Transformation Update & Financial Results. Q Earnings May 31, 2018

Transcription

1 Transformation Update & Financial Results Q Earnings May 31, 2018

2 Cautionary Statement Regarding Forward-Looking Information This presentation contains forward-looking statements intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995, including, but not limited to, statements about our ability to enhance our financial flexibility and liquidity to successfully fund our transformation, our ability to achieve cost savings initiatives, vendors lack of willingness to do business with us or to provide acceptable payment terms or otherwise restricting financing to purchase inventory or services, our ability to effectively compete in a highly competitive retail industry, our ability to successfully implement our integrated retail strategy to transform our business into a member-centric retailer, our ability to successfully manage our inventory levels, initiatives to improve our liquidity through inventory management and other actions, the process being overseen by a special committee of our board of directors to explore the sale of certain assets, and other statements that describe the Company s plans. Whenever used, words such as will, expect and other terms of similar meaning are intended to identify such forward-looking statements. Forward-looking statements, including these, are based on the current beliefs and expectations of our management and are subject to significant risks, assumptions and uncertainties, many of which are beyond the Company s control, that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Detailed descriptions of other risks relating to Sears Holdings are discussed in our most recent Annual Report on Form 10-K and other filings with the Securities and Exchange Commission. While we believe that our forecasts and assumptions are reasonable, we caution that actual results may differ materially. We intend the forward-looking statements to speak only as of the time made and do not undertake to update or revise them as more information becomes available, except as required by law. 2

3 Non-GAAP Financial Measures In addition to our net income (loss) attributable to Sears Holdings' shareholders determined in accordance with Generally Accepted Accounting Principles ("GAAP"), for purposes of evaluating operating performance, we use Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA"). Adjusted EBITDA is computed as net income (loss) attributable to Sears Holdings Corporation appearing on the Condensed Consolidated Statements of Operations excluding income taxes, interest expense, interest and investment income (loss), other loss, depreciation and amortization and gain on sales of assets. In addition, it is adjusted to exclude certain significant items as set forth below. Our management uses Adjusted EBITDA to evaluate the operating performance of our businesses, as well as executive compensation metrics, for comparable periods. Adjusted EBITDA should not be used by investors or other third parties as the sole basis for formulating investment decisions as it excludes a number of important cash and non-cash recurring items. While Adjusted EBITDA is a non-gaap financial measurement, management believes that it is an important indicator of ongoing operating performance, and useful to investors, because: Adjusted EBITDA excludes the effects of financings and investing activities by eliminating the effects of interest and depreciation costs; Management considers gains/(losses) on the sale of assets to result from investing decisions rather than ongoing operations; and Other significant items, while periodically affecting our results, may vary significantly from period to period and have a disproportionate effect in a given period, which affects comparability of results, including impairment charges related to fixed assets, closed store and severance charges, amortization of the deferred Seritage gain, items associated with an insurance transaction, natural disasters and transaction costs associated with strategic initiatives. We have adjusted our results for these items to make our statements more comparable and therefore more useful to investors as the items are not representative of our ongoing operations and reflect past investment decisions. See the appendix for reconciliations of the differences between the non-gaap financial measures used in this presentation with the most comparable financial measures calculated in accordance with GAAP. 3

4 Key Strategic Priorities Improve our financial performance and enhance our liquidity position Unlock the value and earnings potential of our businesses and brands Transform the Company by expanding our Shop Your Way ecosystem through new partnerships and innovative ways to engage and reward our members Offer our members a uniquely tailored, integrated retail experience 4

5 Q Performance and Highlights Financial Results $ in millions Q Q Total Revenues $2,891 $4,199 Comp Store Sales (11.9)% (11.9)% Gross Margin $605 $931 Gross Margin Rate 20.9% 22.2% SG&A Expenses $906 $1,221 Net Income (Loss) $(424) $245 Adjusted EBITDA $(225) $(220) Highlights and Items of Note Store closures contributed to nearly two thirds of the decline in total revenues as we continue to focus on our Best Stores and the right sizing of our store base While total comparable store sales declined 11.9% for Q1 2018, comparable store sales increased at both Sears and Kmart in several categories, including apparel, footwear, and jewelry Reduction in SG&A as a result of restructuring initiatives taken in 2017 and actions taken in 2018 as a result of previously announced $200 million cost savings initiative 5

