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SHLDQ: SEARS HOLDINGS: A LOOK AT THE 40 SEARS AND KMART STORE CLOSURES AND OTHER ITEMS

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11-27-18

Summary

Sears is closing 40 stores, including 29 Sears and 11 Kmarts.

The store closure lists are starting to include more Sears locations, many of which are in weak performing malls.

Real estate value of those stores appears limited.

Restructuring information indicates that the proposed going forward stores are still likely far from profitability.

Those stores are modestly positive with four-wall EBITDA, but non-store level SG&A and logistics costs result in massive negative EBITDA still.

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Sears Holdings' (OTCPK:SHLDQ) most recent list of 40 store closures includes 29 Sears locations and 11 Kmart locations. The store closures are starting to tilt more heavily towards Sears now after being predominately Kmart locations in the past. These 40 stores include many locations in low-performance malls and don't look to have much real estate value.

The Stores Being Closed

Below is a list of the 40 stores that Sears most recently announced as closing.

STATE OR TERRITORY CITY STREET ADDRESS CITY Kmart/Sears
AK Fairbanks Airport Way Fairbanks Sears
AZ Phoenix 4604 E Cactus Road Phoenix Sears
CA Santa Barbara La Cumbre Plz Santa Barbara Sears
CA Temecula 26471 Ynez Road Temecula Kmart
CT Meriden 470 Lewis Ave Meriden Sears
FL Boynton Beach 801 N Congress Ave Boynton Beach Sears
FL Jensen Beach 3342 Nw Federal Hwy Us#1 Jensen Beach Sears
ID Idaho Falls 2300 E 17Th St Idaho Falls Sears
IL Chicago 3443 W Addison Chicago Kmart
IL Springfield 3250 Clear Lake Road Springfield Kmart
IN Michigan City Marquette Mall Michigan City Sears
MD Bethesda 7103 Democracy Blvd. Bethesda Sears
ME Waterville 18 Elm Plaza Waterville Kmart
MI Battle Creek 5575 B Drive N Battle Creek Sears
MS Meridian 1740 Bonita Lakes Circle Meridian Sears
MS Tupelo 1001 Barnes Crossing Road Tupelo Sears
NC Winston Salem 3320 Silas Creek Pkwy Winston Salem Sears
NE Grand Island 3404 W 13Th St Grand Island Sears
NV Las Vegas 4355 Grand Canyon Dr Las Vegas Sears
NY Huntington 805 New York Ave Huntington Kmart
NY Saratoga Spgs 3065 Route 50 Saratoga Spgs Sears
NY Watertown 21182 Salmon Run Mall Watertown Sears
OH Piqua 987 E Ash St Piqua Sears
PA North Versailles 1901 Lincoln Hwy North Versailles Kmart
PA Philadelphia 7101 Roosevelt Blvd Philadelphia Kmart
PA Reading / Wyomissing 1665 State Hill Road Reading / Wyomissing Sears
PA Stroudsburg 344 Stroud Mall Stroudsburg Sears
Puerto Rico Caguas Betamces 400, Las Catalinas Mall Caguas Kmart
Puerto Rico Guaynabo / San Juan 100 Ave. San Patricio Guaynabo / San Juan Kmart
Puerto Rico San German Castro Perez Ave (Pr 122) San German Kmart
SC Rock Hill 2197 Dave Lyle Blvd Rock Hill Sears
TN Chattanooga 401 Northgate Mall Chattanooga Sears
TN Maryville 198 Foothills Mall Maryville Sears
TN Memphis Southland Mall Memphis Sears
TN Murfreesboro 1720 Old Fort Pkwy Murfreesboro Sears
TX El Paso 750 Sunland Park Dr El Paso Sears
TX Longview Longview Texas Mall Longview Sears
VA Glen Allen / Richmond 10101 Brook Road Glen Allen / Richmond Sears
WI Cudahy 6077 S Packard Avenue Cudahy Kmart
WI Janesville 2500 Milton Ave Janesville Sears

Most of the Sears/Kmart locations being closed appear to have low real estate values. The Sears locations in question are generally in malls owned by weaker REITs such as CBL (NYSE:CBL) and Washington Prime Group (NYSE:WPG) or are in some of the worst performing malls of a stronger REIT such as Macerich (NYSE:MAC).

