In connection with our most recent earnings release, I am taking this opportunity to provide Sears Holdings’ many stakeholders with our perspective on where we have been and where we go from here.
The Company has been working hard to transform its business and unlock the value of its assets. This includes a paradigm shift from traditional retailing to a member-centric company. Through that lens, we have integrated capabilities that leverage our physical store footprint, our unique service businesses and the Shop Your Way ecosystem to constantly define an integrated retail experience for our members. We continue to evolve our Shop Your Way 5-3-2-1 credit card, and our amended deal with our partner, Citi, should only make our efforts stronger.
The journey to running a member-centric company on a consistently profitable basis has taken far longer than we expected. Like many other brick and mortar retailers, Sears has encountered very substantial obstacles to profitability as a result of the enormous changes to the retail environment caused by the ever-increasing trend to online shopping. We anticipated these changes and reorganized in light of them, but have yet to achieve the results that we desire.
As a result, in order to help return the Company to profitability and generate adequate liquidity, we have been making many necessary changes, including:
- Strategically closing unprofitable stores:
- Liquidating inventory
- Reducing our workforce (paying severance to those who are eligible)
- Negotiating to achieve value for favorable leases
- Selling properties where we can obtain favorable prices and repaying associated debt
- Seeking partners who can expand the reach of our major brand assets, including Craftsman, Kenmore, DieHard and Sears Home Services
- Reducing operating expenses to align costs with sales and gross profit
In addition to the very difficult retail environment, Sears has also been significantly impacted by its long-term pension obligations. In the last five years, we contributed almost $2 billion, and since 2005 we have contributed over $4.5 billion, to fund our Pension Plans. These funding levels have been significantly higher than they otherwise would have been because of the historically low interest rates driven by Federal Reserve policy since the 2008 financial crisis, increases in Pension Benefit Guaranty Corporation fees, and required changes in mortality assumptions. Had the Company been able to employ those billions of dollars in its operations, we would have been in a better position to compete with other large retail companies, many of which don’t have large pension plans, and thus have not been required to allocate billions of dollars to these liabilities.
The actions we have taken over the past several years have so far provided Sears the runway it needed to engage in value maximizing transactions. We understand that the actions we have taken to meet our immediate liquidity needs have impacted our efforts to achieve a more competitive and profitable company. The reality is that, while we strongly believe in our vision and our strategy for the Company, we also have had to address the pressures that result from the unsatisfactory operating performance as well as the ongoing burden of our legacy pension liabilities.
The Company has consistently discussed financing and capital structure alternatives with numerous banks and investors and we have worked hard to attract the most favorable financing possible. To date, ESL has been willing to provide financing on terms that were at least as favorable as might be achievable in the market and, when practical, was on a basis that allowed other investors to participate on the same terms.
This funding has given the Company time it would not otherwise have had to adjust its operations, attempt to return to profitability, and maximize its asset values. Given the pace and the results so far from our efforts to monetize assets, it is imperative that the Company reduce debt, adjust its debt maturity profile and eliminate the associated cash interest obligations. We continue to believe that it is in the best interests of all our stakeholders to accomplish this as a going concern, rather than alternatives that could result in significant reductions in value.
We have worked hard to make the best possible decisions for the Company given the options available to it and the variety of constraints it has faced. We continue to believe that Sears can successfully evolve into a smaller but profitable company focused on our SYW membership program and our Integrated Retail Capabilities, and with a large enough store and online platform from which to grow. This can only happen with the cooperation of our various stakeholders and with the monetization of further assets that can be reinvigorated independently and without the financial constraints of Sears Holdings.
Like other retailers who have experienced financial challenges, Sears needs the support of a wide variety of constituents. We appreciate the support we have received to date, and continue to seek further support. Most importantly, I want to thank all of our associates who have worked tirelessly to address our opportunities and to serve our members in a challenging environment.