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Sears Holdings Reports Third Quarter 2017 Results

HOFFMAN ESTATES, Ill., Nov. 30, 2017 /PRNewswire/ -- Sears Holdings Corporation ("Holdings," "we," "us," "our," or the "Company") (NASDAQ: SHLD) today announced financial results for its third quarter ended October 28, 2017. As a supplement to this announcement, a presentation, pre-recorded conference and audio webcast are available at our website http://searsholdings.com/invest.

In summary, we reported a net loss attributable to Holdings' shareholders of $558 million ($5.19 loss per diluted share) for the third quarter of 2017 compared to a net loss of $748 million ($6.99 loss per diluted share) for the third quarter of 2016, an improvement of $190 million. Adjusted EBITDA improved $100 million to $(275) million in the third quarter of 2017, from $(375) million in the prior year third quarter. This marks the second consecutive quarter of at least $100 million improvement in Adjusted EBITDA as the restructuring actions taken in the first three quarters of 2017 have resulted in meaningful year-over-year improvement in the Company's performance.

We generated total revenues of approximately $3.7 billion during the third quarter of 2017, compared with revenues of $5.0 billion in the prior year quarter, with store closures contributing to over half of the decline. Revenues were also negatively impacted by reductions in the number of pharmacies in open Kmart stores, as well as the reduction in consumer electronics assortments in both our Kmart and Sears stores. Total comparable store sales declined 15.3% during the quarter. Kmart comparable store sales decreased 13.0%, while Sears comparable store sales declined 17.0%.

Edward S. Lampert, Chairman and Chief Executive Officer of Holdings, said, "In the third quarter, we continued to narrow our losses and delivered another quarter of Adjusted EBITDA improvement of at least $100 million. With the challenging retail landscape continuing to pressure sales, the improvement in Adjusted EBITDA is reflective of the success of the strategic priorities we outlined earlier this year to streamline our operations, reduce inventory and minimize operating expenses, as well as our commitment to our goal of restoring positive Adjusted EBITDA in 2018. Our Shop Your Way membership program and Integrated Retail Strategy remain a key focus for us in order to meet the needs of our members and provide our members with the best experience possible throughout the holiday shopping season."

As we look ahead to the fourth quarter and beyond with a focus on continued improved performance, we intend to:

  • Continue to develop new ways to leverage the Shop Your Way platform in order to invest marketing dollars at the member level to optimize returns and improve comparable store sales trends and associated profitability;
  • Diversify revenue streams through third party partnerships in several of our businesses including Sears Home Services, Innovel, Kenmore and DieHard;
  • Further build on the momentum around our dedicated concept stores similar to the recently opened Sears Appliances and Mattress stores in Camp Hill, Pennsylvania and Honolulu, Hawaii; and
  • Maintain extreme cost discipline focus in light of continued headwinds across the retail sector.

Rob Riecker, Chief Financial Officer of Holdings, said, "The recently announced agreement with the Pension Benefit Guaranty Corporation requires an initial upfront payment to the pension plans which will be secured by 138 properties released to the Company. Once complete, the estimated contributions of $550 million to the pension plans in 2018 and 2019 is eliminated (with the exception of a $20 million payment in July of 2018). Additionally we will be taking action in the near term with respect to certain upcoming debt maturities to provide the Company with further financial flexibility and enhanced liquidity."

Adjusted EBITDA

In addition to our net 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") and Adjusted Loss Per Share ("Adjusted EPS"), which are non-GAAP measures. The tables attached to this press release provide a reconciliation of GAAP to as adjusted amounts. We believe that our use of Adjusted EBITDA and Adjusted EPS 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, thereby improving the comparability of year-to-year results and being more representative of our ongoing performance. Therefore, we have adjusted our results for significant items to make our statements more useful and comparable. However, we do not, and do not recommend that you, solely use Adjusted EBITDA or Adjusted EPS to assess our financial and earnings performance. We also use, and recommend that you use, diluted loss per share in addition to Adjusted EPS in assessing our earnings performance.

As a result of the Seritage and JV transactions, Adjusted EBITDA for the third quarter of 2017 and 2016 included additional rent expense of approximately $40 million and $48 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 38 properties and also exercised our right to terminate the lease on 56 properties.

