Sears Holdings Corporation (

SHLD

)

Q4 2011 Earnings Call

February 23, 2012 08:00 am ET

Executives

Bill Phelan - SVP, Finance

Louis D'Ambrosio - CEO & President

Rob Schriesheim - EVP & CFO

Ron Boire - EVP, Chief Merchandising and President, Sears and Kmart Formats

Analysts

Gary Balter - Credit Suisse

Paul Linen - Morning Star

Emily Shanks - Barclays Capital

David Gober - Morgan Stanley

Presentation

Operator

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Good day ladies and gentlemen and welcome to the Sears Holdings earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the call over to your host Bill Phelan, Senior Vice President of Finance. Please go ahead.

Bill Phelan

Thank you, operator. Good morning and welcome to Sears Holdings earnings call. I am Bill Phelan, the Senior Vice President of Finance for Sears Holdings. Joining me today are Louis D'Ambrosio, our Chief Executive Officer, Rob Schriesheim, our Chief Financial Officer and Ron Boire, our Chief Merchant and President of the Sears and Kmart Formats.

For our call today, you may follow along with the slides that are shown. Slides will be automatically advanced during the discussion and will be posted to our website after today's call. Before we begin, I would like to remind you that today's discussion will contain forward-looking statements related to future events and expectations.

These statements are based on current expectations and the current economic environment and actual results may differ materially from those expressed or implied in the forward-looking statements. You can find factors that could cause the company's actual results to differ materially listed in today's press release in the presentation for today's call that is posted at the Investor Information section of searsholdings.com and in our most recent SEC filings.

In addition our discussion will include certain non-GAAP financial measures. Reconciliation to the most directly comparable GAAP financial measures can be found in today’s press release. Any reference that our discussion to EBITDA means adjusted EBITDA as defined in the press release and presentation. Finally we assume no obligation to update the information presented on this call except as required by law. Now I would like to turn the call over to Louis.

Louis D'Ambrosio

Thanks Bill and thank you all for joining us today. I know we haven’t typically held earnings call, but we thought it was important to provide you more detail on a number of extraordinary items we are recording this quarter and importantly to make our funding strategy clear. The takeaway is that the company’s significant assets and liquidity as well as the actions we are taking which we will describe today make our result and earnings issue rather than an asset or liquidity one. Today we will discuss our financial performance, our funding strategy and specific actions we are taking to further strengthen the balance sheet and operations.

Additionally I will preview the strategic agenda for Sears Holdings which will guide our actions going forward. We will cover this in more detail at our annual meeting on May 2

nd

. So let us get right into it. Our fourth quarter earnings were unacceptable. We know that and are taking immediate actions to address it in three areas. First; actions to improve our financial performance including cost reductions, actions to improve inventory productivity, actions to improve margins, honed and targeted marketing and new talent to strengthen our merchandising and leadership team.

Second we are executing actions to unlock the value of our portfolio and assets. We will discuss two such actions today expected to generate approximately $700 million of proceeds and third we are accelerating actions to drive our strategic agenda to lead in integrated retail. So let us first talk about the quarter. Our main challenge in the quarter was margin rate. The largest margin decline was in apparel and related categories particularly Kmart apparel, Lands’ End and footwear.

Several factors contributed to the declines in these categories. We saw a significant increase in commodity costs particularly cotton. High inventory levels led to increased markdowns and clearance. And unseasonably warm weather impacted several categories such as Lands’ End’s typically strong outer wear business. These are explanations of what happened, but they are not excuses. There are actions we could have taken to have mitigated the margin decline. Our buy could have been executed better, both in terms of quantity and assortment. Our promotional cadence should have been more surgical and cost actions could have been taken earlier.

Actions of each of these areas are now well underway. We have reduced inventory by $544 million below last year’s levels. Our promotional design is been refined and targeted. We have implemented cost actions which we believe will yield in the higher end of the $100 to $200 million estimate we have previously provided. We recently announced the hiring of Ron Boire as the Chief Merchant and President of the Sears and Kmart formats to focus on merchandizing, cross category synergies and strengthening our formats around integrated retail.

Ron joins us from Brookstone where he was CEO. Ron joins other recent additions to the team with significant retail experience. Like Sam Solomon, who was CEO of Coleman and now leads our Tools business and Edgar Huber who was CEO of Juicy Couture and now leads Lands’ End.

While we are disappointed in our performance, it is important to distinguish the income statement performance from the balance sheet strength and flexibility, we are an asset rich enterprise with significant liquidity as Rob will describe in detail shortly.

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