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Summary

  • Sears' sales and earnings have continued to disappoint.
  • There are many levers which management can use to improve operations.
  • The company has time to implement a plan, but must be aggressive in its execution.

Background

On August 21, 2014, Sears Holdings Corp. (NASDAQ: SHLD) reported a 2Q 2014 adjusted-loss of $2.87 per share on sales of $8.0 billion compared to an adjusted loss of $1.56 per share on sales of $8.9 billion in the same period last year. Including special items, Sears' 2Q 2014 loss was $5.39 per share compared to a loss of $1.83 in the same period last year. These figures are based on a diluted share count of 106.3 million for 2Q 2014 and 106.1 million for 2Q 2013.

Sears Holdings is a retailer in the United States and Canada. The company owns retail stores that sell products branded under the Sears, Kmart, Kenmore, Craftsman, and Diehard labels. The company currently operates over 1900 stores in the United States and 449 stores in Canada.

Key Points

  • Business model transformation is centered around membership and promotional models
  • $839 million in cash
  • $2.82 in long-term debt and capitalized lease obligations
  • $1.4 billion in short-term debt
  • $664 generated from distribution of Land's end and $164 million from sale of real estate
  • Electronics business has been a "drag" on the business
  • Sears domestic same-store sales up 0.1%, Kmart same-store sales down 1.7%
  • $486 million in borrowing availability on credit facilities
  • $3.9 billion in equity and inventory
  • Total liquidity of $5.2 billion
  • No term debt maturities until June 2018
  • Announced closure of 130 stores in 2014, have closed 95 year-to-date

Guidance

Management did not provide any earnings guidance in the conference call.

Things to watch for in Q3

Additional spinoffs

Following the Land's End spinoff in April, Sears mentioned that it was considering "strategic alternatives" for Sears Auto Centers, and may begin the process to separate it from the company via a sale, IPO, or spin-off.

Short-term debt obligations

The company currently has $1.4 billion in short-term debt obligations and only $829 million in cash on hand. While Sears has nearly $6.4 billion in merchandise inventories and $516 million in accounts receivable, it is going to feel the pressure to generate cash or refinance with its lenders in order to meet these obligations.

Sale of Real Estate

If the company finds itself in a cash bind, it could consider selling or borrowing against its real estate assets. The company is currently in control of some of the best commercial real estate in the country, as it has long been an anchor store for malls and shopping centers.

Sale of Sears Canada stake

Sears still has a 51% stake in Sears Canada, currently valued at about $765 million and it could sell its remaining stake in order to raise cash.

Quick Take

The first thing that I noticed about this webcast was that it was pre-recorded - an anomaly for such a large company. It is especially troubling that management chose to use a pre-recorded conference call in the wake of a disappointing quarter, and makes it seem that management wants to distance itself from shareholders.

Management was quick to confirm that the company's performance was "not acceptable," in the quarter and that it needed to take steps to improve performance. For a company that has shown consistently lagging sales and has been making moves in an attempt to right the ship it would be helpful to know what management has planned going forward. There are a lot of levers that can be pulled for a company of this size, and there has to be a way for management to stop the bleeding.

CEO Eddie Lampert stated that "Over the next 6-12 months, we intend to work with our lenders and others to evaluate our capital structure with a goal of achieving more long-term flexibility," implying that the company is looking to refinance its short-term ($1.4 billion) and long-term ($2.9 billion) debt obligations.

While management spent a lot of time discussing available ways to produce liquidity via the company's "rich portfolio of assets," they did not go into depth about the steps and investments that they were going to take to fix the company's operations beyond closing under-performing stores. Lampert emphasized that the company's new membership model would help improve margins, but didn't explain much about changing the product mix of stores or improving store layouts.

It's clear that Sears is in the midst of a deep turnaround effort, and while they have been taking some steps to improve profitability, there has not been any improvement on the bottom line and sales have continued to decline. The company still has time to improve operations given its $5.2 billion in liquidity, but it needs to be more aggressive in its efforts.

Conference Call transcript and investor presentation are available on Sears' Investor center linked here.

Source: Breaking It Down: Sears Holdings' 2Q 2014 Earnings Call