Forward-Looking Statements

Results are unaudited. 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 strategic restructuring program and anticipated results of strategic initiatives, our transformation through our integrated retail strategy, our plans to redeploy and reconfigure our assets, our plans to market and sell a portion of our existing real estate assets, our liquidity, our ability to exercise financial flexibility as we meet our obligations and pursue possible strategic transactions, and other statements that describe the Company's plans. Whenever used, words such as "will," "expect," and other terms of similar meaning 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 most recent Annual Report on Form 10-K 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.

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

Condensed Consolidated Statements of Operations

(Unaudited)









Amounts are Preliminary and Subject to Change









13 Weeks Ended


39 Weeks Ended

millions, except per share data

October 28,
2017


October 29,
2016


October 28,
2017


October 29,
2016

REVENUES








Merchandise sales

$

2,893



$

4,061



$

9,820



$

13,111


Services and other

767



968



2,506



2,975


Total revenues

3,660



5,029



12,326



16,086


COSTS AND EXPENSES








Cost of sales, buying and occupancy - merchandise sales

2,535



3,497



8,320



10,928


Gross margin dollars - merchandise sales

358



564



1,500



2,183


Gross margin rate - merchandise sales

12.4%



13.9%



15.3%



16.7%


Cost of sales and occupancy - services and other

423



570



1,403



1,759


Gross margin dollars - services and other

344



398



1,103



1,216


Gross margin rate - services and other

44.9%



41.1%



44.0%



40.9%


Total cost of sales, buying and occupancy

2,958



4,067



9,723



12,687


Total gross margin dollars

702



962



2,603



3,399


Total gross margin rate

19.2%



19.1%



21.1%



21.1%


Selling and administrative

1,339



1,543



3,975



4,530


Selling and administrative expense as a percentage of total revenues

36.6%



30.7%



32.2%



28.2%


Depreciation and amortization

89



91



259



278


Impairment charges

9



3



29



18


Gain on sales of assets

(316)



(51)



(1,437)



(166)


Total costs and expenses

4,079



5,653



12,549



17,347


Operating loss

(419)



(624)



(223)



(1,261)


Interest expense

(136)



(105)



(387)



(289)


Interest and investment loss



(8)



(14)



(25)


Loss before income taxes

(555)



(737)



(624)



(1,575)


Income tax (expense) benefit

(3)



(11)



59



(39)


NET LOSS ATTRIBUTABLE TO HOLDINGS' SHAREHOLDERS

$

(558)



$

(748)



$

(565)



$

(1,614)


NET LOSS PER COMMON SHARE ATTRIBUTABLE TO HOLDINGS' SHAREHOLDERS








Diluted loss per share

$

(5.19)



$

(6.99)



$

(5.27)



$

(15.10)


Diluted weighted average common shares outstanding

107.5



107.0



107.3



106.9


Sears Holdings Corporation

Condensed Consolidated Balance Sheets

(Unaudited)








Amounts are Preliminary and Subject to Change














millions


October 28,
2017


October 29,
2016


January 28,
2017

ASSETS







Current assets







Cash and cash equivalents


$

200



$

258



$

286


Restricted cash


154






Accounts receivable


378



372



466


Merchandise inventories


3,452



5,032



3,959


Prepaid expenses and other current assets


347



304



285


Total current assets


4,531



5,966



4,996


Property and equipment (net of accumulated depreciation and amortization of $2,451, $2,886 and $2,841)


1,855



2,392



2,240


Goodwill


269



269



269


Trade names and other intangible assets


1,244



1,904



1,521


Other assets


294



334



336


TOTAL ASSETS


$

8,193



$

10,865



$

9,362


LIABILITIES







Current liabilities







Short-term borrowings


$

1,061



$

618



$


Current portion of long-term debt and capitalized lease obligations


1,310



594



590


Merchandise payables


772



1,556



1,048


Other current liabilities


1,534



1,848



1,956


Unearned revenues


676



759



748


Other taxes


290



355



339


Total current liabilities


5,643



5,730



4,681


Long-term debt and capitalized lease obligations


2,032



3,087



3,573


Pension and postretirement benefits


1,641



1,997



1,750


Deferred gain on sale-leaseback


446



656



563


Sale-leaseback financing obligation


247



164



235


Other long-term liabilities


1,557



1,716



1,641


Long-term deferred tax liabilities


634



890



743


Total Liabilities


12,200



14,240



13,186


DEFICIT







Total Deficit


(4,007)



(3,375)



(3,824)