6 Financial Progress on Our Transformation Proactive Steps to Address Our Capital Structure Strengthening Balance Sheet Enhancing Liquidity and Financial Flexibility Optimizing Cost Structure Creating Value From Our Assets Completed private exchange offers and various amendments to existing debt agreements to reduce cash interest expenses and extend maturity dates Repaid $300 million on the Term Loan due 2019 Executed agreement to reduce insurance liabilities and related letters of credit outstanding Raised nearly $710 million in financing under Secured and Mezzanine Loan facilities and FILO loan $407 million of proceeds to be contributed to Sears pension plans Received $425 million from Citi in conjunction with the extension of our long-term agreement (1) Progress on achieving $200 million of annualized cost savings Right sizing of store footprint and continued focus on Best Stores, resulting in strategic closures of non-profitable stores Nearly $290 million of proceeds from real estate sales in Q1 with a majority of the proceeds used to pay down real estatebacked loans Continued to evaluate strategic options across our portfolio to unlock value from our brands and businesses Areas of Continued Focus to Drive Profitability and Strategic Actions Underway Exploring additional opportunities to streamline operations and adjust inventory and operating expenses, while staying focused on Best Members, Best Categories and Best Stores Special Committee of the Company s Board of Directors initiated a formal process to explore the sale of (i) the Kenmore brand and related assets, (ii) the Sears Home Improvement Products business of the Sears Home Services division and (iii) the Parts Direct business of the Sears Home Services division (1) Subsequent to quarter end 6

7 Operational Progress on Our Transformation Q Initiatives Broadening the Reach and Recognition of Our Brands Other Strategic Partnerships Expansions Innovative collaboration with Amazon.com, making Sears Auto the first nationwide auto service to offer Amazon customers convenient ship-tostore tire solutions (including DieHard) (1) Strategic partnership with GasBuddy, whose Pay with GasBuddy gasoline payment service entitles users to a discount on nearly every gallon of gas they pump Strategic partnership with Truxx, to provide members with unique incentives when they access the innovative trucksharing platform Announced long-term extension of co-brand and private label credit card relationship with Citi (1) Expanded LEASE IT program, to become the only national full-service retailer to offer a full assortment of products to lease both online and in-store Expanded exclusive apparel lines with celebrity brand icon Jaclyn Smith Focus on Serving Our Members Through Shop Your Way and Integrated Retail Best Members: Improvements in member engagement driven by expansion in SYW usage, SYW Points, and FREECASH as well as introduction of new partners Best Categories: Third-party partnerships involving several of our businesses; improvements in Apparel performance Best Stores: Further momentum around new store formats that blend brick & mortar and online retail; continued strong performance in Puerto Rico fueled by cross-merchandising of Sears and Kmart products and expansion into new categories (1) Subsequent to quarter end 7

8 Q Financial Position and Liquid Assets Enhanced Liquidity and Financial Flexibility Approximately $457 million in cash, availability on credit facility, and availability under the short-term borrowing basket as of the end of Q Amounts in millions Q Pro Forma Q (1) Q Cash and cash equivalents $186 $186 $182 Net availability on Credit Facility (2) Availability under Short-Term Borrowing Basket (3) Total Liquid Availability $457 $857 $353 Total long-term debt, including current portion of long-term debt and capital lease obligations, was approximately $3.5 billion at May 5, On a pro forma basis, availability to borrow under our credit revolving credit facility would have been $420 million assuming the cash received from the Citi agreement. (1) Pro forma amounts reflect $400 million of net cash flow received from Citi on May 18, (2) Reflects effect of springing fixed charge coverage ratio covenant and borrowing base level. (3) The short-term borrowing basket provides the ability to borrow with maturities inside of the ABL Maturity of July The short-term borrowing basket can be paid down and re-borrowed as desired. Availability on the short-term borrowing basket for Q is stated as $1.25 billion less $187 million of real estate loans outstanding, $140 million of incremental real estate loans outstanding, $570 million of Line of Credit loans outstanding under the Second Lien Credit Agreement and $102 million of Secured Loans outstanding. 8

