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Sears to report first profit in three years but no good news about sales

BY Dan Berthiaume

Hoffman Estates, Ill. – Sears Holdings Corp. is expecting to announce some rare good news about profits thanks to a real estate spinoff when it reports its second quarter results on Aug. 20. But the news will be tempered by dismal sales results.

Sears is predicting that its July spinoff of 235 retail properties into a new publicly traded real estate investment trust (REIT) will produce its first quarterly profit since 2012. The company expects to earn about $1.4 billion in total from the creation of its new Seritage Growth Properties REIT, with $510 million to be recorded in the second quarter. Combined with a $240 million tax benefit, Sears forecasts this gain will produce net income between $155 million and $205 million.

Same-store sales forecasts are not so rosy. Sears expects a total same-store sales decline of 10.6%, its tenth straight quarter of decline, including negative growth of 13.9% at Sears domestic stores and 6.9% at Kmart stores. Poor consumer electronics sales hurt same-store sales results, which Sears said would have otherwise declined 9.1% overall, including drops of 5.4% at Sears stores and 12.5% at Kmart stores.

In addition, Sears has extended a credit line of $3.28 billion, with usage of $657 million expected in the second quarter. Combined with the recent REIT transaction, Sears said it has enhanced its financial flexibility and achieved an objective of reducing our reliance on inventory as a source of financing. Sears is also making a tender offer to purchase up to $1 billion of $1.24 billion in 6.625% senior secured notes due in 2018.

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