Sears Holdings Reports Fourth Quarter And Full Year 2017 Results

Completes Secured Loan in Connection with Previously Announced PBGC Transaction

HOFFMAN ESTATES, Ill., March 14, 2018 /PRNewswire/ -- Sears Holdings Corporation ("Holdings," "we," "us," "our," or the "Company") (NASDAQ: SHLD) today announced financial results for its fourth quarter and full year ended February 3, 2018. As a supplement to this announcement, a presentation, pre-recorded conference call and audio webcast are available at our website http://searsholdings.com/invest.

In summary, today we reported the following:

  • Generated positive Adjusted EBITDA during the fourth quarter of 2017 with year-over-year improvement of $63 million;
  • Completed secured loan in connection with the previously announced PBGC transaction which unlocks nearly $980 million of appraised asset value; and
  • Expect to report year-over-year Adjusted EBITDA improvement in the first quarter of 2018 as we continue to focus on liquidity required to effectuate our transformation.

Net income attributable to Holdings' shareholders was $182 million ($1.69 earnings per diluted share) for the fourth quarter of 2017, which included a non-cash tax benefit of approximately $470 million related to tax reform, as well as a non-cash accounting charge of $72 million related to the impairment of the Sears trade name. This compares to a net loss attributable to Holdings' shareholders of $607 million ($5.67 loss per diluted share) for the prior year fourth quarter, which also included a non-cash accounting charge of $381 million related to the impairment of the Sears trade name. Adjusted EBITDA was $2 million in the fourth quarter of 2017 compared to $(61) million in the prior year fourth quarter.

Edward S. Lampert, Chairman and Chief Executive Officer of Holdings, said, "We made progress in 2017, with a return to positive Adjusted EBITDA and another quarter of year-over-year improvement in our financial results. We also took the actions necessary to increase our liquidity and fund our ongoing transformation of the Company. In addition, we entered important partnerships, such as our agreement to sell Kenmore appliances and related services through Amazon, that broaden the reach of our brands. Finally, we continued to enhance our Shop Your Way ecosystem to offer our members more compelling and uniquely tailored value and shopping experiences."

"We also recognize that we need to do more if we are to deliver on our commitment to return to profitability in 2018. We will work to build on the progress we made in 2017, including ongoing actions to improve or close unprofitable stores and to unlock the value in our assets. Importantly, to ensure our long-term viability, we must substantially improve our sales and gross margin performance, including adjustments to our business model," Lampert concluded.

Rob Riecker, Chief Financial Officer of Holdings, said, "As we continue with our transformation efforts, Sears Holdings has taken a number of actions to improve financial flexibility and support our operations. In addition to pursuing several transactions to adjust our capital structure in order to enhance our liquidity and financial position, we are taking incremental actions to further streamline our operations to drive profitability, including cost reductions of $200 million on an annualized basis in 2018 unrelated to store closures."

Actions undertaken during the fourth quarter of 2017 and into the first quarter of 2018 to provide the Company with additional financial flexibility included:

  • Extended the maturity of an existing term loan, which originally was to mature in June 2018 (the "Term Loan"), to January 2019, with the option to further extend the maturity to July 2019. During the fourth quarter, the Company paid down the Term Loan reducing the outstanding balance to approximately $398 million;
  • Raised $210 million in new financing in the fourth quarter of 2017, and an additional $40 million subsequent to quarter-end, through a series of financial transactions, supported by ground leases and certain intellectual property, with the ability to raise an additional $50 million against the same collateral;
  • Amended the borrowing base definition in the indenture relating to the Company's second lien notes, maturing October 15, 2018, to change the advance rate for inventory to 75%, increased from 65%. The amendment also defers the collateral coverage test for purposes of the repurchase offer covenant in such indenture and restarts it with the second quarter of 2018 (such that no collateral coverage event can occur until the end of the third quarter of 2018). The Company has also made corresponding amendments to its second lien credit agreement;
  • Amended its Domestic Credit Agreement, dated as of July 21, 2015, increasing the size of the general debt basket to $1.25 billion;
  • Completed a third amendment to the Second Lien Credit Agreement, dated as of September 1, 2016, which increased the maximum aggregate principal of the uncommitted line of credit facility established under the Second Lien Credit Agreement to $600 million and extended the maximum duration of line of credit loans to 270 days;
  • Secured an additional $100 million incremental real estate loan (the "Incremental Loan") on March 8, 2018, pursuant to an amendment to the Second Amended and Restated Loan Agreement, dated as of October 18, 2017, with JPP, LLC and JPP II, LLC, entities affiliated with ESL Investments, Inc. The Incremental Loan is secured by the same real estate properties as the 2017 Secured Loan Facility, and certain properties under the previous Incremental Loans outstanding, and matures in July 2020. The Company expects to use the proceeds of the Incremental Loan for general corporate purposes;
  • Closed on a new secured loan (the "Secured Loan") and mezzanine loan (the "Mezzanine Loan"), pursuant to which the Company received aggregate gross proceeds of $440 million. The Secured Loan is secured by properties that were previously subject to a ring-fence arrangement with the Pension Benefit Guaranty Corporation (the "PBGC"), and the Mezzanine Loan is secured by a pledge of the equity interests in SRC O.P. LLC, the direct parent company of the entities that own such properties. Pursuant to the Company's November 2017 agreement with the PBGC, the Company will contribute $407 million of the proceeds into the Sears pension plans, which contribution relieves the Company of contributions to its pension plans for approximately two years (other than a $20 million supplemental payment due in the second quarter of 2018). The Company expects to pay down a substantial portion of the Secured Loan over the next three to six months using proceeds generated from the sale of the underlying properties; and
  • Commenced private exchange offers for its outstanding 8% Senior Unsecured Notes Due 2019 and 6 5/8% Senior Secured Notes Due 2018 to improve the terms on non-first lien debt.

Revenues and Comparable Store Sales

We follow a retail-based financial reporting calendar. Accordingly, our fourth quarter and fiscal year 2017 results reflect the 14- and 53- week periods ended February 3, 2018, respectively, whereas 2016 contained 13- and 52- weeks for the fourth quarter and year, respectively.

We generated total revenues of $4.4 billion for the fourth quarter of 2017, compared with total revenues of $6.1 billion for the prior year fourth quarter, with store closures contributing to over half of the decline, partially offset by the inclusion of an additional week of revenues in the fourth quarter of 2017. Total comparable store sales declined 15.6% for the fourth quarter. Kmart comparable store sales declined 12.2%, while Sears comparable store sales declined 18.1%.

For the full year, revenues were $16.7 billion in 2017 as compared to revenues of $22.1 billion in the prior year. The decline in revenues included a decrease of approximately $3.2 billion as a result of having fewer Kmart and Sears Full-line stores in operation. For the full year, comparable store sales declined 13.5%, with Kmart comparable store sales declining 11.4% and Sears comparable store sales declining 15.2%.

Financial Position

At February 3, 2018, we had utilized approximately $648 million of our $1.5 billion revolving credit facility due in 2020, consisting of $271 million of borrowings and $377 million of letters of credit outstanding. The amount available to borrow under our credit facility was approximately $69 million, which reflects the effect of our springing fixed charge coverage ratio covenant and the borrowing base limitation in our revolving credit facility, which varies based on our overall inventory and receivables balances. Availability under our general debt basket was approximately $102 million at February 3, 2018.

The Company's total cash balances were $336 million at February 3, 2018, including restricted cash of $154 million, compared to $286 million at January 28, 2017. Short-term borrowings totaled $915 million at February 3, 2018, consisting of $271 million of revolver borrowings, $500 million of line of credit loans, and $144 million of borrowings under the incremental real estate loan.

Merchandise inventories at February 3, 2018 were $2.8 billion, compared to $4.0 billion at January 28, 2017, while merchandise payables were $0.6 billion and $1.0 billion at February 3, 2018 and January 28, 2017, respectively.