9 Key Takeaways Focusing on enhanced financial performance and progress on transformation Strengthening our balance sheet through proactive capital structure and liquidity initiatives Continuing to drive improvements while executing against our strategy of focusing on our Best Members, Best Categories and Best Stores Accelerating our transformation to a member-centric provider of services and products Our leadership team and associates remain fully committed to returning Sears Holdings to profitable growth 9

10 Appendix 10

11 Amount in millions Q Revenue Changes $4,199 Revenue declined 14.4% on a comparable basis, including the impact of both store and non-store sales (1) $(488) $3,379 Q1 Comp Store Sales Kmart (9.5)% Sears Domestic: (13.4)% Total Domestic (1) : (11.9)% $(820) $(284) $2,891 $(204) Q As Reported Closed Stores Q Comp Basis Comp Store Sales (1) Comp Non-Store Sales (2) Q As Reported (1) Comparable store sales amounts include sales for all stores operating for a period of at least 12 full months (including remodeled and expanded stores, but excluding store relocations and stores that have undergone format changes), as well as sales from sears.com and kmart.com shipped directly to customers and have been adjusted for the change in the unshipped sales reserves recorded at the end of each reporting period. (2) Comp Non-Store Sales represents revenue from ongoing business operations not directly associated with a store, as well as revenue from our ongoing relationships with Sears Hometown and Outlet Stores, Inc. and Lands End. Note, the majority of the Comp Non-Store Sales decline is attributed to reduced revenue from Sears Hometown and Outlet Stores, Inc. 11

12 Amount in millions Q Gross Margin Changes $931 Gross margin declined 24.5% on a comparable basis and gross margin rate declined by 280 bps $(196) $16 $801 $(146) $(116) $605 $(80) Q As Reported Closed Store Impact (1) Other Q Comp Basis Volume Rate Q As Reported (1) Primarily consists of non-cash reserves, additional Seritage/JV rent expense of $32 million and $45 million, respectively in Q and Q1 2017, and amortization of deferred Seritage gain. 12

13 Amount in millions Q Expense Changes SG&A expenses declined 26.3% on a comparable basis $1,221 $9 $1,230 $(324) $906 Broader Reduction $4.0B since 2012 Q As Reported (1) Non-Operating Q Comp Basis Expense Increase Expense Decrease SG&A Q As Reported (1) Consists of closed store reserves and severance as well as items associated with an insurance transaction, natural disasters and transaction costs. 13

14 Consolidated Results Q First Quarter millions, except per share data Revenues $ 2,891 $ 4,199 Net income (loss) attributable to Holdings' shareholders $ (424) $ 245 Net income (loss) per diluted share attributable to Holdings' shareholders $ (3.93) $ 2.29 Adjusted EBITDA $ (225) $ (220) 14

15 Reconciliation of Adjusted EBITDA to GAAP Q First Quarter millions Net income (loss) attributable to Holdings per statement of operations $ (424) $ 245 Income tax expense (benefit) 9 (72) Interest expense Interest and investment (income) loss (1) 2 Other loss Operating income (loss) (217) 349 Depreciation and amortization Gain on sales of assets 165) (741) Impairment charges Before excluded items (301) (290) Closed store reserve and severance Other (1) Amortization of deferred Seritage gain (18) (21) Adjusted EBITDA $ (225) $ (220) (1) The 13-week period ended May 5, 2018 consisted of items associated with an insurance transaction and natural disasters, while the 13-week period ended April 29, 2017 consisted of transaction costs associated with strategic initiatives. 15

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