Retail

Forget Sears Earnings, It Is All About Future REIT Structure

Sears_Greenville
Source: Wikimedia Commons (Mike Kalasnik)
When Sears Holdings Corp. (NASDAQ: SHLD) reported results Thursday morning, the share price tumbled as revenues failed to meet consensus estimates. Net losses are being curtailed, but that is due nearly entirely to cost cutting. While cost cutting generally only goes so far toward making a company profitable again, in the case of Sears there are still a lot of pieces that can be lopped off to cut costs and increase liquidity.

That is what we can infer from the company’s announcement Thursday morning that it is expecting to hive off 200 to 300 Sears and Kmart stores into a real estate investment trust (REIT) that could generate proceeds of more than $2 billion to the company. No word on what would happen to the other 1,400 to 1,500 stores that would be left under the Sears Holdings umbrella. The company also said it closed approximately 234 underperforming Sears and Kmart stores in 2014, leaving it with more than 1,700 stores. At least the company has plan for a few hundred of them.

ALSO READ: Companies Cutting the Most Jobs

In its announcement Sears had this to say about the proposed REIT:

The REIT itself would be funded by equity and debt with the equity raised through a rights offering. The subscription rights would be distributed pro rata to all stockholders of record of the Company, and every stockholder would have the right to participate, except that holders of the Company’s restricted stock that is unvested as of the record date would be expected to receive cash awards in lieu of subscription rights.

Back in November when Sears first said it was actively exploring the formation of a REIT, the company said it could be structured as a sale-and-leaseback transaction, in which case the REIT would own the real estate and Sears would continue to operate the (money-losing) stores.

Real estate is where the value is for Sears. And the retail business? In this latest earnings announcement, Sears said, “We are continuing our efforts to develop Sears Holdings as a membership company, without the significant asset intensity of its traditional retail business.”

So, because real estate is a liability to a retail business, Sears will dump it for cash that it can then lose on its strategy of developing the business as a membership company without the membership fees. As a retail strategy that has never made a lot of sense because it amounts to double discounting, first by offering Sears’s traditional promotional pricing and second by offering reward points. Margins will be compressed to the point of invisibility. How creating a REIT helps change this is a mystery.

ALSO READ: Wal-Mart, Sears Most ‘Liked’ Retailers

Investors appear to have the same questions, knocking more than 6% of the share price Thursday morning. The stock traded at $35.57 early Thursday, in a 52-week range of $22.45 to $48.25.

Sponsored: Tips for Investing

A financial advisor can help you understand the advantages and disadvantages of investment properties. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

Investing in real estate can diversify your portfolio. But expanding your horizons may add additional costs. If you’re an investor looking to minimize expenses, consider checking out online brokerages. They often offer low investment fees, helping you maximize your profit.