WISCONSINREPORT.COM (12/27/2011) - Sears Holdings recent announcement that it would likely close up to 120 K-Mart and Sears full line stores was based on poor performance during the past few months. Kmart's quarter to date comparable store sales decline reflects decreases in the consumer electronics and apparel categories and lower layaway sales, while Sears Domestic's sales decline was attributed to consumer electronics and home appliances. Sears apparel sales were flat, and Lands End sales in Sears stores was actually up, but by single digits.

Due to Sears Holdings performance in 2011 the company expects that Sears Holdings 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 carry forwards and other tax benefits remain available to reduce future taxes to the extent income is generated.

Further, the combined company 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.

"Given our performance and the difficult economic environment, especially for big-ticket items, we intend to implement a series of actions to reduce on-going expenses, adjust our asset base, and accelerate the transformation of our business model," said Chief Executive Officer Lou D'Ambrosio.

"These actions will better enable us to focus our investments on serving our customers and members through integrated retail – at the store, online and in the home," Lou D'Ambrosio added.

Specific actions which we plan to take include:

- Close 100 to 120 Kmart and Sears Full-line stores. Sears Holdings expects 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, the firm intends 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, the company currently expects 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.

- Reduce fixed costs by $100 to $200 million.

In addition to the specific store closures listed above, Sears will carefully evaluate store performance going forward and act opportunistically to recognize value from poor performing stores as circumstances allow.

While the past practice has been to keep marginally performing stores open while Sears worked to improve their performance, the company no longer believes that to be the appropriate action in this environment.

Sears Holdings intends to accentuate its focus and resources to better performing stores with the goal of converting their customer experience into a world-class integrated retail experience.

Sears Holdings currently expects the store closure and inventory reduction actions to reduce peak inventory in 2012 by $500 to $580 million and reduce the peak borrowing need by $300 to $350 million in 2012 from levels that may have resulted in 2012 without such actions.


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