Kmart and Sears outlook remains bleak

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Kmart and Sears outlook remains bleak

05/25/2017

Shares of Sears Holdings popped on May 25 when the company reported first quarter results that were bad, but not as bad as some had feared. The company, which seems to be in a perpetual state of restructuring, said same store sales declined 11.2 percent at Kmart stores and declined 12.4 percent at Sears stores. The comp declined combined with fewer stores in operation as a result of closures meant total sales declined to $4.3 billion during the quarter compared to $5.4 billion the prior year.

"While this was certainly a challenging quarter for our company, it was also one that clearly demonstrated our commitment to return Sears Holdings to solid financial footing,” according to Chairman and CEO Edward Lampert. “We recognize that we need to accelerate our efforts to improve our operational performance and are moving decisively with our $1.25 billion restructuring program."

Kmart and Sears stores both experienced an increase in promotional markdowns due to what the company called, “competitive pressures in the retail environment.” And even with the promotional activity the same store sales declines were driven by weakness in grocery and household, pharmacy, apparel and home categories at Kmart. Sears domestic declines were blamed on weakness in home appliances, apparel and lawn and garden categories.

With ongoing weakness in sales, the widely held view in the retail industry is that Sears Holding’s days are numbered because it falls into a category of retailers that Amazon Founder and CEO Jeff Bezos puts in the “Day 2” category. In his letter to shareholders, Bezos refers to the need to remain a “Day 1” company, one that is always looking forward and relentlessly innovating with a focus on the customer.

Failing to do so means it becomes “Day 2,” which is followed by irrelevance and excruciating, painful decline, followed by death.

“To be sure, this kind of decline would happen in extreme slow motion,” according to Bezos. “An established company might harvest Day 2 for decades, but the final result would still come.”

He didn’t mention Sears Holdings by name, but the company certainly has a knack for hanging on and finding new ways to generate liquidity to maintain its operations.

"During the first quarter we took decisive actions to reduce our cost base and drive operational efficiencies which allowed us to make significant progress on our restructuring program, according to CFO Rob Riecker. “We also remained focused on increasing our financial flexibility and creating value from our asset base to ensure we continue to meet our financial obligations and fund our transformation. We will continue to evaluate our options to deliver further improvements to our operational performance and balance sheet."

At the end of the quarter, the company had a cash balance of $264 million, short term borrowings of $551 million and had used roughly $1 billion of its revolving credit facility. Total long term debt was $3.7 billion, which is equal to the amount of total liquidity and liquid assets the company said it has.

 

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