Total long-term debt (long-term debt and capital lease obligations) was $3.2 billion and $4.2 billion at February 3, 2018 and January 28, 2017, respectively.

Non-GAAP Financial Measures

In addition to our net income (loss) attributable to Holdings' shareholders determined in accordance with Generally Accepted Accounting Principles ("GAAP"), for purposes of evaluating operating performance, we use Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA"), which is a non-GAAP measure. The tables attached to this press release provide a reconciliation of GAAP to the as adjusted amounts. We believe that our use of Adjusted EBITDA provides an appropriate measure for investors to use in assessing our performance across periods, given that these measures provide adjustments for certain significant items which may vary significantly from period to period, improving the comparability of year-to-year results and is therefore representative of our ongoing performance. Therefore, we have adjusted our results for them to make our statements more useful and comparable. However, we do not, and do not recommend that you, solely use Adjusted EBITDA to assess our financial and earnings performance.

As a result of the Seritage and JV transactions, Adjusted EBITDA for the fourth quarter of 2017 and 2016 included additional rent expense of approximately $40 million and $47 million, respectively, while the full year of 2017 and 2016 included additional rent expense of approximately $169 million and $197 million, respectively. Due to the structure of the leases, we expect that our cash rent obligations to Seritage and the joint venture partners will decline, over time, as space in these stores is recaptured. From the inception of the Seritage transaction to date, we have received recapture notices on 55 properties and also exercised our right to terminate the lease on 56 properties.

Forward-Looking Statements

This press release 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 transformation through our integrated retail strategy, our plans to redeploy and reconfigure our assets, our liquidity, our ability to exercise financial flexibility as we meet our obligations and pursue possible strategic initiatives and other transactions, the commencement of the private exchange offers and other statements that describe the Company's plans. Whenever used, words such as "believe," "estimate," "intend," "will," "expect," and other terms of similar meaning or expression 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 Annual Report on Form 10-K for the fiscal year ended January 28, 2017, 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. Results presented herein are unaudited. The unaudited and estimated financial results for the fourth quarter and full-year 2017 contained in this press release reflect a number of complex and subjective judgments and estimates about the appropriateness of certain reported amounts and disclosures. Our financial statements for the 2017 fiscal year are not finalized. We are required to consider all available information through the finalization of our financial statements and their possible impact on our financial conditions and results of operations for the period, including the impact of such information on the complex judgments and estimates referred to above. As a result, subsequent information or events may lead to material differences between the information about the results of operations described herein and the results of operations described in our subsequent annual report. You should consider this possibility in reviewing the financial information for the period described above.

Pre-Recorded Conference Call and Audio Webcast

Sears Holdings, in conjunction with today's financial results announcement, will post a pre-recorded conference call and audio webcast on its corporate website. It will feature prepared remarks from Mr. Riecker, who will focus his comments to provide additional context around the quarter. The pre-recorded conference call may be accessed by telephone at 844.826.0613 or 973.200.3092 (conference ID: 4997267), and on Sears Holdings' website at http://www.searsholdings.com/invest/ under "Events & Presentations." The accompanying presentation and transcript will be posted online in conjunction.

About Sears Holdings Corporation

Sears Holdings Corporation (NASDAQ: SHLD) is a leading integrated retailer focused on seamlessly connecting the digital and physical shopping experiences to serve our members - wherever, whenever and however they want to shop. Sears Holdings is home to Shop Your Way®, a social shopping platform offering members rewards for shopping at Sears and Kmart, as well as with other retail partners across categories important to them. The Company operates through its subsidiaries, including Sears, Roebuck and Co. and Kmart Corporation, with full-line and specialty retail stores across the United States. For more information, visit www.searsholdings.com.

