I have the privilege of serving as executive vice president and chief financial officer of Sears Holdings Corporation. I say it is a privilege because we are a proud American business. We are an integrated retailer with significant physical and intangible assets, as well as virtual capabilities enabled through technology. We currently operate a network of 1,980 full-line and specialty retail stores in the United States operating through Kmart and Sears. We have a long history, with over 200,000 associates who are proud to be part of a team driving a broad transformation in an industry which itself is undergoing a great deal of change. We are also the home of Shop Your Way, a free member-based social shopping platform that offers rewards, personalized services and a unique experience. Shop Your Way connects all of the ways members shop – in store, at home, online and by phone.
In my career I have participated in large scale transformations while working for and with successful investor-owners. Large-scale transformations are never easy nor are they linear. They often require bold, calculated moves to new business models, such as Shop Your Way, while others may cling to outdated models despite rapidly changing competitive landscapes and disruptive technologies. However, successful transformations always require three critical elements: (1) financial staying power to fund the necessary investments, (2) leadership committed to seeing things through challenging circumstances and (3) long term investors who are willing to place their capital at risk. We are fortunate that in the case of Sears Holdings, we have all three.
Let me address #2 and #3 first related to committed leadership and long term investors.
Sears Holdings is unusual in that we are a publicly-traded company with consolidated annual revenues of about $36 billion and a current equity market value of about $5 billion – but we are 48 percent owned by one investor-owner. This investor-owner, ESL Investments, is itself controlled by Edward S. Lampert. Mr. Lampert also serves as CEO and Chairman of Sears Holdings. ESL Investments has been a significant shareholder of Sears Holdings since the company was formed through the merger of Kmart Holding Corporation and Sears, Roebuck and Co. in 2005, and ESL Investments owned significant stakes in each of Kmart and Sears prior to the merger. Based on its public filings ESL Investments has been a long-term investor in many successful companies, some of which have gone through transformations.
These facts make Sears Holdings a different type of transformation: namely, it is an owner-driven transformation. In this case the largest single owner has about $2.5 billion of equity capital at risk and also serves as our chief executive officer. This means we have an owner-investor who has more at risk than any other person and whose equity capital stands last in line behind our debt obligations. There is never any doubt about commitment when someone has that much equity capital at risk much less somebody who is serving full time as the CEO. Mr. Lampert has been a patient and long term investor and all of this means that we are committed to creating long term sustainable shareholder value while always meeting all of our financial obligations.
Now, let me discuss #1, our financial staying power.
We are an asset rich enterprise with multiple levers at our disposal to create value and provide us with financial flexibility. We have proven this time and again. Over the past two years we have generated about $4 billion in liquidity including through value creating spin-offs, inventory efficiencies, real estate sales, and accessing debt markets all of which show both the value of our assets as well as our willingness and ability to monetize assets. Our objective is to create sustainable long term shareholder value – and to meet all of our financial obligations while doing so. These actions reflect these goals and are proof of our intent and ability.
We have had poor profit performance that we are intensively working to improve through our transformation to a member-centric business model leveraging our Shop Your Way and Integrated Retail platforms. We have experienced positive trends to date in our member engagement metrics giving us confidence that we are on the right path.
However, we should not confuse our poor profit performance with any lack of financial resources to fund the investments in our transformation as well as meeting all of our financial obligations. Importantly, we have the benefit of a flexible capital structure: our $3.275 billion domestic credit facility is in place through April of 2016 and we have no significant term debt maturities until late in 2018.
Now let me list just some of our actions and our assets.
We have $18 billion in assets on our balance sheet including a vast real estate portfolio that is unencumbered and whose value has been the subject of much speculation. I am not going to provide a view on the so-called “market value” of our domestic real estate – but its “accounting value” is reflected on our financial statements at about $5 billion. I would note that we have sold a few properties in the past two years in the US and Canada for about $1.4 billion – more than demonstrating the potential value of this real estate.
We are in the process of spinning-off our Lands’ End business to our shareholders and expect to receive $500 million in cash as part of that transaction.
We also own 51 percent of Sears Canada, which is publicly traded, with this stake being worth about $770 million at current trading levels. We have announced that we are working with the board and management of Sears Canada to maximize the value of this stake and to realize significant cash proceeds to fund our transformation.
In the past 3 years we have substantially reduced our business and balance sheet risk by reducing our net inventory by over $1 billion, reducing our lease obligations by over $1 billion while also reducing our unfunded pension obligation by $600 million in the last year. As a matter of fact, our net debt position as of Feb. 1, 2014, adjusted to include our unfunded pension obligation and pro forma for the $500 million expected Lands’ End dividend, would have declined by about $200 million as compared to the same time last year.
As of Feb. 1, 2014, we had over $1 billion in cash, $885 million available to borrow under our credit facilities and $4.5 billion in net inventory. This total of $6.5 billion in liquid assets and net inventory excludes the $500 million expected to be received from the Lands’ End transaction shortly. We also are permitted to raise up to $760 million in second lien debt subject to borrowing base requirements. Additionally, since our funding as of Feb. 1, 2014 took the form of more longer term debt capital, our commercial paper needs were lower than at the same time in the prior year but our $500 million uncommitted commercial paper program remains in place.
We have substantial financial staying power and we have a long-term owner-investor serving as CEO who has significant equity capital at risk demonstrating commitment.