TOTAL LIABILITIES AND DEFICIT


$

8,193



$

10,865



$

9,362









Total common shares outstanding


107.6



107.0



107.1


Sears Holdings Corporation

Segment Results

(Unaudited)







Amounts are Preliminary and Subject to Change













13 Weeks Ended October 28, 2017

millions, except store data

Kmart


Sears
Domestic


Sears
Holdings

Total revenues

$

1,175



$

2,485



$

3,660








Total cost of sales, buying and occupancy

986



1,972



2,958


Gross margin dollars

189



513



702


Gross margin rate

16.1%



20.6%



19.2%








Selling and administrative

377



962



1,339


Selling and administrative expense as a percentage of total revenues

32.1%



38.7%



36.6%


Depreciation and amortization

19



70



89


Impairment charges

3



6



9


Gain on sales of assets

(132)



(184)



(316)


Total costs and expenses

1,253



2,826



4,079


Operating loss

$

(78)



$

(341)



$

(419)








Number of:






Kmart Stores

510





510


Full-Line Stores



572



572


Specialty Stores



22



22


Total Stores

510



594



1,104















13 Weeks Ended October 29, 2016

millions, except store data

Kmart


Sears
Domestic


Sears
Holdings

Total revenues

$

1,888



$

3,141



$

5,029








Total cost of sales, buying and occupancy

1,605



2,462



4,067


Gross margin dollars

283



679



962


Gross margin rate

15.0%



21.6%



19.1%








Selling and administrative

555



988



1,543


Selling and administrative expense as a percentage of total revenues

29.4%



31.5%



30.7%


Depreciation and amortization

17



74



91


Impairment charges

3





3


Gain on sales of assets

(30)



(21)



(51)


Total costs and expenses

2,150



3,503



5,653


Operating loss

$

(262)



$

(362)



$

(624)








Number of:






Kmart Stores

801





801


Full-Line Stores



676



676


Specialty Stores



26



26


Total Stores

801



702



1,503








Sears Holdings Corporation

Segment Results

(Unaudited)







Amounts are Preliminary and Subject to Change













39 Weeks Ended October 28, 2017

millions, except store data

Kmart


Sears
Domestic


Sears
Holdings

Total revenues

$

4,143



$

8,183



$

12,326








Total cost of sales, buying and occupancy

3,411



6,312



9,723


Gross margin dollars

732



1,871



2,603


Gross margin rate

17.7%



22.9%



21.1%








Selling and administrative

1,092



2,883



3,975


Selling and administrative expense as a percentage of total revenues

26.4%



35.2%



32.2%


Depreciation and amortization

46



213



259


Impairment charges

11



18



29


Gain on sales of assets

(808)



(629)



(1,437)


Total costs and expenses

3,752



8,797



12,549


Operating income (loss)

$

391



$

(614)



$

(223)








Number of:






Kmart Stores

510





510


Full-Line Stores



572



572


Specialty Stores



22



22


Total Stores

510



594



1,104















39 Weeks Ended October 29, 2016

millions, except store data

Kmart


Sears
Domestic


Sears
Holdings

Total revenues

$

6,248



$

9,838



$

16,086








Total cost of sales, buying and occupancy

5,100



7,587



12,687


Gross margin dollars

1,148



2,251



3,399


Gross margin rate

18.4%



22.9%



21.1%








Selling and administrative

1,597



2,933



4,530


Selling and administrative expense as a percentage of total revenues

25.6%



29.8%



28.2%


Depreciation and amortization

51



227



278


Impairment charges

7



11



18


Gain on sales of assets

(120)



(46)



(166)


Total costs and expenses

6,635



10,712



17,347


Operating loss

$

(387)



$

(874)



$

(1,261)








Number of:






Kmart Stores

801





801


Full-Line Stores



676



676


Specialty Stores



26



26


Total Stores

801



702



1,503








Sears Holdings Corporation

Adjusted EBITDA

(Unaudited)







Amounts are Preliminary and Subject to Change







13 Weeks Ended


39 Weeks Ended

millions

October 28,
2017


October 29,
2016


October 28,
2017


October 29,
2016

Net loss attributable to Holdings per statement of operations

$

(558)



$

(748)



$

(565)



$

(1,614)


Income tax expense (benefit)

3



11



(59)



39


Interest expense

136



105



387



289


Interest and investment loss



8



14



25


Operating loss

(419)



(624)



(223)



(1,261)


Depreciation and amortization

89



91



259



278


Gain on sales of assets

(316)



(51)



(1,437)



