Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of Sears Holdings (NASDAQOTH:SHLDQ) jumped on Wednesday after the company announced the formation of a real estate investment trust, Seritage Growth Properties, that will buy 254 of the company's Sears and Kmart stores. After jumping more than 11% at the open, shares of Sears had settled down to a 3.5% gain by 12:20 p.m.
So what: Sears has been struggling over the past few years, and by selling some of its stores to this newly created REIT, the company will get a badly needed cash infusion. Sears expects to raise in excess of $2.5 billion from the sale, an amount that would shore up the balance sheet and give the company more time to turn things around.
After selling the stores, Sears will lease them back from Seritage and continue to operate them. Seritage will raise money through a rights offering, where existing Sears shareholders will have the right to purchase a number of shares based on their ownership of Sears stock. Sears CEO Edward Lampert, who owned nearly 50% of the company at the end of last year, intends to exercise his rights in full, according to the company's press release.
Now what: This deal buys Sears some time. The company has reported a negative free cash flow in every year since 2010, and profitability has been deteriorating. In 2014, Sears posted a free cash flow of negative $1.66 billion.
The balance sheet is in rough shape as well. Sears had just $250 million in cash at the end of January, with total debt sitting at about $3.8 billion. The $2.5 billion from the sale of its stores should give the company an additional couple of years to turn around its business. This may just be delaying the inevitable, however, as there has yet to be any sign that things are getting better at Sears.