Sears' Real Estate Plans Divert Attention From Retail Sales Challenges

 

NEW YORK (TheStreet) -- Sears Holdings Corporation (SHLD) has a newfound desire to form a real estate investment trust that would hold hundreds of stores. Meanwhile, it faces ongoing challenges just being a good old-fashioned retailer.

Competitive pressures from Walmart (WMT) , Target (TGT) , Best Buy (BBY)   and Amazon (AMZN) make the company's future quite cloudy.

Friday Sears announced that it is actively exploring a REIT transaction involving 200 to 300 owned properties, through a rights offering to shareholders. Its shares soared 26% higher in premarket trading. 
 
Moving to a REIT structure, the company would sell certain properties to the trust but continue to operate stores in those locations by leasing them back from the REIT. In such a transaction, called a "sale-leaseback," Sears believes that it would realize "substantial proceeds," to "further enhance its liquidity."

A REIT by definition has to generate at least three quarters of its income from rents or interest on mortgage financing. One big advantage is they pay no corporate income tax in exchange for paying out 90% of their taxable income to shareholders through dividends.

Sears is nurturing the expectation among investors that, by raising cash in this manner, it can prevent a bankruptcy as a result of years of sales and profit declines.

The catch is that Sears has not currently secured its partial REIT status, only offering a signal to investors that it could raise cash from its asset base in this type of approach.

"There can be no assurance that the company will pursue such a transaction, nor can there be any assurance that, even if pursued, such a transaction could be entered into and consummated on satisfactory financial and other terms," pointed out the company in today's Securities and Exchange Commission filing.

The news comes on the heels of further cash-raising efforts by Sears ahead of the holiday season, including a $400 million short-term loan with its largest shareholder Edward Lampert and securing $380 million as part of a rights offering from an interest in Sears Canada. Further, in early October, Sears announced that it has entered into lease agreements with overseas fashion retailer Primark at seven stand-alone stores, essentially bypassing landlords in order to become a rent collector.

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Sears' intention to morph into a Donald Trump-like property manager, long viewed as the primary reason behind the company's merger with Kmart in 2004, diverts investor attention away from another poor quarter.

Sears reported same-store sales increased 0.5% at Kmart and fell by 0.7% at its domestic namesake business. The company noted sales "improvements in most categories" at Kmart, specifically apparel, outdoor living and toys, while sales of grocery and household and consumer electronics remained weak.  Sales of food and consumer electronics comprise about 67% of Kmart's business.
 
Same-store sales at the Sears U.S. division fell in consumer electronics, apparel and auto centers, and rose in its home appliance and mattress categories.

Sluggish sales at Kmart and Sears U.S. ultimately led to more red ink on the profit line, and a dwindling cash pile that explains the company hurrying to secure liquidity.

Sears expects a domestic adjusted earnings before interest, taxes, depreciation and amortization loss for the third quarter of between $275 million and $325 million. In the third quarter a year earlier, the domestic adjusted EBITDA loss was $310 million.  The company's unadjusted net loss for the third quarter ranged from $590 million to $630 million compared to $497 million a year earlier.

Sears had total cash of about $330 million at quarter end, and availability of $234 million under its revolving credit facility.

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At the end of the second quarter, Sears had cash balances of $839 million and availability under its domestic revolving credit of $240 million. The sequential decline in cash should be expected in front of the holiday season where extra inventory must be bought. But the company's tattered profit structure could be seen in one key comparison: Based on today's SEC filing, Sears used $509 million in cash quarter-over-quarter -- a year earlier in the comparable quarter, Sears used $74 million. At the time of publication, the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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