(166)


Before excluded items

(646)



(584)



(1,401)



(1,149)










Closed store reserve and severance

115



113



319



182


Pension expense

248



72



539



216


Other(1)

18



43



9



52


Amortization of deferred Seritage gain

(19)



(22)



(59)



(66)


Impairment charges

9



3



29



18


Adjusted EBITDA

$

(275)



$

(375)



$

(564)



$

(747)




(1)

The 13-week period ended October 28, 2017 consisted of expenses associated with natural disasters and transaction costs associated with strategic initiatives, while the 39-week period ended October 28, 2017 consisted of items associated with legal matters, expenses associated with natural disasters and transaction costs associated with strategic initiatives. The 13- and 39- week periods ended October 29, 2016 consisted of expenses associated with legal matters, transaction costs associated with strategic initiatives and other expenses.

Sears Holdings Corporation

Adjusted EBITDA

(Unaudited)









Amounts are Preliminary and Subject to Change









13 Weeks Ended


October 28, 2017


October 29, 2016

millions

Kmart

Sears
Domestic

Sears
Holdings


Kmart

Sears
Domestic

Sears
Holdings

Operating loss per statement of operations

$

(78)


$

(341)


$

(419)



$

(262)


$

(362)


$

(624)


Depreciation and amortization

19


70


89



17


74


91


Gain on sales of assets

(132)


(184)


(316)



(30)


(21)


(51)


Before excluded items

(191)


(455)


(646)



(275)


(309)


(584)










Closed store reserve and severance

87


28


115



107


6


113


Pension expense


248


248




72


72


Other(1)

9


9


18




43


43


Amortization of deferred Seritage gain

(3)


(16)


(19)



(4)


(18)


(22)


Impairment charges

3


6


9



3



3


Adjusted EBITDA

$

(95)


$

(180)


$

(275)



$

(169)


$

(206)


$

(375)


% to revenues

(8.1)%


(7.2)%


(7.5)%



(9.0)%


(6.6)%


(7.5)%





39 Weeks Ended


October 28, 2017


October 29, 2016

millions

Kmart

Sears
Domestic

Sears
Holdings


Kmart

Sears
Domestic

Sears
Holdings

Operating income (loss) per statement of operations

$

391


$

(614)


$

(223)



$

(387)


$

(874)


$

(1,261)


Depreciation and amortization

46


213


259



51


227


278


Gain on sales of assets

(808)


(629)


(1,437)



(120)


(46)


(166)


Before excluded items

(371)


(1,030)


(1,401)



(456)


(693)


(1,149)










Closed store reserve and severance

189


130


319



159


23


182


Pension expense


539


539




216


216


Other(1)

(15)


24


9



8


44


52


Amortization of deferred Seritage gain

(9)


(50)


(59)



(13)


(53)


(66)


Impairment charges

11


18


29



7


11


18


Adjusted EBITDA

$

(195)


$

(369)


$

(564)



$

(295)


$

(452)


$

(747)


% to revenues

(4.7)%


(4.5)%


(4.6)%



(4.7)%


(4.6)%


(4.6)%




(1)

The 13-week period ended October 28, 2017 consisted of expenses associated with natural disasters and transaction costs associated with strategic initiatives, while the 39-week period ended October 28, 2017 consisted of items associated with legal matters, expenses associated with natural disasters and transaction costs associated with strategic initiatives. The 13- and 39- week periods ended October 29, 2016 consisted of expenses associated with legal matters, transaction costs associated with strategic initiatives and other expenses.

Sears Holdings Corporation

Adjusted Earnings per Share

(Unaudited)


Amounts are Preliminary and Subject to Change



13 Weeks Ended October 28, 2017



Adjustments


millions, except per share data

GAAP

Pension
Expense

Closed Store
Reserve,
Store
Impairments
and
Severance

Gain on
Sales of
Assets

Amortization
of Deferred
Seritage Gain

Other(1)

Tax
Matters

As
Adjusted

Gross margin impact

$

702


$


$

60


$


$

(19)


$


$


$

743


Selling and administrative impact

1,339


(248)


(55)




(18)



1,018


Depreciation and amortization impact

89



(19)






70


Impairment charges impact

9



(9)







Gain on sales of assets impact

(316)




290





(26)


Operating loss impact

(419)


248


143


(290)


(19)


18



(319)


Income tax expense impact

(3)


(93)


(54)


109


7


(7)


212


171


After tax impact

(558)


155


89


(181)


(12)


11


212


(284)


Diluted loss per share impact

$

(5.19)


$

1.44


$

0.83


$

(1.68)


$

(0.11)


$

0.10


$

1.97


$

(2.64)




(1)

Consisted of expenses associated with natural disasters and transaction costs associated with strategic initiatives.


