SEARS – I TOLD YOU SO

That retailer Sears, aka K-Mart, just preannounced what can only be described as catastrophic Q4 results should not be a surprise to anyone: after all we have been warning ever since the “record” thanksgiving holiday that when you literally dump merchandize at stunning losses, losses will, stunningly, follow. Sure enough enter Sears. What we, however, are ourselves stunned by is that as part of its preannouncement, Sears has decided it would be prudent to provide an update on its credit facility status as well as availability. As a reminder to anyone and everyone – there is no more sure way of committing corporate suicide than openly inviting the bear raid which always appears whenever the words “revolving credit facility” and “availability” appear in the same press release. Just recall MF Global. And here, as there, we expect shorting to death to commence in 5…4…3…

From Sears:

Sears Holdings Corporation (“Holdings,”  “we,” “us,” “our,” or the “Company”) (Nasdaq: SHLD – News) today is providing an update on its quarter-to-date performance and planned actions to improve and accelerate the transformation of its business. 

Comparable store sales for the eight-week (“QTD”) and year-to-date (“YTD”) periods ended December 25, 2011 for its Kmart and Sears stores are as follows:

K-Mart

QTD  -4.4%

YTD  -1.8%

Sears Domestic

QTD  -6.0%

YTD  -3.3%

Total

QTD  -5.2%

YTD  -2.6%

Kmart’s quarter-to-date comparable store sales decline reflects decreases in the consumer electronics and apparel categories and lower layaway sales.  Sears Domestic’s quarter-to-date sales decline was primarily driven by the consumer electronics and home appliance categories, with more than half of the decline in Sears Domestic occurring in consumer electronics.  Sears apparel sales were flat and Lands’ End in Sears stores was up mid-single digits.

The combination of lower sales and continued margin pressure coupled with expense increases has led to a decline in our Adjusted EBITDA.  Accordingly, we expect that our fourth quarter consolidated Adjusted EBITDA will be less than half of last year’s amount.  For reference, last year we generated $933 million of Adjusted EBITDA in the fourth quarter ( $795 million domestically and $138 million in Canada ). 

Due to our performance in 2011 we expect that we will record in the fourth quarter a non-cash charge related to a valuation allowance on certain deferred tax assets of $1.6 to $1.8 billion .  Although a valuation adjustment is recognized on these deferred tax assets, no economic loss has occurred as the underlying net operating loss carryforwards and other tax benefits remain available to reduce future taxes to the extent income is generated.  Further, we may recognize in the fourth quarter an impairment charge on some goodwill balances for as much as $0.6 billion .  These charges would be non-cash and combined are estimated to be between $1.6 and $2.4 billion . 

“Given our performance and the difficult economic environment, especially for big-ticket items, we intend to implement a series of actions to reduce on-going expenses, adjust our asset base, and accelerate the transformation of our business model. These actions will better enable us to focus our investments on serving our customers and members through integrated retail – at the store, online and in the home,” said Chief Executive Officer Lou D’Ambrosio.  Specific actions which we plan to take include:

• Close 100 to 120 Kmart and Sears Full-line stores.  We expect these store closures to generate $140 to $170 million of cash as the net inventory in these stores is sold and we expect to generate additional cash proceeds from the sale or sublease of the related real estate.  Further, we intend to optimize the space allocation based on category performance in certain stores.  Final determination of the stores to be closed has not yet been made.  The list of stores closing will be posted at www.searsmedia.com when final determination is made.
• Excluding the effect of store closures, we currently expect to reduce 2012 peak domestic inventory by $300 million from the 2011 level of $10.2 billion at the end of the third quarter as a result of cost decreases in apparel, tighter buys and a lower inventory position at the beginning of the fiscal year.
• Focus on improving gross profit dollars through better inventory management and more targeted pricing and promotion. 
• Reduce our fixed costs by $100 to $200 million .

In addition to the specific store closures listed above, we will carefully evaluate store performance going forward and act opportunistically to recognize value from poor performing stores as circumstances allow.  While our past practice has been to keep marginally performing stores open while we worked to improve their performance, we no longer believe that to be the appropriate action in this environment.  We intend to accentuate our focus and resources to our better performing stores with the goal of converting their customer experience into a world-class integrated retail experience.

We currently expect the store closure and inventory reduction actions to reduce peak inventory in 2012 by $500 to $580 million and reduce our peak borrowing need by $300 to $350 million in 2012 from levels that may have resulted in 2012 without such actions. 

At December 23rd , we had $483 million of borrowings outstanding on our domestic revolving credit facility leaving us with over $2.9 billion of availability on our revolving credit facilities ( $2.1 billion on our domestic facility and $0.8 billion on our Canadian facility).  There were no borrowings outstanding last year at this time.

During the fourth quarter through December 23, 2011 , we have not repurchased any of our common shares under our share repurchase program.  As of December 23, 2011 , we had remaining authorization to repurchase $524 million of common shares under the previously approved programs.