Sears Holdings Corporation

Consolidated Statements of Operations

(Unaudited)










Amounts are Preliminary and Subject to Change











Quarters  Ended


Years Ended

millions, except per share data


February 3,
2018


January 28,
2017


February 3,
2018


January 28,
2017

REVENUES









Merchandise sales


$

3,589



$

5,125



$

13,409



$

18,236


Services and other


787



927



3,293



3,902


     Total revenues



4,376




6,052




16,702




22,138











COSTS AND EXPENSES









Cost of sales, buying and occupancy - merchandise sales


3,029



4,256



11,349



15,184


    Gross margin dollars - merchandise sales


560



869



2,060



3,052


    Gross margin rate - merchandise sales


15.6

%


17.0

%


15.4

%


16.7

%

Cost of sales and occupancy - services and other


423



509



1,826



2,268


    Gross margin dollars - services and other


364



418



1,467



1,634


    Gross margin rate - services and other


46.3

%


45.1

%


44.5

%


41.9

%

Total cost of sales, buying and occupancy


3,452



4,765



13,175



17,452


    Total gross margin dollars


924



1,287



3,527



4,686


    Total gross margin rate


21.1

%


21.3

%


21.1

%


21.2

%

Selling and administrative


1,156



1,579



5,131



6,109


Selling and administrative expense as a percentage of total revenues


26.4

%


26.1

%


30.7

%


27.6

%










Depreciation and amortization


73



97



332



375


Impairment charges


113



409



142



427


Gain on sales of assets


(211)



(81)



(1,648)



(247)


    Total costs and expenses


4,583



6,769



17,132



24,116











Operating loss


(207)



(717)



(430)



(1,978)


Interest expense


(152)



(115)



(539)



(404)


Interest and investment income (loss)


2



(1)



(12)



(26)


Other income




13





13











Loss before income taxes


(357)



(820)



(981)



(2,395)


Income tax benefit


539



213



598



174











NET INCOME (LOSS) ATTRIBUTABLE TO HOLDINGS' SHAREHOLDERS


$

182



$

(607)



$

(383)



$

(2,221)











NET INCOME (LOSS) PER COMMON SHARE ATTRIBUTABLE TO HOLDINGS' SHAREHOLDERS:









Diluted earnings (loss) per share


$

1.69



$

(5.67)



$

(3.57)



$

(20.78)


Diluted weighted average common shares outstanding


107.7



107.0



107.4



106.9


 

Sears Holdings Corporation

 Condensed Consolidated Balance Sheets

(Unaudited)






Amounts are Preliminary and Subject to Change










millions


February 3,
2018


January 28,
2017

ASSETS





Current assets





   Cash and cash equivalents


$

182



$

286


   Restricted cash


154




   Accounts receivable


343



466


   Merchandise inventories


2,798



3,959


   Prepaid expenses and other current assets


335



285


   Total current assets


3,812



4,996







Property and equipment (net of accumulated depreciation and amortization of $2,381 and 2,841)


1,729



2,240


Goodwill


269



269


Trade names and other intangible assets


1,168



1,521


Other assets


284



336


   TOTAL ASSETS


$

7,262



$

9,362







LIABILITIES





Current liabilities





   Short-term borrowings


$

915



$


   Current portion of long-term debt and capitalized lease obligations


968



590


   Merchandise payables


576



1,048


   Unearned revenues


641



748


   Other taxes


247



339


   Other current liabilities


1,568



1,956


   Total current liabilities


4,915



4,681







Long-term debt and capitalized lease obligations


2,249



3,573


Pension and postretirement benefits


1,619



1,750


Deferred gain on sale-leaseback


362



563


Sale-leaseback financing obligation


247



235


Other long-term liabilities


1,467



1,641


Long-term deferred tax liabilities


126



743


   Total Liabilities


10,985



13,186


   Total Deficit


(3,723)



(3,824)


   TOTAL LIABILITIES AND DEFICIT


$

7,262



$

9,362







Total common shares outstanding


107.8



107.1


 

Sears Holdings Corporation

Segment Results

(Unaudited)








