Generlaissimo Fransisco Franco took less time to die……
So, I guess since maybe a day or so after the Sears/Kmart merger critics have been saying it is doomed to fail. Well, here we are just over 5 years later and not only is Sears NOT dead, it would seem to be well, about to prove the critics wrong, um, yet again?!?.
Couple of items:
Sears Holdings Corporation (Nasdaq: SHLD) announced that we entered into agreements to purchase or cause a wholly-owned subsidiary to purchase a total of 18,660,880 common shares of Sears Canada Inc. at a price of C$30.00 per share from Pershing Square, L.P., Pershing Square II, L.P. and Pershing Square International, Ltd. The acquisition is scheduled to close on April 27, 2010. The common shares to be acquired represent approximately 17.3% of the outstanding shares of Sears Canada. As a result of these agreements, we beneficially own an additional 18,660,880 common shares and now beneficially own 97,341,670 common shares, representing approximately 90.4% of the outstanding shares of Sears Canada. The purchases are being made as we consider them to be an attractive investment.
The purchases are being made in compliance with the private agreement exemption contained in section 100.1(1) of the Securities Act (Ontario) and section 4.2 of Multilateral Instrument 62-104, as the price does not exceed the maximum amount payable under such exemption and the purchases are being made from not more than five vendors.
In connection with this transaction, we are also providing the following financial update.
Comparable Store Sales and Earnings Outlook
For the quarter-to-date (“QTD”) period through April 21, 2010 comparable store sales for our Kmart and Sears stores were as follows:
QTD
Kmart- +3.2%
Sears Domestic- +0.3%
Total- +1.7%Kmart’s QTD comparable store sales benefited from increases in apparel, home and toys categories. Sears Domestic’s comparable store sales reflect increased sales of home appliances which benefited from the launch of new Kenmore products and a federally funded stimulus program to encourage customers to replace less energy efficient appliance products, offset by lower sales in the tools and home electronics categories.
We currently expect net income attributable to Holdings’ shareholders for the quarter ending May 1, 2010 will be between $0 and $35 million, or between $0.00 and $0.31 per diluted share. In the first quarter of the prior year, we reported net income attributable to Holdings’ shareholders of $26 million, or $0.21 per diluted share.
Financial Position
We currently expect to end the quarter with approximately $1.8 billion in cash balances (of which approximately $500 million will be domestic and $1.3 billion will be Sears Canada).
Short-term borrowings (consisting of commercial paper and borrowings under our revolving credit facility) are expected to be approximately $500 million at May 1, 2010, up from our year-end balance of $325 million but below last year’s first quarter balance of $839 million. The expected short-term borrowings exclude the effects of the $560 million purchase of Sears Canada shares noted above.
During the first quarter through April 22, 2010, we repurchased approximately 12,000 common shares at a total cost of $1 million (or $88.76 per share) under our share repurchase program. As of April 23, 2010, we had remaining authorization to repurchase $581 million of common shares under the previously approved programs.
Adjusted EBITDA
The Company expects to report total Adjusted EBITDA (consisting of Kmart, Sears Domestic and Sears Canada segments) of $290 to $350 million in the current quarter as compared to Adjusted EBITDA of $359 million in the prior year quarter. During the quarter we incurred an incremental $40 million of expenses building our multi-channel capabilities and Shop Your Way Rewards program.
The current year expected Adjusted EBITDA range contemplates:
- expected operating income of $85 to $130 million;
- plus expected depreciation expense of $215 to $230 million;
- less gains on sales of assets of $42 million;
- plus expected domestic pension expense of $26 million;
- plus expected closed store / severance costs of $6 million.
So, doesn’t really look like a company about to go under….actually, given the retail environment, looks pretty darn good. Lampert’s patience with the Sears Canada situation is about to be rewarded as he now will have over 90% of a VERY strong retailer in Canada.
Sears still has a balance sheet that ranks easily in the upper tiers of the retail industry.
Perhaps that is why Fitch Ratings said 3/31 it upgraded its ratings of Sears on improved credit metrics, strong cash flow and a liquidity position backed by collateral. Fitch raised its long-term issuer default rating on Sears to BB- from B+. The outlook is stable.
Now, before we start doing victory laps, this is only one quarters SSS increase. Should the next Q disappoint, we are back to where we were. But, if Q2 comes in strong again, then people may begin to get excited again. Just speaking for the locals\ mall here, the Sears at Solomon Pond Mall has had its parking lot packed for the last 5 months (we pass it several times a week on the way to hockey), that is a stark change from last spring summer.
Let’s not forget Sears short interest. At current levels, the shorts would need 13 days to cover their positions. ANY short squeeze in Sears would be extremely painful event for the shorts and one in which shareholders would not soon stop celebrating. It should be noted that the total shares short has fallen roughly 40% since last November. Even this number ought to tell us something. Those covering shorts since November have help goose the stock ~75% since then. Imagine what we would see if they were forced to do it in a couple weeks vs 6 months? Boom…..