In the past 18 months, we have taken a series of steps to foster the long-term viability of Sears Holdings in the face of a very challenging retail industry environment. We have extended the reach and long-term value of our prominent brands through strategic transactions and partnerships, including our collaboration with Amazon to sell Kenmore and DieHard products on their platform and the sale of Craftsman to Stanley Black & Decker. Most recently, we reached an agreement with the PBGC to pre-fund our contributions to the pension plan for the next two years. This agreement built on several other actions we took this year to protect the benefits of our retirees, including the annuitization of the pensions of almost 100,000 beneficiaries. These steps have also required the achievement of $1.25 billion in cost savings and a significant reduction in our store base through the closing of unprofitable locations. Finally, we have monetized some of our valuable real estate portfolio through property sales, which enabled us to repay some of the loans that were made to provide liquidity and obtain time for our transformation.
While these actions have so far helped our Company survive the so-called “Retail Apocalypse”, many observers are not persuaded that Sears Holdings can be a viable competitor in the long term. It is obvious that to overcome such skepticism and obtain the support of outside lenders and our vendor community – which is crucial to the success of any retailer – we need to undertake further measures.
As a result, we announced today that we will pursue broader, more fundamental changes in our capital structure and business model, so that Sears Holdings can move forward with greater financial flexibility and more capital to invest in the most promising areas of our business. To accomplish these objectives:
- We have initiated a series of financial transactions to raise an incremental $300 million in new liquidity, of which $100 million was already received.
- In addition, we have amended our existing 2018 second lien notes to loosen certain collateral coverage restrictions and are also in discussions with certain lenders regarding additional transactions that would improve the terms on potentially more than $1 billion of our non-first lien debt.
- Further, we have identified $200 million of cost savings, unrelated to store closures, to achieve our goal of returning to profitability in 2018.
We will also benefit from cost reduction activities undertaken in the 2017 fiscal year, including additional store closures announced last week. This right-sizing of our store footprint in number and size has been a painful but essential element of our transformation. While the closing stores collectively generated about $850 million in sales over the past 12 months, they were among our lowest performing stores with an average gross margin rate approximately 400 basis points lower than our ongoing stores. While closing these stores may negatively impact our sales, our actions are aimed at returning the Company to profitability. Furthermore, we expect to generate a significant amount of cash from the liquidation of the inventory and related assets of these stores.
If we successfully complete the financing transactions we are contemplating, we will materially improve the financial strength and operating focus of Sears Holdings and provide meaningful reassurance of our viability to our vendors and business partners. Perhaps most important, these transactions will enable us to increase our emphasis on our most profitable businesses and our Shop Your Way network. Finally, the financial transactions we have initiated will, if completed, facilitate our ongoing efforts to unlock value in our other brands and major assets, including Kenmore, DieHard, Sears Home Services, Sears Auto Centers and our real estate portfolio.
However, should our efforts to complete the refinancing not be fully successful, the Company’s Board will consider all other options to maximize the value of Sears Holdings’ assets.
For the last 15 years, we have worked to transform Kmart and Sears into a business that could thrive in the 21st Century. We have always believed that the combination of these two iconic retail platforms had the foundation and the ingredients to become a great Company. The logic behind enabling Kmart’s emergence from bankruptcy in 2003 and the merger with Sears in 2005 was to give the two businesses the best chance not just to survive, but to thrive in what would become a retail environment of accelerating change.
However, circumstances in both Sears Holdings, the industry and our legacy obligations (we have contributed over $4 billion to our pension plan over the past decade) have forced us to pursue measures in the ultimate interest of the company that we all would have preferred to avoid and that run counter to my philosophy of building businesses. In addition, while exaggerated by some in the media, various vendors and other providers to the Company have taken or threatened actions that have had a major impact on our operations and liquidity.
Sears Holdings has valuable assets that can be harnessed to create value in the future, but it requires a more stable environment and more cooperative partners. In May 2016, we hired Citigroup to seek partners or acquirers of our major brands – Kenmore, Craftsman, and DieHard – as well as our Home Services and Auto Services businesses. We concluded a successful process with the sale of Craftsman in March 2017, where we will continue to sell Craftsman products while benefiting from Stanley Black & Decker’s ownership of the brand. As SB&D seeks to develop the brand further, we will benefit from its growth through an associated royalty stream for the next 15 years. In addition, we began selling Kenmore products and related services on Amazon in mid-2017 and DieHard products on Amazon in late 2017, which will expand the reach of these brands across America. We continue to seek additional alternatives for these brands and major assets and have been in discussions with various parties to that end.
Where We Are Today
When implemented, the initiatives we are announcing today will represent an important forward step for Sears Holdings – one that will strengthen our financial position and sharpen our operating focus. We will of course have a lot of work to do to prove we can deliver on our plans. But our leadership team is more aligned and committed to the transformation of our Company than ever before. We are prepared for the challenge and strongly believe in the merits of the action plan we are laying out today. We hope that as the financial transactions outlined above are finalized, all our stakeholders will recognize the magnitude of the positive changes we are making and get fully behind our Company.
Eddie Lampert is Chairman and Chief Executive Officer at Sears Holdings Corporation.
Forward Looking Statements
This blog contains forward-looking statements intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995, including, but not limited to, statements about our strategic restructuring program and anticipated results of strategic initiatives, our transformation through our integrated retail strategy, our plans to redeploy and reconfigure our assets, our plans to market and sell a portion of our existing real estate assets, our liquidity, our ability to exercise financial flexibility as we meet our obligations and pursue possible strategic transactions, and other statements that describe the Company’s plans. Whenever used, words such as “will,” “expects,” “intends,” and other terms of similar meaning are intended to identify such forward-looking statements. Forward-looking statements, including these, are based on the current beliefs and expectations of our management and are subject to significant risks, assumptions and uncertainties, many of which are beyond the Company’s control, that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Detailed descriptions of other risks relating to Sears Holdings are discussed in our most recent Annual Report on Form 10-K and other filings with the Securities and Exchange Commission. While we believe that our forecasts and assumptions are reasonable, we caution that actual results may differ materially. We intend the forward-looking statements to speak only as of the time made and do not undertake to update or revise them as more information becomes available, except as required by law.