Sears Holdings Reports Wider Quarterly Loss; Denies Interest in Selling Canadian Unit
Sears Holdings Corporation reported a wider quarterly net loss last Thursday after sales fell at both its namesake department stores and its Kmart discount chain and it invested in more promotions targeting rewards members.
The company is trying to engineer a turnaround. Sales have been falling since 2005, when hedge fund manager Edward Lampert merged the two U.S. chains in an $11-billion deal.
The net loss in the third quarter ended on Nov. 2 widened to $534-million, or $5.03 a share, from $498-million, or $4.70 a share, a year earlier.
Excluding severance costs, tax-related adjustments and a pension expense, the loss was $2.88 a share.
Sales fell 6.7% to $8.3-billion, missing the analysts’ average estimate of $8.9-billion, according to Thomson Reuters.
Sears has been closing stores, tightly managing inventory, selling real estate and shedding assets, but the retailer is still struggling to generate cash from its operations.
Wall Street has criticized Lampert for not investing enough in stores and for relying on financial engineering to boost profits. Last week, he said Sears was spending more to make targeted offers to members of its Shop Your Way rewards program. He said 70% of sales are now made to Shop Your Way members.
Same-store sales fell 3.1%, including a decline of 2.1% at Kmart. At that chain, weak demand for groceries, consumer electronics and toys offset strength in the apparel and “seasonal and outdoor living” categories.
A 4% drop at Sears U.S. reflects decreases in most categories, including the consumer electronics, lawn and garden, tools, home appliances and apparel.
At the end of the quarter, total debt was $4.7-billion.
The Hoffman Estates, Illinois-based company recently refinanced some debt, sold its stake in eight properties it owns with the Westcliff Group and terminated some store leases in Canada. It said it was on track to generate $2-billion of liquidity during the fiscal year.
On his own and through his ESL Investments hedge fund, Lampert holds about 55.34% of Sears stock, according to the latest U.S. securities filings.
Meanwhile, Sears Holdings is denying reports it wants to sell off Sears Canada, but this didn’t seem to deter investors Monday.
Shares of the U.S. retailer jumped 7% after the New York Post reported that Mr. Lampert had spoken to several major investment banks including Goldman Sachs about overseeing a sale process of Sears Canada, citing anonymous sources.
Other sources cited in the article said they are skeptical any banks would step up to conduct the ‘prospective process,’ noting Lampert has been quietly soliciting potential interest in the retailer for some time now without much luck.
“Eddie never actually hires banks,” one insider told The Post. “He just sucks their brains and does what he wants.”
According to the Post, “What Lampert wants . . . is to accelerate his recent moves to turn Sears Canada into cold, hard cash, despite announcing plans last year to mount a data-driven “turnaround” of the Toronto-based department store.”
Both Sears or Goldman declined to provide comment to the Post.
Sears Canada also declined to comment on the report when asked by Canada’s Business News Network.
“It is false to claim that Mr. Lampert, the CEO of Sears Holdings, is interviewing or otherwise is in talks with investment bankers about Sears Holdings’ interest in Sears Canada,” said a statement by the Hoffman Estates, Ill.-based retailer on Monday.
Sears Canada has seen its shares rise more than 30% in the past month amid market speculation about the end game of several of its initiatives, including property sales and special dividends. Its stock rose about 2% on Monday.
Last week, Sears Canada announced it is paying its shareholders a hefty dividend as part of a move that will send nearly half a billion dollars in cash back to the U.S. parent company and Lampert.
Word of the extraordinary payment of $5 per share that will be made on Dec. 5 came on the same day it posted a wider-than-expected third-quarter loss.
Sears Canada is in the midst of a turnaround plan that has involved selling key stores and laying off thousands of employees over the past few years.
In October, the retailer announced it was closing its downtown Toronto store at the Eaton Centre and exiting four locations in a $400-million deal to sell leases back to its landlords.
The biggest winners in the Sears Canada payout will be its largest shareholders: parent Sears Holdings Corp., which owns 51% of the company and hedge fund ESL Investments Inc., headed by Lampert, which owns 27.6%. Lampert owns another 10.2% stake in Sears Canada.
These transactions according to industry sources, has fanned worries among Sears suppliers and executives alike about the future of the chain.
“Eaton Centre [in Toronto] was one of their best locations,” an exec at one supplier said. “They’re insulting us if they tell us they want to stay in business.”
The latest sale of profitable locations follows the sell-off of other high-performing stores in Vancouver, Calgary and Ottawa to Nordstrom. It’s a template for what’s to come, according to Mark Cohen, a professor at Columbia Business School who had been CEO of Sears Canada from 2001 to 2004.
“When legitimate companies sell assets, they reinvest by paying down debt or using the funds to invest in the business,” Cohen said.
“What’s Eddie Lampert doing? Putting the money in his pocket.”
