Sears shares soar on news of store sales

CHICAGO — In its continued efforts to raise cash, Sears Holdings announced Friday it is considering selling 200 to 300 stores to a real estate investment trust and leasing back the space.

Sears shares soared 32 percent in morning trading to more than $43.

The Hoffman Estates, Ill.-based retailer said it would fund a portion of the sale/lease-back transaction by offering its shareholders rights to buy common shares or other equity in the newly created trust, with the balance from mortgage or other debt financing.

Sears would continue to operate in the sold locations under master leases.

The company also disclosed that in October it sold its Sears full-line store in Cupertino, Calif., for $102.5 million, and will continue to operate there for up to one year. Macy's and J.C. Penney also sold their Cupertino stores, the Sears filing said. Published reports have said the three department stores, all in Cupertino's Vallco Shopping Mall, were sold to developer Sand Hill Property Co.


Sears has launched several efforts in the last couple of months to generate liquidity during the crucial holiday shopping season, often by tapping the deep pockets of its chairman and CEO, hedge fund billionaire Eddie Lampert. The department store chain, which has reported 30 consecutive quarters of revenue declines and nine consecutive quarters of losses, for several years has been closing stores and selling or spinning off assets as it attempts to transform into a membership-based "integrated" retailer.

Sears, which will formally release third-quarter earnings Dec. 4, said it expects third-quarter losses attributable to Sears Holdings shareholders to be $590 million to $630 million, compared with losses of $497 million last year. It expects sales at stores open at least a year to have been mostly flat, with sales up 0.5 percent at Kmart and down 0.7 percent at Sears Domestic. Excluding consumer electronics, a category the retailer is attempting to shift from focusing on televisions to connected devices (such as garage-door openers operated by smartphone), sales would have been up 1.2 percent at Kmart and 1 percent at Sears.

The company trumpeted an improvement in its adjusted earnings before interest, taxes, depreciation and amortization, anticipated to be a loss of $275 million to $325 million, in line with the $310 million loss in the third quarter of 2013 rather than the widening loss it had been experiencing over the previous six quarters.

"We believe this change in trend is a positive development that we currently expect to continue into the fourth quarter," the company said in its filing.

Gary Balter, an analyst at Credit Suisse, said in a note that the Sears and Kmart properties included in the trust are likely the best performing in the company's portfolio in order to generate enough free cash flow to pay rent. That, combined with the sale of the Cupertino store and Sears' announcement last month that it is leasing seven properties to European fast-fashion chain Primark, including an important location in Pennsylvania's King of Prussia mall, "leaves Sears with very few other assets to sell, so while the company seemed quite pleased with losing $300 million in EBITDA (at the midpoint of guidance) again this quarter, we still need to see evidence that the company can significantly reduce its operational cash burn to be considered a long-term viable competitor."

Balter noted that Sears' exit from prime locations may be good for The Home Depot and Lowe's, while its shift away from TVs may benefit Best Buy.

While the picture is not all positive, "Mr. Lampert deserves significant credit for his efforts not just to monetize the good assets, but to focus on the larger money-losing categories," Balter said. "We still seem to be missing the bridge that takes us from these large losses to profitability as a retailer, hence, we retain our negative long-term view, but Sears cannot be accused of not trying. Now if only they would put some of that effort into store service, the story may be more promising."

Sears this week commenced a rights offering for $625 million in senior unsecured notes with warrants, part of its efforts to raise cash. The company also aimed to generate another $380 million by selling part of its stake in Sears Canada through a rights offering, which closes at the end of the day Friday. As of Thursday, it had raised about $300 million from Sears Canada.


Lampert, who through his hedge funds owns about 48 percent of Sears Holdings, planned to exercise his subscription rights. Lampert in September also gave Sears a $400 million secured short-term loan.

As of Nov. 1, Sears had total cash of about $330 million and availability under its credit facility of $234 million, which doesn't include about $132 million in Sears Canada subscriptions made after Nov. 1. Debt at the end of the third quarter was $6.3 billion, down $400 million from the same time last year, and if the rights offerings are fully subscribed it expects debt to fall another $200 million.

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