Sears Earnings: Should Investors Abandon All Hope?

I’m sure that short-sellers are frustrated with Sears Holdings (NASDAQ: SHLD), the venerable department store that seems to have found ongoing life as a cast member of “The Walking Dead.” Department stores are in big trouble these days, because online retailing has taken over so much market share.
Sears should be dead, but it carries so much debt that its lenders agreed to extend maturities out as far as 2020. The hope, it seems, is that they will derive more revenue by letting the loans stay out rather than foreclose. Lenders agreed to this because Sears finally decided to spin off its real estate into a REIT, which would give it a hefty cash cushion. That, plus a sale-leaseback deal on 235 Kmart stores, will generate $3 billion in cash.
That pretty much saves the day.
Still, as we go through the details of the first-quarter Sears earnings report, you’ll see why things are so bad operationally. I guess investors are supposed to be happy that last year’s $402 million loss was cut to $303 million, and that adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was only negative $141 million this quarter compared to negative $178 million last year.

Dismal Same-Store Sales

Sears’ comparable store sales could not be described as anything other than dismal. Kmart’s fell 7% and Sears’ fell 14.5%. It’s nothing short of miserable.
Revenues fell $2 billion to $5.9 billion. To be fair, almost $700 million was lost decoupling Sears Canada from the core business, $222 million from separating out Lands’s End, and $500 million by closing down stores.
Turning to the balance sheet, the company has $286 million in cash which will be enhanced by the above moves. On the debt side, short-term paper includes $410 million in a credit facility, $200 million in secured short-term notes, and $104 million in commercial paper. That $200 million loan got repaid in the quarter. IT has $726 million remaining on its facility.
But the big news was the debt restructuring. The three largest lenders agreed to amend and extend the $3.28 billion facility maturing next April into 2020 – although $1.275 billion must be paid off by April.
What this all does is basically gets Sears back on its feet. You’ll be able to invest in the REIT if you like and avoid the operational side completely. The operations will now have enough cash to pay off all the debt, so it isn’t in danger of default.

A Viable Retailer?

The issue that remains is whether Sears can become a viable retail storefront operation again. It needs to be spruced up, but after the disaster of J.C. Penney (NYSE: JCP), it will have to approach this with caution.
What the company needs now is a vision. Old management needs to go. Someone new and fresh, with an eye on making storefront retail relevant, needs to be brought in.
Consumers need to have a reason to visit Sears, because everything they sell is easily found online. If Burger King was able to reinvent itself, and Best Buy (NYSE: BBY) found new life, it is possible for Sears.

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