Sears Holdings Corp. shares jumped 31.4 percent in midday trading on the word that the retailer has a new plan to cut both costs and its pension obligations.
Shares of Sears were trading at $7.28 as of noon on Wall Street.
Chairman Edward S. Lampert said the company’s new restructuring program will target $1 billion in annualized cost savings to build on current momentum.
One credit analyst called the news a positive, even though there wasn’t much new news in the company’s announcement. Still, the idea that Sears was being more aggressive about fixing its cost structure had the analyst thinking about giving the thumbs up on orders to Sears again.
“We haven’t been recommending the company, and haven’t given a credit opinion for awhile,” the credit analyst said. “This news that they are looking at reducing costs is good. I don’t believe they will realize profits any time soon, but it’s still positive news. Maybe it’s time to go back in with a small credit line. The company should be okay short term for at least six months to a year,”
The momentum that Lampert referred to was the improvement in adjusted earnings before interest, taxes, depreciation and amortization in the fourth quarter to a loss of $61 million, compared with an adjusted EBITDA loss of $137 million in the same year-ago quarter. Sears also provided a fourth-quarter update that said it expects a net loss of between $535 million and $635 million, including a non-cash impairment charge to the Sears trade name of between $350 million and $400 million, compared with the net loss of $580 million in the comparable 2015 fourth quarter. In the year-ago quarter, the impairment charge related to the Sears trade name was $180 million.
The company also guided total revenue for the fourth quarter to $6.1 billion, with comparable-store sales down 10.3 percent, reflecting a comp decline of 8 percent at Kmart and a decline of 12.3 percent at Sears Domestic.
The restructuring program includes an intention to simplify Sears Holdings’ organizational structure; implementation of an integrated model to drive efficiencies in pricing, sourcing, supply chain and inventory management; optimization of the product assortment, and active management of its real estate portfolio.
Lampert said: “We significantly improved our operating performance and made progress toward profitability in the fourth quarter of 2016. In the first several weeks of 2017, we undertook a series of transactions to optimize our capital structure and unlock value across our wide range of assets. We also reached an agreement to amend our asset-based credit facility, which further enhances our liquidity and financial flexibility.”
The restructuring initiative “will reduce our overall cash funding requirements” and enable the retailer to focus its investments towards its “strategic transformation and the evolution of our Shop Your Way ecosystem,” Lampert said.
In addition to the savings from cost reductions connected to the previously revealed closure of 108 Kmart and 52 Sears locations, the company said it continues to evaluate options for its Kenmore and DieHard brands, as well as its Sears Home Services and Sears Auto Centers businesses.
On the financial front, the company on Friday said it entered into an agreement to amend its existing asset-based credit facility. The amendment provides a $140 million increase to its available borrowing capacity. It reduces the aggregate revolver commitments to $1.5 billion from $1.97 billion, but modifies covenants and reserves that improve net liquidity, Sears said. Further, the amended credit facility is smaller, reflecting the retailer’s reduced needs given fewer physical stores and lower inventory levels. The amendment also raises the general debt basket to $1 billion from $750 million.
That’s on top of the recent financial maneuvers. The company closed on a $72.5 million real estate sale at the end of last month for five Sears full-line stores and two Sears Auto Centers; fully utilized its $500 million Senior Secured Loan Facility through the borrowing of an additional $179 million of loan proceeds; engaged Eastdil Secured to market and sell $1 billion of certain real estate properties, and said it was selling its Craftsman brand in a deal valued at $900 million that includes $775 million in cash.
Sears said it is targeting a reduction of its outstanding debt and pension obligations of $1.5 billion for fiscal 2017. The company noted that it has contributed almost $4 billion to its pension plan since 2005, driven largely by the prolonged low interest rate environment.