Bloomberg News

Sears Falls After Saying It Will Close as Many as 120 Stores

December 28, 2011

(Updates shares price in fifth paragraph.)

Dec. 27 (Bloomberg) -- Sears Holdings Corp. tumbled the most in 8 1/2 years after saying it will close as many as 120 stores, with a deeper-than-expected sales decline casting doubt on Chairman Edward Lampert’s efforts to turn around the chain.

Lampert has tried several strategies since merging Sears with Kmart in 2005, none of which have reversed falling sales. His latest push involves moving toward smaller stores and licensing the Craftsman, DieHard and Kenmore brands. As a result, the larger stores have received less investment and prompted customers to shop elsewhere, according to Gary Balter, an analyst with Credit Suisse Group AG in New York.

Same-store sales at the largest U.S. department store chain fell 5.2 percent in the eight weeks ended Dec. 25, Sears said today. By contrast, such sales in the department-store sector as a whole will climb an estimated 4 percent in November and December, compared with the same period a year ago, according to the International Council of Shopping Centers, a New York-based trade group.

“Results were much worse than anticipated,” Balter said. The share price also was artificially high because of a very limited number of shares outstanding, he said. Today’s news also “scares” investors who are long on the stock, said Balter, who rates the shares “underperform.”

Sears fell 27 percent to $33.38 at the close in New York, the biggest decline since April 29, 2003. The shares have fallen 55 percent this year.

Bond Prices

The chain’s $987.4 million of 6.625 percent notes due in October 2018 declined 4.6 cents to 76 cents on the dollar to yield 11.9 percent today in New York, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority. That’s the lowest price since the notes were issued in exchange for other debt in August, Bloomberg and Trace data show.

Closing the Kmart and Sears stores will generate $140 million to $170 million of cash from inventory sales and leasing or sales of the locations, the Hoffman Estates, Illinois-based company said today in a statement. Sears will incur non-cash expenses of as much as $2.4 billion in the fourth quarter to write down the value of potential tax benefits and goodwill.

The company plans to reduce fixed costs by $100 million to $200 million, according to the statement.

“There is not enough value in the real estate to do much with,” Balter said. “Who is going to buy the stores? There are no buyers. There is no one growing in U.S. retail.”

Hedge Fund

Lampert, who along with his hedge fund owns 60 percent of Sears, has presided over 18 consecutive quarters of declining sales. Before today’s announcement, Sears had closed 171 of its large U.S. stores since 2005. Besides turning to smaller stores and franchising, Lampert also has been leasing space to other retailers and trying to boost Web sales.

Instead of reviving growth, Sears has lost customers and market share to discounters such as Wal-Mart Stores Inc. and Target Corp., which are attracting budget-minded consumers.

Earnings before interest, depreciation and amortization in the fourth quarter will be less than half of last year’s $933 million, Sears said.

“There is this philosophy that you don’t need to make as much of an investment in the stores if you have a brand,” Balter said in a telephone interview. “That has not worked.”

Sears didn’t identify which stores will be closed. In his annual investor letters, Lampert has identified the smaller Hometown and Sears Outlet stores as sources of growth and profit. The company opened 122 of those “specialty” stores last year, he said in his 2011 letter, and now has 945 -- less than a quarter of the total.

Biggest Exposure

Landlords with the biggest exposure to Sears are Simon Property Group Inc., which has Sears as a tenant at 137 of its 190 malls, and General Growth Properties Inc., with Sears as a tenant at 110 of its 167 malls, according to Andrew Johns, an analyst at Green Street Advisors Inc. in Newport Beach, California.

“Generally, when Sears decides to close, it’s the lower productivity stores with lower sales per square foot,” Johns said in a telephone interview. “Sears has good real estate at some malls.”

The company is allowing other retailers to sell its DieHard, Craftsman and Kenmore products. Sears has also cut deals with such retailers as Costco Wholesale Corp. and Ace Hardware to sell Craftsman tools in their stores.

“If they can just create enough cash flow to get through the downturn, at some point there is going to be a huge uptick in appliance sales,” Paul Swinand, an analyst with Morningstar Inc. in Chicago, said in a telephone interview. “They just have to make sure that when that happens they are not cut off at the knees, and that it doesn’t all go to Home Depot and Best Buy.”

Sears is to report fourth-quarter earnings on Feb. 23.

“The market is assuming there’s more bad news to come,” Swinand said.

--With assistance from Lauren Coleman-Lochner and Tim Catts in New York, and Daniel Taub in Los Angeles. Editors: James Callan, Robin Ajello

To contact the reporter on this story: Cotten Timberlake in Washington at ctimberlake@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net


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