Sears Holdings same-store sales to drop 15% as company looks for more cash

Key Points
  • Sears Holdings announced a number of steps it's taking to gain liquidity.
  • Sears has struck an agreement with Pension Benefit Guaranty Corp. to relieve the retailer from contributions to its pension plans for the next two years.
  • Sears also pre-announced its third-quarter earnings.
Sears Holdings same-store sales to drop 15.3%
Sears Holdings same-store sales to drop 15.3%

Sears Holdings announced Wednesday a number of steps it's taking to gain liquidity as its sales continue to erode at a double-digit pace.

Sears struck an agreement with guardians of its underfunded pension fund — the Pension Benefit Guaranty Corp. — to allow for the sale of 140 Sears properties, though the company didn't say when those sales will take place. In exchange, Sears said it paid $407 million to the plan.

Sears shares were recently down nearly 5 percent after the news.

The PBGC is a federal government oversight organization that guarantees individuals' pensions, acting as a parachute if a company goes bankrupt. The powerful organization can force a company to put up collateral against underfunded pension plans. In merger and acquisition transactions, companies with underfunded pension plans often have to negotiate part of the value to be directed to shore up pension plans. Sears was forced to do this earlier this year when it sold Craftsman.

Sears said this step will allow it to gain more financial flexibility and provides relief from contributions to the pension plans for the next two years. The retailer has contributed roughly $4.5 billion to pension plans since the merger of Sears and Kmart in 2005.

"This agreement with the PBGC is another positive step forward which, upon closing, will provide our Company with financial flexibility while supporting our commitment to honor our obligations to the associates and retirees covered by the pension plans," Chief Executive Eddie Lampert said in a statement.

Sears said it is working to ensure its associates and retirees receive their full pension benefits in either a lump sum or annuity form. On Wednesday, Sears said the number of participants in its pension plans has been reduced from roughly 400,000 to 100,000.

Sears also pre-announced its third-quarter earnings, saying the department store chain's total same-store sales tumbled 15.3 percent during the period.

"The retail environment remains challenging, with continued pressures on sales," Sears said in a statement.

The company reported total revenue of roughly $3.7 billion during the third quarter of 2017, compared with $5 billion a year ago. Recent store closures contributed to more than half the declines, the company added.

Sales were also hurt by a reduction in the number of pharmacies open in Kmart stores, and fewer consumer electronics sold.

Same-store sales at Sears stores fell 17 percent, while those at Kmart stores dropped 13 percent during the third quarter.

Meantime, Sears is anticipating its third-quarter net loss to improve by about $190 million.

The company expects a net loss of between $525 million and $595 million, compared with a $748 million loss in the same period last year.

Sears said it expects to reach positive adjusted earnings before interest, taxes, depreciation and amortization next year.

Crucial holiday season

Sears is approaching the crucial holiday season, in which it needs to sell product in its stores to generate sales. The companies that stock its shelves though are increasingly butting heads with the retailer; amid this tension, they can stop shipment altogether, as Whirlpool did, or they can demand payment faster and in cash, to protect themselves in the event of a bankruptcy.

Sears has said of its vendor relationships: "We continue to have strong relationships with over 50,000 vendors and suppliers. Any changes to our agreements over the years have been part of the normal discussions between retailers and vendors."

As it relates to Whirlpool, Sears said: "In relation to Whirlpool, we were unable to reach an agreement that would have allowed us to offer Whirlpool products to our members at a reasonable price."

What Sears is trying to avoid is a vendor "run on the bank," which can be deadly for a retailer with limited cash resources. The dynamic helped drive Toys R Us and Gymboree into bankruptcy faster than expected.

At least one vendor who spoke to CNBC said he continues to ship to the retailer, though feels comfortable doing so because he is receiving cash payment. He said he is supportive of the retailer's long-term health.

Below is the ratio of Sears' accounts payable (what it owes its suppliers) compared with its inventory (the merchandise it has in store), taken from Sears' filings with the Securities and Exchange Commission. While a rough calculation, it is used to assess how quickly Sears is paying its vendors. In this case, the quickening pace is most likely being driven by the vendors themselves.

As the chart shows, that ratio has dropped from 38 percent to 20 percent over the past five years. The chart's data is based on the second quarter of each year.

As of Oct. 28, Sears said the amount it owned its vendors was $800 million. That was down from $1.6 billion on Oct. 29, 2016. Sears said this reflected its "significantly reduced ... dependency on vendor financing."