Sears Holdings (SHLD) Q1 2017

Rob Riecker – CFO

They are closing unprofitable stores to save costs

“In April, we increased our annualized cost savings target from our ongoing restructuring program to $1.25 billion from $1.0 billion. Based on the significant progress we delivered during the first quarter, including $700 million in annualized cost savings action to date. As part of the program, we completed the previously announced closure of 150 nonprofitable stores and initiated the closure of 92 underperforming pharmacy operations in certain Kmart stores and 50 Sears Auto Center locations.”

They extended maturity of debt

“During the first quarter of 2017, we were able to pay down approximately 418 million of our term loan debt outstanding. And as previously announced, we reached an agreement to extend the maturity of 400 million of our $500 million 2016 secured loan facility from July 2017 to January 2018”

The retail headwinds persisted

“the retail headwinds persisted in the first quarter with continued softness in the store traffic and elevated promotional markdowns due to competition. We reported total revenue of $4.3 billion in the first quarter of 2017, compared to $5.4 billion in the same quarter last year, representing a decrease of $1.1 billion. This was largely driven by having fewer stores in operations, which accounted for $557 million of the sales decline, and declines in our comparable store sales due to industry headwinds I just mentioned, which accounted for $417 million of the decline.”

Sears Holdings 1Q15 Earnings Call Notes

Pretty significant comp declines

“first quarter domestic comparable store sales declined 10.9%, comprised of decreases of 7% at Kmart and 14.5% at Sears Domestic. There are three main factors underlying our comparable store sales performance: First, we are focused on restoring profitability to our company and we have taken deliberate actions with respect to our promotional design and marketing spend in pursuit of this objective. The result of these actions was that, in many categories, we saw an increase in profitability despite experiencing comparable store sales declines.”

Unlocking value of real estate through joint ventures

“in the first quarter of 2015, we continued to demonstrate our ability to unlock the value of our assets and our commitment to creating shareholder value through the formation of real estate joint ventures with three of the country’s leading mall owners. On April 1st, we entered into a joint venture with General Growth Properties in which we contributed 12 properties located at General Growth Property malls to the joint venture in exchange for $165 million in cash and a 50% interest in the joint venture. On April 13th, we entered into a joint venture with Simon Property Group in which we contributed 10 properties located at Simon malls to the joint venture in exchange for $114 million of cash and a 50% interest in the joint venture. On April 30th, we entered into a joint venture with The Macerich Company in which we contributed nine properties located at Macerich malls to the joint venture in exchange for $150 million of cash and a 50% interest in the joint venture. ‘

Launching REIT offering on June 12

“on June 12th we will launch the rights offering for the formation of a public REIT, Seritage Growth Properties. Pursuant to this transaction, Seritage will purchase 235 properties from Sears Holdings and our remaining 50% interests in the three previously announced joint ventures under a sale leaseback transaction which we expect will result in $2.6 billion in cash proceeds to Sears Holdings in early July.”

Sears will still own a lot of properties, lease a lot of locations from Seritage

“our retail presence in the top malls in the country will remain unchanged even after the REIT transaction is completed as Sears Holdings will continue to own or directly lease stores in 60 of the top 149 malls in the country. As part of the REIT transaction, Seritage will lease stores back to Sears Holdings, allowing Sears and Kmart to continue to maintain a retail presence in the locations sold to the REIT. Furthermore, the lease provides Sears Holdings with termination rights that give Sears the flexibility to make strategic decisions about whether or not to continue operating any of these locations, should they turn unprofitable in the future. I’d also point out that assuming the closing of the REIT transaction, Sears Holdings will continue to own about 425 properties.”

Sears Holdings 2Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

No one is more incentivized to create value

“As the CEO and the largest individual shareholder of Sears Holdings, I am personally committed to driving our transformation, improving our profit performance, and ensuring our financial flexibility, all while creating shareholder value.”

member centric

“A key component of transforming our business is to move towards a structure that focuses on providing benefits to our members by combining technology, people and stores to form more personalized relationships with them. Our new business model is intended to be less asset-intensive and our new cost structure is intended to be more variable in nature.”

The plan

“our new model, which leverages our scale and the investments that we continue to make in the Shop Your Way program and Integrated Retail capabilities. These include, optimizing store network and square footage, accelerating Shop Your Way and Integrated Retail as the foundation of our business, transforming select business models and reducing selling and administrative expenses.”

Focusing on technology

“we have made substantial investments in Integrated Retail capabilities in our stores. We are seeing these investments drive good results, and we will continue to roll out these capabilities to additional stores throughout the remainder of the year. For example, these abilities include more flexible technology, like the SHOPSears app utilized by associates in stores, digital signs which enable dynamic pricing and marketing, and RFID technology which enables our associates to do inventory counts in a fraction of the time, giving them more time to focus on serving our members. This has resulted in improved sales and margins in the stores where we have enabled this technology.”

Focusing on inventory

“I want to touch briefly on working capital, which has and will continue to be an important area of focus. As we have discussed before, we have reduced our net domestic inventory levels by over $1 billion over the past three years. We believe there is still substantial opportunity to further improve our inventory productivity.”

Retailer Square Footage Comparison

With some retail quarters starting to trickle in, I wanted to put together a comparison of some of the US’ largest multi-line retailers based on square footage.

It’s always amazing to think about just how large $WMT is compared to its competitors.  Partially because it has more international locations than the rest of its peers, it has nearly four times the amount of real estate that $TGT does: 1.1 Billion Square Feet!  That’s 39 square miles, or about 1.7x the size of Manhattan.

Even more amazing perhaps, the company generates a respectable $116 gross profit dollars per square foot on all that space.  That’s higher than everyone else on this list besides $COST and $JWN.  Costco and Nordstrom do a great job of generating gross profit relative to their size, but also have the highest valuations per square foot to go along with that.

Retail Square Footage Comparison


Sources: Most recent 10-k, Compustat Data