Leaving no stone unturned in its hunt for revenue streams, Sears Holdings Corp. is now eyeing licensing and distribution opportunities for its crown jewel brands.
Even as Sears Holdings chairman and chief executive officer Edward S. Lampert has struggled to effect a turnaround at the Sears and Kmart nameplates, one of the main things that has remained unscathed is the retailer’s house brands Kenmore, Craftsman and DieHard. The three are considered Sears’ crown jewels, the brands that still resonate with consumers and give them a reason to shop at the store.
But that’s about to change, perhaps because there are few signs that Lampert’s other moves have delivered any signs of sustainable and profitable growth. On Thursday, Sears Holdings posted a wider first-quarter loss, although on an adjusted basis it has managed to narrow its losses for five straight quarters. And it managed to beat Wall Street’s revenue estimate and adjusted earnings per share projections for the quarter, resulting in a 6.6 percent spike in the group’s share price on Nasdaq to $13.34.
Lampert has tried to buy more time in his attempts to transform the brick-and-mortar chain into an Internet-focused and consumer-centric omnichannel player. Over the last two years, he has tried everything from loans to real estate joint ventures to spinoffs of Lands’ End and the creation of Seritage Growth Properties, a real estate investment trust that holds properties once owned by Sears.
His latest strategy is to consider options to expand the distribution of Sears’ Kenmore, Craftsman and DieHard brands and grow the Sears Home Service operation. Sears said its board believes the brands could have “significant growth” by being expanded beyond just their presences in Sears and Kmart stores. Also, its home services business has greater potential than what has been delivered in the past, the company said. Sears hired Citigroup Global Markets and LionTree Advisors to assist with its efforts.
Rob Schriesheim, Sears’ chief financial officer, said on a pre-recorded call to Wall Street analysts, that the exploration of alternatives includes evaluating partnerships. And he added that control of Sears Home Services has “discouraged other retailers from utilizing the capabilities of this business.” The business includes the store’s protection agreements, parts and delivery and installation services.
What Schreisheim didn’t discuss was the possibility of a sale of the IP assets. A sale of the IP, if that were to happen, might be a somewhat complicated transaction. Lampert securitized the intellectual property assets of the three brands in 2006. Through the securitization, or $1.8 billion in notes backed by the IP, ownership of the assets was moved to a separate entity called KCD IP. Licensing fees pay the interest on the notes. Sears Reinsurance, a Sears subsidiary created to fund the retailer’s insurance obligations, purchased the notes.
The KCD entity is considered bankrupt remote, meaning that a bankruptcy of the company — should it ever occur — would have no impact on KCD. Sears in September said it entered into a binding term sheet with the Pension Benefit Guaranty Corp. — a government-run entity that insures pension plans — about a “ring-fence” around certain assets and KCD was mentioned. That agreement was finalized in March, and contains multiple covenants in connection with the IP assets that address PBGC’s rights should it need to step in to satisfy Sears’ pension liabilities.
A spokesman for Sears said: “We wouldn’t speculate on the nature of any transaction we might complete, given that a potential transaction or strategic relationship could take a variety of forms with one or more parties. Any transaction or relationship we pursue would, of course, be completed in accordance with our existing contractual obligations, including our agreement with the PBGC.”
As for the most recent quarter, for the three months ended April 30, the net loss was $471 million, or $4.41 a diluted share, compared with a net loss of $303 million, or $2.85, a year ago. On an adjusted basis, the loss was $199 million, or $1.86 a diluted share, compared with $213 million, or $2, a year ago. Revenues fell 8.3 percent to $5.39 billion from $5.88 billion. Consolidated comparable-store sales fell 6.1 percent, and were down 5 percent at Kmart and 7.1 percent at Sears Domestic stores. Sales were also impacted by having fewer Kmart and Sears stores in operation, which accounted for $149 million of the decline.
Wall Street was expecting a loss of $3.20 a share on revenues of $5.26 billion. That had Sears beating EPS estimates by $1.34.
Lampert said that while operating performance still remains well below the company’s goals, first-quarter adjusted earnings before interest, taxes, depreciation and amortization — excluding Seritage Growth Properties and joint venture rent — improved by $14 million compared with the first quarter a year ago. “Our Sears Domestic and Kmart apparel businesses continue to be negatively impacted by a heavily promotional competitive environment. We continue to focus on improving the overall assortment, sourcing, pricing and inventory management practices,” Lampert said.
Schriesheim said Sears still has an asset rich portfolio and will take actions to adjust its capital structure. The company previously said it plans to monetize at least $300 million of assets. Further, Sears during the first quarter closed on a $750 million senior secured term loan and received $722 million in net proceeds. It also entered into a $500 million committed secured loan facility, with a maturity in July 2017, and received net proceeds of $485 million. Proceeds from both were used to reduce outstanding borrowings under an asset based revolving credit facility and for general corporate purposes, the company said.
Between the $1.25 billion of committed financing and the planned $300 million in monetization of assets, the chief financial officer said, “[T]his set of actions would result in an aggregate of $1.5 billion of enhanced liquidity.”
On the call to Wall Street analysts, Schriesheim said that collateral for the committed secured loan facility was through 21 real estate properties.
Separately, the company said Schriesheim would be exiting Sears Holdings once a successor is found. He will remain an adviser to the company through Jan. 31, 2017.