Sears 1st-quarter loss narrows; expects REIT to be declared effective by SEC this week

NEW YORK, N.Y. – Sears’ first-quarter loss narrowed but sales continue to slump as the retailer prepares the rollout of its real-estate investment trust this week to raise cash.

Sears Holdings Corp., which operates Sears and Kmart stores, said that it expects the real estate investment trust that it is forming, Seritage Growth Properties, will be declared effective by the Securities & Exchange Commission this week.

Sears, based in Hoffman Estates, Illinois, is planning to sell and lease back about 235 properties, most of them Sears and Kmart stores, to the REIT. The company expects $2.6 billion in proceeds. The transaction also includes the purchase of interest in its joint ventures. The chain closed more than 200 Sears and Kmart stores in 2014.

In April, Sears struck three real estate transactions, including getting $150 million from a joint venture with mall operator Macerich. It also has deals with General Growth Properties Inc. and Simon Property Group Inc. Before establishing the REIT, the retailer had been subletting some of its excess space to Forever21 and Whole Foods. With the new real estate manoeuvr, the company said it will create a mechanism to continue that move in an accelerated fashion. The REIT will have the ability to recapture up to half of the space in each of its stores, the company said.

Sears is trying to extract value from its real estate holdings and replenish its cash as it tries to turn around its long-suffering retail business. The company is also selling some of its assets such as the Lands’ End clothing business.

At the same time, the company is shifting its focus from running a store network to operating an online and offline business tied together by its Shop Your Way loyalty program. The company said that during the company’s fiscal first quarter, its Shop Your Way program accounted for more than 70 per cent of eligible sales. The goal is to have smaller and fewer stores and have them tied to online services.

But the latest report shows the big challenges that continue for billionaire hedge fund manager Edward Lampert, who is Sears Holdings’ CEO and chairman, in turning around the company. Lampert combined Sears and Kmart in 2005, about two years after he helped bring Kmart out of bankruptcy. The combination has proved unsuccessful, and the company, known for shabby stores, has been slow to compete with the likes of Wal-Mart, Home Depot and Best Buy, which have been updating their locations. Sears finished its fiscal year with its eighth annual revenue drop and its fourth annual loss. Losses continued into its first quarter and sales for a key measure continue to slump at its stores.

“We have taken actions to generate substantial amounts of liquidity and provide our company with longer-term financial flexibility in a way that not only allows us to continue to operate our stores, but also is structured to accelerate the right-sizing of our store space,” said Rob Schriesheim, chief financial officer at Sears, in a pre-recorded transcript. But he acknowledged that the company still has a lot of work to do to “generate an acceptable level of return for our shareholders.”

Greg Melich, an analyst at Evercore ISI, noted that the company doesn’t appear to be well positioned this year given its continued market share losses and anemic sales.

“While these asset sales have kept (Sears) solvent, it remains far from being on a path to stability or recovery,” wrote Melich in a report published Monday.

Sears’ stores experienced weakness in consumer electronics, clothing, home appliances, lawn and garden and Sears Auto Centers. Kmart had weaker sales of consumer electronics, grocery and household, clothing and drugstore items.

The company lost $303 million, or $2.85 per share, in the latest quarter. Losses, adjusted for one-time gains and costs, were $2 per share. That compares with a loss of $402 million, or $3.79 per share, a year earlier.

Selling and administrative expenses declined to $1.68 billion from $2.09 billion.

Revenue fell to $5.88 billion from $7.88 billion.

Sales at Sears domestic locations open at least a year dropped 14.5 per cent, while sales at Kmart domestic locations open at least a year declined 7 per cent.

Its stock dropped 89 cents, or 2.2 per cent, to $39.85 in morning trading Monday. Shares have risen 24 per cent since the beginning of the year as the losses have narrowed.