Transformation Update & Financial Results. Q Earnings September 13, 2018

Size: px

Start display at page:

Download "Transformation Update & Financial Results. Q Earnings September 13, 2018"

Vernon Waters
5 years ago
Views:

1 Transformation Update & Financial Results Q Earnings September 13, 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 effectively and timely execute financing and asset sale transactions and other actions 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 membercentric 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, including the result of any required vote of a majority of the disinterested stockholders of the Company, 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 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 full potential and value of our business and its assets 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 $3,182 $4,278 Comp Store Sales (3.9)% (11.5)% Gross Margin $702 $972 Gross Margin Rate 22.1% 22.7% SG&A Expenses $864 $1,123 Net Loss $(508) $(250) Adjusted EBITDA $(112) $(66) Highlights and Items of Note Store closures were a major contributor to the year-over-year decline in revenue. Comparable store sales decline of 3.9% for Q Significant improvement over the double digit declines of the last several quarters. Months of July and August had positive comparable store sales of 3.0% and 2.5%, respectively. There were positive comparable store sales in several categories, including apparel, footwear and jewelry. Experienced year-over-year margin rate declines due to increased investment in Shop Your Way and additional streamlining of inventory. Reduction in SG&A continues to be driven by restructuring initiatives undertaken in 2017 and actions pursued in 2018 as a result of the 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 Entered into Consolidated Loan Agreement that provided an additional $186 million of liquidity and extended maturities of nearly $325 million of loans to July 2020 Repaid all loans outstanding under 2016 Real Estate Loan Facility Paid down remaining balance of $95 million of the Term Loan 1 Executed amendments to credit and loan agreements creating additional liquidity, allowing the company to incur an aggregate of $125 million in additional Mezzanine borrowings Received $425 million from Citi in conjunction with the extension of our long-term agreement Progress on achieving $200 million of annualized cost savings; additional initiatives expected to achieve additional $100 million of annualized cost savings Simplify and implement organizational structure changes, while staying focused on Best Members, Best Categories and Best Stores Right-sizing our store footprint to a base that we can operate profitably and from which we can generate sales growth 1 Subsequent to Q

Creating Value From Our Assets Taken together, these actions will help extend our runway as we continue to work to transform the Company Enhancing Liquidity by Monetizing Properties Generated nearly

financing secured by real estate properties, including properties released from the ring-fence arrangement with the Pension Benefit Guaranty Corporation ( PBGC ) 1 Entered into additional amendments

7 Creating Value From Our Assets Taken together, these actions will help extend our runway as we continue to work to transform the Company Enhancing Liquidity by Monetizing Properties Generated nearly $440 million of proceeds from real estate sales during the first half of fiscal 2018, with a majority of the proceeds used to pay down real estate-backed loans Executed an additional $75 million of financing secured by real estate properties, including properties released from the ring-fence arrangement with the Pension Benefit Guaranty Corporation ( PBGC ) 1 Entered into additional amendments to the Credit Agreement and Mezzanine Loan Agreement pursuant to which the Company borrowed an additional $113 million as a Secured Loan and extended the maturity of the aggregate principal amount of the Secured Loan outstanding under the Credit Agreement to August 30, Exploring Strategic Initiatives Continued to evaluate strategic options across our portfolio to unlock value from our brands and businesses Special Committee of the Company s Board of Directors continues 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 Q

8 Operational Progress on Our Transformation Q Initiatives Broadening the Reach and Recognition of Our Brands Pursuing Other Strategic Partnerships Expanding Offerings Focusing on Best Stores Expanded innovative Sears Auto Center tire installation program with Amazon.com; added ship-to-store tire solution to 71 stores, bringing the total to 118 stores Rolled out a fully integrated marketing campaign supporting The MOREs of Kenmore to highlight all the outstanding offers available to members who purchase Kenmore products Launched Shop Your Way Hotels partnership with Rocketmiles, giving members exclusive access to reserve rooms at 400,000+ hotels around the world and an average of $50 CASHBACK in Shop Your Way points for each booking Partnering with Salvation Army to support relief efforts in Puerto Rico Announced long-term extension of co-brand and private label credit card relationship with Citi Expanded online marketplace to add top brands and popular products, including floor care products from ihoover, Dirt Devil, and Oreck; Dockers; G.H. Bass; and Lucky Brand, as well as precious metals Identified 46 unprofitable stores that will be closing in November 2018 (1) Continued taking steps to enhance the in-store experience for members Focus on Serving Our Members Through Shop Your Way and Integrated Retail Best Members: Continue to seek additional ways to enhance our SYW ecosystem to drive improvements in value and experience for our members and increase the frequency of their engagement Best Categories: Strength in apparel, footwear and jewelry again drove positive comparable store sales Best Stores: Further momentum around new smaller store formats that blend brick & mortar and online experiences (1) Subsequent to quarter end 8

