And Rob's point on it, not wanting to exit a community is an important one. There's parts of our strategy in particular -- it's actually in both boxes, but more in particular in the Sears box that really depends on having a local presence. So how we think about that definitely changes as we know more about our customers and customers' needs and get better at delivering a truly outstanding, Integrated Retail experience.

Louis J. D’Ambrosio

It's Lou, and I think we've shown, over time that we've been extremely patient in staying in communities. We certainly have some stores which are performing better than others. As Ron described earlier, we are making significant investments in stores through technology, through enhancements to the way we're laying out the merchandise, et cetera. And we will continue to look at the combination of assets we have. Stores, online, mobile, home services, as we allocate capital to find the best answer, both in serving our members, as well as delivering returns to the shareholders.

William K. Phelan

All right. I think that's it. I want to thank you very much for joining us on our earnings call today. And I wish everyone a very happy Thanksgiving. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!