On November 7, 2014, we filed an 8-K with the Securities and Exchange Commission (“SEC”) in connection with our rights offering for up to $625 million of Senior Unsecured Notes with Warrants. We encourage investors to read the Form 8-K in its entirety, including the cautionary language regarding forward looking statements contained in the filing, because it includes information which may be important to investors. You can find the filing on www.sec.gov at the following link. Below is some Q&A which might be helpful:
Why did you file an 8-K at this time?
As previously announced on October 30 in connection with the commencement of our rights offering for unsecured notes and warrants, we are today providing an update on our estimated performance and financial position for the recently completed third quarter 2014 and actions we expect to take to improve our liquidity and business operations.
What does it say about your Q3 results?
Our domestic Adjusted EBITDA in the third quarter 2014 is expected to be similar to the same period last year. We expect our domestic Adjusted EBITDA for the third quarter to be between $(275) million and $(325) million, which is consistent with $(310) million in the third quarter of last year. This represents a meaningful improvement in the trend of our year-over-year domestic Adjusted EBITDA performance relative to the prior six quarters. We believe this change in trend is a positive development that we currently expect to continue into the fourth quarter.
It also provides an update on our domestic comparable store sales for the third quarter and year-to-date as follows:
Total comparable store sales for the quarter were flat, comprised of an increase of 0.5% at Kmart offset by a decrease of -0.7% at Sears Domestic. Kmart’s third quarter comparable store sales increase reflects improvements in most categories, most notably apparel, outdoor living and toys, partially offset by declines in the grocery and household and consumer electronics categories. Sears Domestic’s third quarter comparable store sales decline is primarily attributable to decreases in consumer electronics, apparel and Sears Auto Centers, partially offset by increases in home appliances and mattresses. Excluding consumer electronics (a business that we are transforming from largely focused on televisions to connected solutions), comparable store sales would have increased 1.2% at Kmart, 1.0% at Sears Domestic and 1.1% overall in the third quarter.
Does it provide any update on your liquidity actions?
Yes. The 8-K provides an update on the rights offering for up to 40 million common shares of our stake in Sears Canada. As of November 6, 2014 we have sold a total of 31,578,464 common shares of Sears Canada to our shareholders, realizing gross proceeds, or from proceeds in transit, of approximately $300 million. The 40 million share ($380 million) rights offering closes at the end of the business today, November 7, 2014.
The 8-K filing also disclosed that in October 2014, we were one of three major retailers (including J.C. Penney Company, Inc. and Macy’s, Inc.) that sold its full-line store in Cupertino, California. The purchase price that we received for our store was $102.5 million. We received $90 million in cash and $12.5 million in a promissory note payable one year from closing and secured by the sold property. The store will continue to operate as a full-line store for up to one year from the sale date, subject to our right to terminate on an earlier date.
Given this update and previously announced liquidity actions completed or underway, we now expect that, we will have generated between $1.1 billion and $1.5 billion from September of 2014 through November 18.
We also reiterated that we continue to evaluate our capital structure with the objective of enhancing our financial flexibility and liquidity. We intend to proactively right-size, redeploy and highlight the value of our assets, including our substantial real estate portfolio, as we transition from an asset-intensive, “store-focused” retailer to an asset-light, integrated retail member-focused company.
In particular, we disclosed that we are actively exploring the monetization of a portion of our owned real estate portfolio (potentially in the range of 200-300 stores), through a sale-leaseback transaction, with the selected stores to be sold to a newly-formed real estate investment trust (“REIT”). We would continue to operate in the store locations sold to the REIT under one or more master leases. We currently operate approximately 1,800 stores and, if we pursued and completed this transaction, we would own between 400 and 500 stores and lease between 1,300 and 1,400 stores. In the event such sale-leaseback transaction were to occur, we would realize substantial proceeds from such sale, which would further enhance our liquidity.
If we determine to pursue such a transaction, we expect to distribute rights to purchase shares of common stock or other equity interests of the REIT to our shareholders, which allows all shareholders the opportunity to participate on a basis equal to their proportionate equity ownership interest. The subscription proceeds from such a rights offering would fund a portion of the purchase price for the stores with the balance coming from mortgage or other debt financing. There can be no assurance that we 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.
What does it say about your current liquidity position?
As of November 1, 2014, we had total cash of approximately $330 million and availability under our credit facility of $234 million. This includes $168 million from the $380 million rights offering for our Sears Canada shares received as of November 1, but does not include approximately $132 million received or in transit subsequent to November 1 and any additional amounts that we may receive after the conclusion of the rights offering expiring at the close of business today. It also excludes any proceeds from the rights offering for $625 million in senior unsecured notes with warrants announced on October 20, 2014. Assuming that both rights offerings had been fully subscribed and completed as of November 1, 2014, availability under our credit facility would have been $1.1 billion versus $572 million last year.
Usage at the end of our third quarter under our $3.275 billion domestic credit facility was $2.3 billion, consisting of $1.6 billion of borrowings and letters of credit outstanding of $672 million versus last year’s total usage of $2.3 billion, consisting of $1.6 billion of borrowings and letters of credit outstanding of $684 million. Assuming that both rights offerings had been fully subscribed and completed as of November 1, 2014, usage under our domestic credit facility would have been $1.4 billion, consisting of $768 million of borrowings and letters of credit outstanding of $672 million.
At the end of the third quarter, debt (including pension and retirement obligations of approximately $1.3 billion on an as reported basis) was $6.3 billion, which was about $400 million lower than the level of the third quarter last year. If we were to give effect to both the $380 million Sears Canada rights offering and the $625 million rights offering from the senior unsecured notes with warrants (assuming that both rights offerings were fully subscribed), debt would be approximately an additional $200 million lower. This would be a decline in debt (including pension and retirement obligations on an as reported basis) of over $600 million year over year.
We currently expect year-end debt (including pension and retirement obligations on an as reported basis) to be materially lower than year ago levels of approximately $5.9 billion, assuming both rights offerings are fully subscribed1.
Rob Schriesheim – Executive Vice President and Chief Financial Officer
Note: The foregoing shall not constitute an offer to sell or a solicitation of an offer to buy any securities, nor shall there be any offer, solicitation or sale of any securities in any state or jurisdiction in which such offer, solicitation or sale would be unlawful prior to the registration or qualification of the securities under the securities laws of such state or jurisdiction.
1We will be required to adjust our pension and retirement obligations in the fourth quarter based on actuarial estimates and discount rates. If current discount rates and actuarial estimates remain unchanged, we would expect that our pension and retirement obligation would be higher than our third quarter reported figure of $1.3 billion but lower than last year’s fourth quarter reported figure of $2 billion.