For example, there are three Sears stores on this list in Macerich malls (Paradise Valley Mall, Wilton Mall, and La Cumbre Plaza). The first two malls do under $300 per square foot in sales, ranking them near the very bottom of Macerich's portfolio. La Cumbre Plaza is better at $481 per square foot, but that still is in the bottom half of Macerich's malls.

There also appears to be three Sears stores in CBL malls and three in Washington Prime Group malls on the list. The best location on the list appears to be at Westfield Montgomery, which did over $800 per square foot in sales, but Sears already monetised that location last year. Sears has already monetised most of its best locations, so we are left with a high proportion of properties that have no value (if leased) or a modest amount of value (if owned).

One example of this is the Sears location at Virginia Center Commons (in Glen Allen). Sears owns its building at the mall, but the main portion of the mall only sold for $9 million in 2017. This points to a low-single-digit million value for the Sears location.

EBITDA And Smaller Store Base

In other news, Docket 729 appears to reinforce my belief that Sears can't realistically achieve profitability with a smaller store base.

Docket 729 indicates that a set of 505 stores (designated as going concern stores at the time) reported $43.8 million in 4-wall EBITDA between March and August 2018. Based on year-over-year decline trends, these stores were projected to have $27.3 million in 4-wall EBITDA between November 2018 and February 2019. Thus, these are stores that may have $100 million or less in 4-wall EBITDA over a full year at the moment.

Non-store level SG&A and logistics is estimated to be around $1.06 billion per year even after some planned headcount reductions of around 1,000 employees.

Other items (including cash discounts from vendors, Sears Auto, and Shop Your Way) may add around $280 million per year to EBITDA. This would put Sears' EBITDA at around negative $680 million per year with 505 stores and the aforementioned headcount reduction. This doesn't include the impact of additional rent from selling owned locations to generate liquidity and pay down debt. The additional rent may result in Sears' EBITDA ending up closer to negative $800 million per year in this scenario.

It doesn't appear that credit card income from Citi (NYSE:C) is included in the above numbers. J.C. Penney's (NYSE:JCP) credit card income was expected to be around $275 million for 2018, so if Sears' credit card income is similar, its EBITDA would be around negative $525 million after factoring that in.

Credit Card Value

I think any discussion about potentially monetising Sears' credit card income stream only matters in a liquidation scenario. As shown above, losing the credit card income would take away a few hundred million per year from a company that is already losing a huge amount of money. That is not compatible with continued operations.

As for the value of the credit card income stream in a liquidation scenario, Sears Canada (OTCPK:SRSCQ) received approximately 2x annual credit income when JPMorgan Chase (NYSE:JPM) terminated the credit card agreement and sold the portfolio to Scotiabank. A similar multiple would translate into potentially $550 million for Sears Holdings if its credit card income is around $275 million per year.

That payment was built into Sears Canada's agreement with JPMorgan Chase in the event of a termination of the agreement and subsequent sale of the credit card portfolio. It is uncertain what terms are in the agreement between Sears Holdings and Citi, although a valuation of somewhere around 2x to 3x current credit card income seems reasonable in a liquidation scenario given the effect the store closures would have on credit card income going forward.

Conclusion

Sears is starting to close more Sears locations now after closing primarily Kmart locations in the past. The most recent set of store closures involves many locations in weaker performing malls and appears unlikely to involve much real estate value.

Other information from Sears' restructuring case indicates that it is unlikely that the set of proposed go-forward stores can come close to profitability. They have only modestly positive four-wall EBITDA, which turns substantially negative once non-store level SG&A and logistics are factored in.

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https://seekingalpha.com/article/4224728-sears-holdings-look-40-sears-kmart-store-closures-items?dr=1