“If anybody harbors the illusion that this guy has any capability or intent of running this company anyplace but into the ground, he’ll lose that illusion real fast,” Cohen added.
The Canadian company’s revenue has been falling for seven years straight as competitors such as Winners, Target and Canadian Tire have won market share.
The dire straits stand in sharp contrast to a decade earlier, when it refused three separate merger overtures by rival Hudson’s Bay, according to a person close to the situation.
Now, insiders say Hudson’s Bay doesn’t appear to be interested in a deal. Target and Walmart may pick up some locations in a liquidation scenario, although the former said last week it continues to suffer losses after a surprisingly weak start in Canada this spring.
“Sears is going to close all their stores, liquidate all their goods and distribute the cash to shareholders,” an industry source predicted.
“Then they’ll wait for a period of time and then file for bankruptcy.”
Source: Reuters, The Financial Post (The New York Post)
Target Corporation saw its third quarter net income plunge a greater than expected 47% as the department store chain deals with higher expansion costs and poorer than anticipated performance north of the border.
The company has faced a harder than expected go at it in this country after it began opening stores in March, surprising some customers for not matching its U.S. stores’ prices and missing its initial sales projections. Target also discovered too many of its Canadian customers buy goods regularly at multiple retailers instead of using Target as a one-stop shopping destination.
Target was counting on Canada not only to bolster its financial results but also, as its first foray outside of the United States, to serve as a blueprint for future international growth. But the company has not been able to deliver on its slogan, “Expect more. Pay less.”
Many Canadians had shopped at Target stores south of the border and expected the same low prices and trendy fashions – and were disappointed on both counts.
Even when initial demand was strong, Target’s fledgling supply chain couldn’t keep up and shelves were often bare. And rivals here raced to raise their game.
Target Canada president Tony Fisher said recently that the company was trying to convince customers that its prices were just as low or lower than market rivals, noting it is a challenge to alter people’s ingrained shopping habits.
“It is essential during the startup period to continue influencing price perception,” he told analysts three weeks ago.
Opening the final two of 124 Canadian stores this year [last] Friday, Target has been clearing out excess home and apparel items “so we can start 2014 in a much healthier position,” Mr. Fisher commented last Thursday.
“We still had inventory that we had committed to from overseas that was basically shipped to Canada, and once we landed it, we realized our sales were under expectations and now we need to do what we can to get rid of that inventory,” he added.
The retailer saw lower than anticipated Canadian sales of US$333-million and lowered its full-year adjusted earnings forecast. Canadian operations reduced Target’s earnings per share by 29¢ in the third quarter and the company’s first division outside of the U.S. more than doubled its operating loss compared with the second quarter, to US$238-million.
The quarterly gross margin rate of 15% in the Canadian segment was also lower than expected, executives said, and they anticipate continued margin pressure in the fourth quarter.
Target said it is now looking to earn an adjusted profit per share of $4.59 to $4.69, down from a previous forecast of $4.70 to 4.90.
Nevertheless, executives remain optimistic about the division and Target is still sticking by its goal of reaching US$6-billion in annual sales and US80¢ in annual earnings in Canada by 2017.
For the three months ended Nov. 2, Target Corp. earned US$341-million, or 54¢ per share, compared with US$637-million, (96¢) in the same period a year ago. Analysts were anticipating earnings of 64¢ per share.
Excluding Canadian-related costs and other items, the Minneapolis-based mass merchant earned 84¢ per share.
Revenue rose 2% to $17.26-billion from $16.93-billion, below analysts’ expectations of $17.38-billion.
Canada wasn’t Target’s only problem, however. At its U.S. stores, traffic fell 1.3 %, marking the fourth consecutive quarter of declines and third-quarter same-store sales rose just 0.9% as consumers tightened their wallets in an uncertain economy
“Over the long-term our expectations haven’t changed at all,” for Canada, CEO Gregg Steinhafel told a conference call with analysts, saying the executive team had “rebooted” early forecasts for this market. Under that revised metric, the unit’s current performance is now better than expected in the first group of stores to open here now that executives have a better handle on Canadian consumer shopping patterns and preferences.
“They are exceeding those newer, revised forecasts,” Mr. Steinhafel said.
Once the excess inventory is cleared, “we are very confident that we are going to be back in the mid-30s in terms of the overall gross margin,” he said.
Mr. Fisher said Target is making its biggest Canadian marketing investment to date this quarter, a “full court press” in flyer, online, television, outdoor and its discount loyalty card advertising.
“We are finally getting that [customer shopping] history we never had,” Mr. Fisher said, providing data that allows the retailer to better assess how to replenish stores.
“We are seeing a continued improvement in the Canadian business. We are definitely not planting the victory flag yet … we are going to be in a period of continuous improvement for a long time.”
Source: The Financial Post, The Globe and Mail