Amounts are Preliminary and Subject to Change
















Quarter Ended February 3, 2018

millions, except store data


 Kmart


Sears
Domestic


Sears
Holdings

Total revenues


$

1,475



$

2,901



$

4,376









Cost of sales, buying and occupancy


1,190



2,262



3,452


Gross margin dollars


285



639



924


Gross margin rate


19.3

%


22.0

%


21.1

%








Selling and administrative


363



793



1,156


Selling and administrative expense as a percentage of total revenues


24.6

%


27.3

%


26.4

%

Depreciation and amortization


14



59



73


Impairment charges


5



108



113


Gain on sales of assets


(73)



(138)



(211)


Total costs and expenses


1,499



3,084



4,583


Operating loss


$

(24)



$

(183)



$

(207)









Number of:







  Kmart Stores


432





432


  Full-Line Stores




547



547


  Specialty Stores




23



23


  Total Stores


432



570



1,002


















Quarter Ended January 28, 2017

millions, except store data


 Kmart


Sears
Domestic


Sears
Holdings

Total revenues


$

2,402



$

3,650



$

6,052









Cost of sales, buying and occupancy


1,993



2,772



4,765


Gross margin dollars


409



878



1,287


Gross margin rate


17.0

%


24.1

%


21.3

%








Selling and administrative


578



1,001



1,579


Selling and administrative expense as a percentage of total revenues


24.1

%


27.4

%


26.1

%

Depreciation and amortization


20



77



97


Impairment charges


15



394



409


Gain on sales of assets


(61)



(20)



(81)


Total costs and expenses


2,545



4,224



6,769


Operating loss


$

(143)



$

(574)



$

(717)









Number of:







  Kmart Stores


735





735


  Full-Line Stores




670



670


  Specialty Stores




25



25


  Total Stores


735



695



1,430









 

Sears Holdings Corporation

Segment Results

(Unaudited)








Amounts are Preliminary and Subject to Change
















Year Ended February 3, 2018

millions, except store data


 Kmart


Sears
Domestic


Sears
Holdings

Total revenues


$

5,618



$

11,084



$

16,702









Cost of sales, buying and occupancy


4,601



8,574



13,175


Gross margin dollars


1,017



2,510



3,527


Gross margin rate


18.1

%


22.6

%


21.1

%








Selling and administrative


1,455



3,676



5,131


Selling and administrative expense as a percentage of total revenues


25.9

%


33.2

%


30.7

%

Depreciation and amortization


60



272



332


Impairment charges


16



126



142


Gain on sales of assets


(881)



(767)



(1,648)


Total costs and expenses


5,251



11,881



17,132


Operating income (loss)


$

367



$

(797)



$

(430)









Number of:







  Kmart Stores


432





432


  Full-Line Stores




547



547


  Specialty Stores




23



23


  Total Stores


432



570



1,002


















Year Ended January 28, 2017

millions, except store data


 Kmart


Sears
Domestic


Sears
Holdings

Total revenues


$

8,650



$

13,488



$

22,138









Cost of sales, buying and occupancy


7,093



10,359



17,452


Gross margin dollars


1,557



3,129



4,686


Gross margin rate


18.0

%


23.2

%


21.2

%








Selling and administrative


2,175



3,934



6,109


Selling and administrative expense as a percentage of total revenues


25.1

%


29.2

%


27.6

%

Depreciation and amortization


71



304



375


Impairment charges


22



405



427


Gain on sales of assets


(181)



(66)



(247)


Total costs and expenses


9,180



14,936



24,116


Operating loss


$

(530)



$

(1,448)



$

(1,978)









Number of:







  Kmart Stores


735





735


  Full-Line Stores




670



670


  Specialty Stores




25



25


  Total Stores


735



695



1,430









 

Sears Holdings Corporation

Adjusted EBITDA Reconciliation

(Unaudited)






Quarters Ended


Years Ended

millions

February 3,
2018


January 28,
2017


February 3,
2018


January 28,
2017

Net income (loss) attributable to Holdings per statement of operations

$

182



$

(607)



