Sears Holdings (NASDAQ:SHLD) appears to be intent on surviving another year, with the announcement that it was attempting to cut annualized costs by $1 billion while also selling at least $1 billion in additional real estate assets. The savings will come partially as a result of store closures, so the actual impact on adjusted EBITDA will be significantly less than $1 billion though, leaving Sears far from breakeven cash flow still (excluding asset sales and working capital changes such as inventory reductions). Unless Sears can reverse its comparable store sales decline, restructuring will just be delayed. I expected Sears to survive until at least the second half of 2018, so these moves don't surprise me. However, given Sears's continued comparable store sales decline, there doesn't appear to be any improvement in the long-term future for its common shares.
Q4 2016 Update
Sears's Q4 2016 actually ended up a bit better than expected, albeit compared to the very low expectations set by its holiday update. The comparable store sales of -10.3% represented an improvement from the -12% to -13% that Sears mentioned that it had achieved during the first two months of the quarter. This likely means that January's comparable store sales were only down low-single digits. January is a low volume sales month though, so its performance generally doesn't indicate very much about the sales trajectory going forward.
As well, Sears's adjusted EBITDA of negative $61 million in Q4 2016 was an improvement over Q4 2015's negative $137 million. Sears is still extremely far from even reaching positive adjusted EBITDA over a full year though since Q4 is generally the best quarter for retailers by a large margin.
Sears mentioned that it was attempting to achieve at least $1 billion in annualized cost savings. This includes the effect of store closures, with the 150 store closures announced in January likely contributing around $325 million in annualized cost savings by my estimate. Sears also is likely to close additional stores throughout the year like it has in previous years. These store closures may bring the cost savings from store closures up to around $500 million per year, leaving around $500 million for Sears to cut from other areas to reach its target.
Effect On Financials
The store closures may end up bringing Sears's revenue down to around $18.5 billion to $19 billion for 2017 when combined with a high single-digits decline in comparable store sales. This would result in Sears ending up with an estimated negative $500 million adjusted EBITDA when factoring in the targeted $1 billion reduction in SG&A. This would be an improvement over 2016's negative $808 million adjusted EBITDA, but that adjusted EBITDA level would still lead to a large cash burn (probably around $900 million) not including the effect of store closure costs, pension plan payments, working capital changes and asset sales. As well, the $1 billion reduction in SG&A is an annualized target, so the effect in 2017 may be less than $1 billion, with the consequent effect of lowering adjusted EBITDA further.
Sears appears intent on surviving another year through cost cutting and asset sales. This is good for its equity in the short-term since any continued survival must be considered a positive. In the longer-term, Sears's moves are negative for its common shares as long as comparable store sales continue to decline at a significant rate. Cost cutting alone isn't enough to get Sears's operations to cash flow neutral with its sales declines, so continued survival just means that Sears will own fewer assets and have lower equity if/when it finally restructures. Sears aims to reduce its debt and pension obligations by $1.5 billion in 2017, but that will probably require over $2.5 billion in asset sale proceeds (Craftsman, real estate, inventory reductions) to achieve.
Sears appears to remain suitable only for trading purposes. Shorting Sears for the long-term is difficult given the cost to borrow shares, which would eliminate most profits if Sears takes until the second half of 2018 to restructure. On the other hand, taking a long-term long position would involving watching Sears continue to sell whatever assets it has left in order to fund retail losses and pay debtholders.
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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.