Sears reports $2.4 billion Q4 loss, will spin off some stores
Hoffman Estates, Ill. — Sears Holdings Corp. reported Thursday a loss of $2.4 billion in the fourth quarter, compared with a profit of $374 million in the year-ago period. And in a move long anticipated by some analysts, the chain also announced plans to tap into its massive real estate holdings to help make up for its faltering retail performance.
Revenue for the quarter slipped 4% to $12.5 billion, from $13 billion. Same-store sales fell 4.1% during the quarter at Sears and 2.7% at Kmart.
In a statement, CEO Lou D’Ambrosio said that the company was taking “immediate actions” to address the losses, including cost and inventory reductions, targeted marketing and hiring for its merchandising team.
The parent to Sears and Kmart disclosed that it plans to separate its smaller Sears Hometown and Outlet Businesses, as well as some hardware stores through a special rights offering that is expected to raise approximately $400 million to $500 million. Sears said the separation will provide additional liquidity to the company and enable it to focus on its core business.
In addition, Sears announced it will sell 11 full-line Sears stores to mall owner General Growth Properties for $270 million. The stores, which are part of GGP, will continue to operate as Sears locations into 2013, with final closing dates to be determined and announced later this year, according to Sears Holdings.
“We’re executing actions to unlock the value of our portfolio and assets,” said Sears CEO Lou D’Ambrosio in a quarterly conference call with analysts. The call itself was unusual in that the chain hasn’t had one since billionaire Edward Lampert took over the company in 2005.
On the call, Sears executives stressed the company had ample liquidity and that restructuring moves would demonstrate the value of its assets.
The plans, which follow news in December that the company would close at least 100 stores to raise cash, are part of the retailer’s aggressive turnaround strategy, which has also included job cuts.
Sears said its quarterly performance was hurt by high costs for cotton and fuel, too-high inventory, and unseasonable weather that led to lower sales of winter gear. The company also cited low consumer demand for two of its biggest categories, appliances and consumer electronics.
For the year, net loss totaled $3.1 billion, compared with net income of $133 million.
Revenue fell 3% to $41.57 billion, from 442.66 billion a year ago.
Bankruptcies Key to Chain Retailers Overcoming ‘The Squeeze’
By Dave Spargo, [email protected]
While many people believe the worst of the recession is already behind us, some may be surprised to learn that there will likely be an increase in the number of chain stores filing for bankruptcy this year. Although the economy has been slowly recovering, the chain retail and restaurant industries still have a long road ahead before they are on a course of long-term profitability. While filing for bankruptcy may typically not be viewed as a positive occurrence, it may be the best solution for retail businesses to right-size obligations and remain competitive.
A major factor that has led to the growth in and continued trend toward bankruptcy filings is the increase in the cost structure underlying chain store businesses. The cost of goods has continued to increase due to rising commodity and production costs. Other expenses that continue to increase include utilities, which have grown steadily due to the rise in fuel prices, as well as the annual costs associated with maintaining brick-and-mortar stores.
Unfortunately, one result is that top-line sales have not kept pace with expense increases. In the last few years, sales for most retail and restaurant companies have stabilized and are beginning to trend up. However, any apparent new growth may be artificial since sales are typically measured from a basis of lower receipts overall due to the declines experienced during the height of the recession.
A growing factor that has hurt retailers is the recent phenomenon of “showrooming” spawned by online merchandisers. “Showrooming” occurs when consumers visit a brick-and-mortar store to examine a product in person but then return home to buy it from an online retailer, often at a cheaper price. While stores have been attempting to figure out strategies to thwart this phenomenon, such as by offering products sold exclusively through certain retail outlets; it continues to present a challenge.
With the increase in pressure from online rivals and shrinking profit margins, retailers’ ability to service debt and maintain their obligations has been drastically impaired and many are feeling “the squeeze.” During the recessionary years, lenders were frequently willing to extend the terms of loan obligations to assist businesses which were struggling; thus buying the lender and retailer time for the economy to improve. In today’s market however, as a result of the availability of other options and pressures, lenders can be resistant to granting extensions.
Many banks are under pressure to clear their books of certain underperforming or non-core loans and may be willing to force a bankruptcy to enable them to be paid off (even at a discount) through exit financing options or liquidation in Chapter 7 bankruptcy.
As more and more chain stores have had to turn to bankruptcy to restructure their obligations and strengthen their balance sheets, many have become more competitive in the marketplace. Those chain stores that have not restructured may be attempting to compete in a new market in which they are unable to offer as favorable terms to their customers.
