Despite every appearance to the contrary, Sears Holdings (NASDAQOTH:SHLDQ) chairman and CEO Eddie Lampert pinky swears he is not getting rid of the Kmart chain. He says such talk is irresponsible and likely a conspiracy created by those who want to undermine the retailer's prospects as a means of profiting from its fall.
Earlier this summer, employees fretted that a new inventory management program Kmart was implementing indicated the retailer was prepping for a liquidation sale. It was moving all of its stock out of the backrooms and putting it on store shelves, causing employees to fear they would soon be out of a job.
In a blog post of his own, Kmart's president and head of retail, Gareth Glynne, said the shelf-stocking practice wasn't an indication the store was going out of business but rather a way to deliver a "WOW" experience for the customer who would not only find shelves full but employees on the floor ready to help them.
Yet despite the reassurance, the concerns expressed by the employees did seem to be validated when Sears said it would be closing 64 underperforming Kmart stores within the next year, including 17 owned by real estate investment trust Seritage Growth Properties, on top of some 68 Kmarts slated for closing earlier in the year.
A sprawling footprint
Of course, as Lampert points out, Kmart still operates more than 700 Kmart stores, and while the closings amount to about 15% of the total number, Sears still has a broad footprint in operation.
Lampert goes on to say that quite a number of Kmarts are profitable, and he is working to make the others equally so, but if they cannot turn a profit, then they will be closed. At the end of the day, he "expect(s) to end up with a large chain of stores."
Perhaps, but Sears and Kmart continue to swirl down the drain. A second quarter earnings report showed net sales slumping 9% from last year as it closed more stores, and sales at existing stores continued to decline. Sears has failed to record a single quarter of rising comps for 11 years straight.
Comparable sales are an important retail metric, because they largely strip out any growth that might occur simply from opening new locations -- they are seen as a more organic measure of a retailer's health.
Net losses continued to grow, hitting $395 million, or $3.70 per share in the period, a dramatic U-turn from the $208 million profit, or $1.84 per share, the company logged a year ago.
Lending a helping hand
Sears' declining prospects forced Lampert to step in yet again and loan the retailer even more money to keep it afloat. In August, he lent the retailer $300 million through his hedge fund, ESL Investments, which will be secured by a junior lien against Sears inventory, receivables, and other working capital, with the possibility of offering to "third party investors the right to participate in up to an additional $200 million of debt financing on the same terms and conditions."
Over the past year or so, Sears has needed several bailouts to keep its doors open as sales dwindle. Lampert might have taken the step to plug Sears' leaky boat early so that vendors wouldn't get spooked again as the retailer enters the important Christmas sales season. Last year, Sears got a $400 million loan to push through the holidays and keep suppliers from bolting.
It's true that Lampert has invested heavily in online and digital initiatives like the Shop Your Way loyalty program, and he does have significant personal resources tied up in the company. But that doesn't mean it has been successful, and investors should take the CEO at his word that he'll close down unprofitable stores, because that's likely what we'll see him doing more of in the quarters ahead.