13 Weeks Ended October 29, 2016



Adjustments


millions, except per share data

GAAP

Pension
Expense

Closed Store
Reserve,
Store
Impairments
and
Severance

Gain on
Sales of
Assets

Mark-to-
Market
Adjustments

Amortization
of Deferred
Seritage
Gain

Other(1)

Tax
Matters

As
Adjusted

Gross margin impact

$

962


$


$

38


$


$


$

(22)


$


$


$

978


Selling and administrative impact

1,543


(72)


(75)





(43)



1,353


Depreciation and amortization impact

91



(2)







89


Impairment charges impact

3



(3)








Gain on sales of assets impact

(51)




16






(35)


Operating loss impact

(624)


72


118


(16)



(22)


43



(429)


Interest and investment loss impact

(8)





9





1


Income tax expense impact

(11)


(27)


(44)


6


(3)


8


(16)


287


200


After tax impact

(748)


45


74


(10)


6


(14)


27


287


(333)


Diluted loss per share impact

$

(6.99)


$

0.42


$

0.69


$

(0.09)


$

0.06


$

(0.13)


$

0.25


$

2.68


$

(3.11)




(1)

Consisted of expenses associated with legal matters, transaction costs associated with strategic initiatives and other expenses.

Sears Holdings Corporation

Adjusted Earnings per Share

(Unaudited)


Amounts are Preliminary and Subject to Change



39 Weeks Ended October 28, 2017



Adjustments


millions, except per share data

GAAP

Pension
Expense

Closed Store
Reserve,
Store
Impairments
and
Severance

Gain on
Sale of
Trade
name

Gain on
Sales of
Assets

Mark-to-
Market
Adjustments

Amortization
of Deferred
Seritage
Gain

Other(1)

Tax
Matters

As
Adjusted

Gross margin impact

$

2,603


$


$

164


$


$


$


$

(59)


$


$


$

2,708


Selling and administrative impact

3,975


(539)


(155)






(9)



3,272


Depreciation and amortization impact

259



(33)








226


Impairment charges

29



(29)









Gain on sales of assets impact

(1,437)




492


794






(151)


Operating loss impact

(223)


539


381


(492)


(794)



(59)


9



(639)


Interest and investment loss impact

(14)






17





3


Income tax benefit impact

59


(202)


(143)


185


298


(6)


22


(3)


174


384


After tax impact

(565)


337


238


(307)


(496)


11


(37)


6


174


(639)


Diluted loss per share impact

$

(5.27)


$

3.14


$

2.21


$

(2.86)


$

(4.62)


$

0.10


$

(0.34)


$

0.06


$

1.62


$

(5.96)




(1)

Consisted of items associated with legal matters, expenses associated with natural disasters and transaction costs associated with strategic initiatives.


39 Weeks Ended October 29, 2016



Adjustments


millions, except per share data

GAAP

Pension
Expense

Closed Store
Reserve,
Store
Impairments
and
Severance

Gain on
Sales of
Assets

Mark-to-
Market
Adjustments

Amortization
of Deferred
Seritage
Gain

Other(1)

Tax
Matters

As
Adjusted

Gross margin impact

$

3,399


$


$

102


$


$


$

(66)


$


$


$

3,435


Selling and administrative impact

4,530


(216)


(80)





(52)



4,182


Depreciation and amortization impact

278



(7)







271


Impairment charges impact

18



(18)








Gain on sales of assets impact

(166)




63






(103)


Operating loss impact

(1,261)


216


207


(63)



(66)


52



(915)


Interest and investment loss impact

(25)





29





4


Income tax expense impact

(39)


(81)


(78)


24


(11)


25


(20)


630


450


After tax impact

(1,614)


135


129


(39)


18


(41)


32


630


(750)


Diluted loss per share impact

$

(15.10)


$

1.26


$

1.21


$

(0.36)


$

0.17


$

(0.39)


$

0.30


$

5.89


$

(7.02)




(1)

Consisted of expenses associated with legal matters, transaction costs associated with strategic initiatives and other expenses.

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SOURCE Sears Holdings Corporation