Sears and Kmart stores to close due to declining sales

Sears Holdings Corporation reported that it would close up to 120 of its Sears and Kmart stores as it goes through a transformation.

Both Kmart and Sears stores have seen serious drops in the quarter over quarter numbers and year over year financials:

The declines have been blamed on reduced demand for appliances, electronics and apparel, but the company is using tax strategies to prevent it from taking a realized loss.

Due to our performance in 2011 we expect that we will record in the fourth quarter a non-cash charge related to a valuation allowance on certain deferred tax assets of $1.6 to $1.8 billion.  Although a valuation adjustment is recognized on these deferred tax assets, no economic loss has occurred as the underlying net operating loss carryforwards and other tax benefits remain available to reduce future taxes to the extent income is generated.  Further, we may recognize in the fourth quarter an impairment charge on some goodwill balances for as much as $0.6 billion.  These charges would be non-cash and combined are estimated to be between $1.6 and $2.4 billion.

In order to transform the Sears retail network into something more competitive, the retail giant will be taking several steps:

• Close 100 to 120 Kmart and Sears Full-line stores.  We expect these store closures to generate$140 to $170 million of cash as the net inventory in these stores is sold and we expect to generate additional cash proceeds from the sale or sublease of the related real estate.  Further, we intend to optimize the space allocation based on category performance in certain stores.  Final determination of the stores to be closed has not yet been made.  The list of stores closing will be posted at www.searsmedia.com when final determination is made.
• Excluding the effect of store closures, we currently expect to reduce 2012 peak domestic inventory by $300 million from the 2011 level of $10.2 billion at the end of the third quarter as a result of cost decreases in apparel, tighter buys and a lower inventory position at the beginning of the fiscal year.
• Focus on improving gross profit dollars through better inventory management and more targeted pricing and promotion.

Sears is also modifying its long-held policy of keeping even marginal stores open:

Reduce our fixed costs by $100 to $200 million. While our past practice has been to keep marginally performing stores open while we worked to improve their performance, we no longer believe that to be the appropriate action in this environment.  We intend to accentuate our focus and resources to our better performing stores with the goal of converting their customer experience into a world-class integrated retail experience.

While the store closures will reduce inventory by over $500 million and company debt by up to $350 million, there must be some concern over Sears’ reduced ability to compete with the growing number of Wal Mart and Target stores.