Sears Reports Net Loss of $748 million in Q3

Sears Holdings Corporation announced financial results for its third quarter ending October 29, 2016. Sears reported a net loss of $748 million for the third quarter 2016, compared to a net loss of a $454 million in the third quarter of 2015.

“We remain fully committee to restoring profitability to our company and are taking actions such as reducing unprofitable stores, reducing space in stores we continue to operate, reducing investments in underperforming categories and improving gross margin performance and managing expenses relative to sales in key categories,” said Edward Lampert, Sears Holdings Corporation’s Chief Executive Officer and Chairman. While many observers have acknowledged the significant asset base of our company, we understand the concerns related to our operating performance and are committed to transforming our company through our Shop Your Way membership program and our Integrated Retail investments. At the same time, we will continue to explore options to recognize the inherent asset value in a manner that complements our transformation.”

Highlights include:

  • A partnership with Citi Retail Services, Inc. to bring together the Sears MasterCard and Shop Your Way® offer. Starting November 1st, more than five million current Sears MasterCard holders whose cards are linked to the Shop Your Wayprogram earn more Shop Your Waypoints at many of their favorite places and, in early 2017, the Sears MasterCard will evolve into a newly branded Shop Your Waycard.
  • A strategic relationship with Uber Technologies, Inc. that allows its drivers and riders to earn Shop Your Waypoints on trips made with Uber, leveraging the scale of Shop Your Way, its tens of millions of members, and the footprint of Sears Auto Centers to provide unique benefits for drivers and riders; and
  • Improvements in our Home Services business and expansion of its capabilities including our home warranty offerings.

“We will continue to take actions to generate liquidity, adjust our overall capital structure, and manage our business while meeting all of our financial obligations,” said Jason M. Hollar, Sears Holdings Corporation’s Chief Financial Officer. “Actions may include additional expense reductions, financing transactions and asset monetization including exploring alternatives for our Kenmore, Craftsmanand DieHard brands, our Sears Home Services business and our real estate portfolio.”

Revenues decreased approximately $721 million to $5.0 billion for the quarter ended October 29, 2016, compared to revenues of $5.8 billion for the quarter ended October 31, 2015. The year-over-year decline in revenues was primarily driven by having fewer Kmart and Sears Full-line stores in operation, which accounted for $323 million of the decline, as well as a 7.4% decline in comparable store sales during the quarter, which accounted for $304 million of the revenue decline.

At Kmart, comparable store sales decreased 4.4%. While Sears experienced an overall comparable store sales decline in its Kmart segment driven by declines in the grocery & household, consumer electronics and pharmacy categories, it is encouraged by the comparable store sales increases experienced in several categories this quarter, including apparel, jewelry and outdoor living. Sears Domestic comparable store sales decreased 10.0% during the third quarter of 2016, primarily driven by decreases in the home appliances, apparel and consumer electronics categories.

During the third quarter, gross margin decreased $300 million compared to the prior year third quarter due to the above noted decline in sales, as well as a decline in its gross margin rate in both the Kmart and Sears Domestic segments. The decline in margin rate in both segments was primarily driven by a decline in gross margin performance in the apparel business, as well as an overall increase in markdowns.

Selling and administrative expenses decreased $87 million in the third quarter of 2016 compared to the prior year quarter. Excluding significant items noted in its Adjusted Earnings Per Share tables, selling and administrative expenses declined $224 million, primarily due to a decrease in payroll expense. In addition, advertising expense declined as Sears shifted away from traditional advertising to the use of Shop Your Way  points awarded to members, the expense for which is included in gross margin.

The Company’s cash balances were $258 million at October 29, 2016 compared with $238 million at January 30, 2016. Short-term borrowings totaled $618 million at the end of the third quarter of 2016 compared to $797 million at January 30, 2016.

Merchandise inventories were $5.0 billion at October 29, 2016, compared to $6.2 billion at October 31, 2015, while merchandise payables were $1.6 billion and $2.3 billion at October 29, 2016 and October 31, 2015, respectively.

At October 29, 2016, Sears had utilized approximately $1.0 billion of its $1.971 billion revolving credit facility due in 2020 (consisting of $370 million of borrowings and $660 million of letters of credit outstanding). The amount available to borrow under its credit facility was approximately $174 million, which reflects the effect of our springing fixed charge coverage ratio covenant and the borrowing base limitation in its revolving credit facility, which varies primarily based on its overall inventory and receivables balances.

Total long-term debt (including current portion of long-term debt and capital lease obligations) was $3.7 billion and $2.2 billion at October 29, 2016 and January 30, 2016, respectively.

On May 26, 2016, Sears announced our intention to explore alternatives for our Kenmore, Craftsmanand DieHardbrands and our Sears Home Services business by evaluating potential partnerships or other transactions that could expand distribution of our brands and service offerings to realize significant growth. We continue to evaluate opportunities for these businesses. There can be no assurance that we will complete one or more transactions, and we also intend to take actions on our own that present the opportunity to improve the economics of these brands and business, including potential externalization through non-Sears Holdings channels.

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