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