Could Edward S. Lampert be thinking of taking Sears Holdings Corp. out of brick and mortar?
Lampert, Sears’ chairman and chief executive officer, didn’t rule out that possibility Thursday in a pre-recorded earnings call on fourth-quarter results, which once again were deep in the red even as the company trumpeted an “improved” performance. Lampert has been preaching about a multiyear transformation of the perennially beleaguered business to an “asset-lite, member-centric integrated retailer” that has become more of an e-tailer, with a far smaller brick-and-mortar footprint.
That asset-lite move could shrink Sears Holdings’ physical presence even more come May or June when the company is expected to shift 200 to 300 stores into a real estate investment trust that incorporates a sale/leaseback structure. The REIT move is expected to generate more than $2 billion in proceeds for Sears, yet another example of Lampert’s increasingly intricate financial maneuvering to prop up Sears’ continually deteriorating liquidity. But Sears would likely have to pay fair market rates to lease those stores from the REIT.
Further, Sears has already begun leasing out some of its store space, effectively turning the retailer into a landlord. Whether in the REIT or outside of that structure, the expectation is that the company will continue to explore more of those opportunities.
“We anticipate that the REIT would enable us to continue and to accelerate many of the activities that we have been pursuing over the past several years. Specifically, we have been working to partner with other retailers and mall owners to enable us to reduce the operating footprint of our stores to smaller but still significant spaces, while leasing part of the store to retailers who will bring increased foot traffic and relevance to our location,” Lampert said.
Lampert added: “We believe that many locations can be repurposed with or without Sears Holdings as an anchor, which would give the REIT the potential for value creation, as well as downside protections if Sears Holdings were unable to continue to operate certain stores profitably.”
Lampert, through ESL Investments, is the majority shareholder of Sears, with a 48.5 percent equity stake.
Craig Johnson, president of research and analysis firm Customer Growth Partners, said that Sears as a company has already evolved into a real estate firm, given its subleasing of space and the plans regarding Aventura Mall in South Florida that effectively turns the company into a part-time developer.
As for the retail operation, Johnson said, “The company is heading downhill and nobody is stepping on the brakes. Oddly enough, they actually aren’t doing that badly on the e-commerce side on a topline basis. They have a good technology platform, but it’s hard to know how much money they are making since the only way to sell anything online or in stores is via deep discounting.…If I were to take a snapshot of Sears, I would say they are making more money now in the role as landlord than as a retailer.”
Although Johnson said the Kmart nameplate is one whose time has “come and gone,” he emphasized that company-owned Kmart stores are very valuable: “These freestanding stores are in urban areas with a large footprint that would be very difficult for a commercial or residential developer to acquire.”
How much longer Sears can survive has been the topic of speculation for some time among Lampert’s naysayers. Responding to its critics, Sears has maintained that it is asset-rich, although asset sales and spinoffs — such as Lands’ End last year — have left it primarily with the option of exploring real estate alternatives.
Johnson and others speculate that a bankruptcy could still be in the cards down the road — even if a year or two out — in a scenario where the company transitions to a real estate operation, with its retail business entering into a pre-packaged bankruptcy as a way to exit leftover, unprofitable leases.
Lampert, in his annual letter to shareholders on Thursday, rebuked the naysayers. Specifically, he noted that the company has provided more details about what it is doing, in an effort to be more transparent, to “clarify some of the complexity around our financial results” to clear up any confusion or misunderstanding about what it is trying to do.
He also discounted the idea of a bankruptcy, stating that if it wasn’t for the “aggressive steps” taken to move Sears from a brick-and-mortar based to a multichannel, integrated shopping experience, “we might have been stuck on the same path that has claimed retailers like Circuit City, Borders, Radio Shack and others.…The financial results certainly are not where we want them to be yet, but we did see our performance trend improve.…”
Lampert also spoke of “material changes” to certain businesses, such as consumer electronics, where the new model “requires less working capital and operating expenses by partnering with other providers,” suggesting that vendors could be asked to share more of the category costs.
While the company has closed stores and given its investments in the e-commerce business and transformation attempts for the last few years, it still can’t stop bleeding red ink.
The loss for the fourth quarter ended Jan. 31 narrowed to $159 million, or $1.50 a diluted share, from a loss of $358 million, or $3.37, a year ago. Revenues fell 23.5 percent to $8.10 billion from $10.59 billion. Kmart comparable-store sales declined 2 percent, while Sears Domestic stores fell 7 percent. Wall Street was expecting a loss of $1.89 a share on sales of $8.30 billion.