Many chain stores negotiated their debt and original lease obligations during the height of the market and made commitments that are no longer feasible. Rather than face dissolution of their organization and liquidation of all business assets, retailers should consider proactively pursuing bankruptcy and restructuring their obligation. Frequently, businesses wait too long and enter bankruptcy with a tarnished brand as a result of a prolonged lack of marketing, as well as a lack of cash resources to finance a Chapter 11. This unfortunate set of circumstances will ultimately limit the options available to a chain store in bankruptcy.
As part of reorganization under Chapter 11 bankruptcy, retailers have the opportunity to restructure their business while continuing to operate; frequently without having to hand over control. Their financial obligations are automatically stayed (frozen) while the optimal method of repayment is determined. Repayment plans are negotiated usually at a reduced rate or over time.
While vendor contracts may be renegotiated in a relatively straightforward manner, multi-chain retailers may face more complex decisions when it comes to maintaining their branches. Consolidating a major chain retailer by closing selected stores can be the best way to increase profitability. The transfer of sales from closed units to those remaining, and the elimination of overhead as a result of those closures can lead to increases in top line unit sales and improved margins. An in-depth analysis of the company portfolio must be undertaken to determine which stores are to be closed and under what terms their lease and other contract obligations can be renegotiated in order to achieve maximum profitability.
From the debt perspective, businesses will have to convince lenders that agreeing to a plan of reorganization under Chapter 11 is going to be more beneficial for all concerned than a forced sale or liquidation under Chapter 7. As part of a reorganization, there are typically two main options for debtors. The first is to secure exit financing from an outside lender to pay off the debt owed to the existing lender under more favorable terms or at an acceptable discount. The second option is to modify the terms of the debt with the existing lender. Regardless of which option is chosen, the debtor will have to demonstrate to the court that the plan provides more favorable terms than liquidation.
Retail businesses that are faced with “the squeeze” from relatively flat sales and rapidly increasing costs may need to consider restructuring their obligations through bankruptcy. For businesses that are locked into unsustainable long-term leases and other obligations, reorganization may allow them to renegotiate these contracts while continuing to run their companies. Following reorganization, retailers may be able to gain a renewed foothold in the marketplace in order to better compete with online retailers. By becoming more competitive in the marketplace, chain stores, in turn, pass on these benefits to increasingly savvy and demanding consumers.
Dave Spargo is a founding principal with Huntley, Mullaney, Spargo & Sullivan, Inc., a financial restructuring firm. He can be reached at [email protected] or (916) 787-2060.
Target knows all about you … sort of
It’s a safe bet that Andrew Pole will never talk to another reporter after the treatment he and Target received in a piece in the Feb.16 edition of The New York Times with the headline, “How companies learn your secrets.”
The inference from the headline is that companies employ underhanded or deceptive means to obtain information people would like to keep private. In the case of Target and Pole’s efforts on behalf of the retailer, the lengthy article details how he developed a market basket analysis model that could be used to predict which shoppers might be pregnant so they could be provided relevant product offers. Market basket analysis has been a common practice in retail since point-of-sale scanning equipment and data warehouses first allowed retailers to glean insights from transaction data. What’s changed over the years is the expanding array of data streams that retailers and consumer packaged goods companies are able to incorporate and paint a picture of consumer behavior from which strategies to drive sales can be developed.
The methods employed by Pole, as outlined by the Times article, were actually fairly crude by today’s standards and downright archaic given where the field of analytics is headed. For example, one of the hottest trends in the burgeoning field of shopper insights on display last January at the National Retail Federation’s annual convention involves the field of video analytics. Software programs exist that allow video captured by shelf edge cameras or overhead cameras traditionally used for loss prevention purposes to be analyzed to determine shoppers age and gender. Another capability transforming how retailers communicate with shoppers relates to in-store wireless networks and the growing prevalence of smartphones. The technology exists for shoppers who participate in a retailer’s loyalty program to be served up a digital coupon or some other inducement to spend when they are within range and have opted in to the wireless network.
Such capabilities can be viewed as fascinating or creepy depending on one’s perspective which in the case of the Times was the latter. But to suggest that companies are learning secrets is a blatant attempt to feed into people’s privacy fears fueled by reports of identify theft, data breaches or intrusive searches at airports. Some concerns are well founded, but raising a fuss over Target’s method of detecting pregnant woman seems overdone, especially since pregnant women are usually pretty easy to spot.
See what you think. Read the Times article by clicking here, but be warned the piece is long.