$

(383)



$

(2,221)


Income tax benefit

(539)



(213)



(598)



(174)


Interest expense

152



115



539



404


Interest and investment (income) loss

(2)



1



12



26


Other income



(13)





(13)


Operating loss

(207)



(717)



(430)



(1,978)


Depreciation and amortization

73



97



332



375


Gain on sales of assets

(211)



(81)



(1,648)



(247)


Impairment charges

113



409



142



427


Before excluded items

(232)



(292)



(1,604)



(1,423)










Closed store reserve and severance

143



202



462



384


Pension expense

117



72



656



288


Other (1)

(7)



(21)



2



31


Amortization of deferred Seritage gain

(19)



(22)



(78)



(88)










Adjusted EBITDA

$

2



$

(61)



$

(562)



$

(808)




(1)

The 14- and 53- week periods ended February 3, 2018 consisted of items associated with legal matters, expenses associated with natural disasters and transaction costs associated with strategic initiatives. The 13- and 52- week periods ended January 28, 2017 consisted of expenses associated with legal matters, transaction costs associated with strategic initiatives and other expenses.

 

Sears Holdings Corporation

Adjusted EBITDA Reconciliation

(Unaudited)









Amounts are Preliminary and Subject to Change







Quarters Ended

millions

February 3, 2018


January 28, 2017


Kmart

Sears
Domestic

Sears
Holdings


Kmart

Sears
Domestic

Sears
Holdings

Operating loss per statement of operations

$

(24)


$

(183)


$

(207)



$

(143)


$

(574)


$

(717)


Depreciation and amortization

14


59


73



20


77


97


Gain on sales of assets

(73)


(138)


(211)



(61)


(20)


(81)


Impairment charges

5


108


113



15


394


409


Before excluded items

(78)


(154)


(232)



(169)


(123)


(292)










Closed store reserve and severance

92


51


143



159


43


202


Pension expense


117


117




72


72


Other (1)

(8)


1


(7)



7


(28)


(21)


Amortization of deferred Seritage gain

(2)


(17)


(19)



(4)


(18)


(22)


Adjusted EBITDA

$

4


$

(2)


$

2



$

(7)


$

(54)


$

(61)










% to revenues

0.3

%

(0.1)

%

%


(0.3)

%

(1.5)

%

(1.0)

%


















Years Ended

millions

February 3, 2018


January 28, 2017


Kmart

Sears
Domestic

Sears
Holdings


Kmart

Sears
Domestic

Sears
Holdings

Operating income (loss) per statement of operations

$

367


$

(797)


$

(430)



$

(530)


$

(1,448)


$

(1,978)


Depreciation and amortization

60


272


332



71


304


375


Gain on sales of assets

(881)


(767)


(1,648)



(181)


(66)


(247)


Impairment charges

16


126


142



22


405


427


Before excluded items

(438)


(1,166)


(1,604)



(618)


(805)


(1,423)










Closed store reserve and severance

281


181


462



318


66


384


Pension expense


656


656




288


288


Other (1)

(23)


25


2



15


16


31


Amortization of deferred Seritage gain

(11)


(67)


(78)



(17)


(71)


(88)


Adjusted EBITDA

$

(191)


$

(371)


$

(562)



$

(302)


$

(506)


$

(808)










% to revenues

(3.4)

%

(3.3)

%

(3.4)

%


(3.5)

%

(3.8)

%

(3.6)

%



(1)

The 14- and 53- week periods ended February 3, 2018 consisted of items associated with legal matters, expenses associated with natural disasters and transaction costs associated with strategic initiatives. The 13- and 52- week periods ended January 28, 2017 consisted of expenses associated with legal matters, transaction costs associated with strategic initiatives and other expenses.



NEWS MEDIA CONTACT:
Sears Holdings Public Relations
(847) 286-8371

 

SOURCE Sears Holdings Corporation








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