Sears: Now You See It, Now You Don't?

Sears Holdings Corp SHLD's CEO and largest shareholder Eddie Lampert isn't pulling any punches when it comes to the future of its brick and mortar stores.

In the recent Sears earnings report, Lampert shared, "During 2014, we closed approximately 234 underperforming Kmart and Sears Full-line stores, the majority of which were Kmart stores."

Notably, Sears still owns or controls ~1,700 store locations.

Related Link: Could Sears Stores Disappear? Brian Sozzi Thinks So

Tale Of The Tape

In the fourth quarter of 2014, Kmart comparable store sales declined 2.0 percent and Sears Domestic declined 7.0 percent.

The 2014 FY net loss of $1.7 billion ($15.82 loss per share) exceeded the prior year loss of $1.4 billion (or $12.87 loss per share).

Sears has now posted a loss for 11 consecutive quarters.

A Better Mousetrap?

Sears Holdings CFO Rob Schriesheim, commented that the company "is an asset-rich enterprise with multiple levers to generate continued financial flexibility, while creating shareholder value."

"We are continuing our efforts to develop Sears Holdings as a membership company, without the significant asset intensity of its traditional retail business. To this end, we announced in November that we have been exploring the formation of a Real Estate Investment Trust (REIT) to purchase some of our properties and to manage them like a pure real estate company," he added.

The REIT Plan - 200 To 300 Stores

Sears Holdings is still targeting to sell between 200 to 300 stores and to receive more than $2 billion of proceeds from the REIT transaction, which is anticipated to close in May or June of this year.

"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," according to Schriesheim.

Why Only So Few?

A September 2013 Baker Street Capital Management 139-page report made the case for Sears as a real estate asset play.

Regardless of the exact figures, the vast majority of the value in Sears' real estate is limited to the top 20 percent or so of the store locations.

"Shop Your Way" - Members Focus

Lampert is counting on fewer bricks and more clicks moving forward.

Omnichannel Retail Model

Smaller Store Footprints

Increased foot traffic is another substantial benefit when Sears "right-sizes" its footprint by leasing to relevant retailers such as Forever 21 and Whole Foods.

Annual Rent Savings - Drop In The Bucket

The $44 million Y/Y rent expense savings in 2014 is relatively small compared to the $1.7 billion loss.

However, Lampert is certainly making headway in reducing the long-term Sears lease obligations, which have fallen from $6.617 billion in 2007 to just $2.885 billion in 2014.

Pension Obligations

Ongoing funding of legacy pension obligations is a ghost that still haunts the Sears Holdings bottom line each year.

The current low interest rate environment exacerbates this problem.

Investor Takeaway

While the Sears Holdings "Shop Your Way" and omnichannel retailing initiatives are cutting edge in 2015; the company still struggles with the "bleeding edge" of legacy lease and pension fund obligations.

While the Sears Holdings REIT initiative may raise ~$2 billion of much needed cash by early summer of this year, it remains to be seen how the REIT will impact Sears' operations moving forward.

The only thing that is certain is that the Sears/Kmart stores will continue to shrink away.

Image credit: Public Domain