Q2 2018 Financial Position and Liquid Assets Enhanced Liquidity and Financial Flexibility Approximately $941 million in cash, availability on credit facility and availability under the short-term

9 Q Financial Position and Liquid Assets Enhanced Liquidity and Financial Flexibility Approximately $941 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 $193 $193 $186 Net availability on Credit Facility (2) Availability under Short-Term Borrowing Basket (3) Total Liquid Availability $941 $1,129 $457 Total long-term debt, including current portion of long-term debt and capital lease obligations, was approximately $3.7 billion as of August 4, (1) Pro Forma amounts reflect $171 million of net proceeds received subsequent to quarter-end from additional financing transactions executed. (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 $570 million of Line of Credit loans outstanding under the Second Lien Credit Agreement and $30 million of Secured Loans outstanding. 9

10 Key Takeaways Leadership team and associates are working hard to transform Sears Holdings and enhance our financial performance Encouraged by improved comparable store sales trend experienced in the second quarter Rightsizing our store footprint to create a base from which we can operate profitably and generate sales growth Enhancing the shopping experience for our members through our Integrated Retail Strategy and Shop Your Way Taking proactive steps to enhance liquidity and optimize our cost structure to extend runway for transformation Continuing to leverage assets to create value while focusing on our Best Members, Best Categories and Best Stores 10

11 Appendix 11

12 Amount in millions Q Revenue Changes $4,278 Revenue declined 7.9% on a comparable basis, including the impact of both store and non-store sales (1) $(272) Q2 Comp Store Sales $3,454 Kmart (3.7)% Sears Domestic: (4.0)% Total Domestic (1) : (3.9)% $(824) $(92) $3,182 $(180) 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

13 Amount in millions Q Gross Margin Changes $972 Gross margin declined 16.4% on a comparable basis and gross margin rate declined by 230 bps $58 $840 $(138) $(190) $(66) $702 $(72) 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 $29 million and $44 million, respectively in Q and Q2 2017, and amortization of deferred Seritage gain. 13

14 Amount in millions Q Expense Changes SG&A expenses declined 23.6% on a comparable basis $1,123 $8 $1,131 $(267) $864 Broader Reduction $4.3B 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 a natural disasters, transaction costs and legal matters. 14

Consolidated Results Q2 2018 Second Quarter Year to Date millions, except per share data 2018 2017 2018 2017 Revenues $ 3,182 $ 4,278 $ 6,073 $ 8,477 Net loss attributable to Holdings'

15 Consolidated Results Q Second Quarter Year to Date millions, except per share data Revenues $ 3,182 $ 4,278 $ 6,073 $ 8,477 Net loss attributable to Holdings' shareholders $ (508) $ (250) $ (932) $ (5) Net loss per diluted share attributable to Holdings' shareholders $ (4.68) $ (2.33) $ (8.61) $ (0.05) Adjusted EBITDA $ (112) $ (66) $ (337) $ (286) 15

16 Reconciliation of Adjusted EBITDA to GAAP Q Second Quarter Year to Date millions Net loss attributable to Holdings per statement of operations $ (508) $ (250) $ (932) $ (5) Income tax expense (19) 10 (10) (62) Interest expense Interest and investment (2) 12 (3) 14 Other loss Operating income (loss) (202) 141 (419) 490 Depreciation and amortization Gain on sales of assets (103) (380) (268) (1,212) Impairment charges Before excluded items (162) (151) (463) (441) Closed store reserve and severance Other (1) 2 (24) 20 (9) Amortization of deferred Seritage gain (16) (19) (34) (40) Adjusted EBITDA $ (112) $ (66) $ (337) $ (286) (1) The 13- week period ended August 4, 2018 consisted of items associated with natural disasters, as well as transactions costs associated with strategic initiatives, while the 26- week period ended August 4, 2018 consisted of items associated with an insurance transaction and natural disasters, as well as transaction costs associated with strategic initiatives. The 13- and 26- week periods ended July 29, 2017 consisted of items associated with legal matters and transaction costs associated with strategic initiatives. 16

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

Transformation Update & Financial Results Q1 2018 Earnings May 31, 2018 Cautionary Statement Regarding Forward-Looking Information This presentation contains forward-looking statements intended to qualify