Sears Holdings on Wednesday said it had entered into an agreement with the Pension Benefit Guaranty Corporation, the federal government fund that insures private sector pension plans, which will release some 140 stores back to Sears in exchange for the company making $407 million in contributions to its pension plans, according to a company press release.
As part of the deal, Sears also gets a two-year reprieve from paying for the pension plans, giving the struggling retail company a measure of liquidity in the near future. Since the 2005 merger of Sears and Kmart, Sears Holdings has contributed some $4.5 billion to the pension plans, to cover what it says was initially a $1.8 billion deficit, and executives have noted it as a drag on the company's resources.
The company also reported its third quarter results, including $3.7 billion in revenue — down significantly from the $5 billion in the prior-year quarter, with store closures contributing to over half of the decline. Total same-store sales declined 15.3% during the quarter, with Kmart same-store sales falling 13% and Sears same-store sales falling 17%.
As America's premier brick-and-mortar retailer decades ago, Sears once had a massive footprint and has been relying on its real estate holdings to prop up its declining retail business. Sears has so far borrowed $499.4 million through a real estate-backed loan dating back to January.
With its pension move announced Wednesday, the company has wrested 140 stores back into its control. It's not clear whether they will sell them to Seritage Properties, (the REIT that already owns many former Sears properties) or some other buyer, place them on a balance sheet or otherwise leverage them. And it's not clear whether any of that will entail shuttering more doors.
But it does buy them some time and reduces their liability, according to Debtwire retail analyst Philip Emma. "This provides them some liquidity, some breathing room," he told Retail Dive. "I would view it as a positive step. A lot of things going on on the surface seem positive, though they're still not generating positive [earnings before interest, taxes, depreciation, and amortization]."
Certainly, as it stocks shelves for the holidays, liquidity is a must for Sears, especially amid reports that suppliers are wary of the retailer and struggling to get insurance on their shipments. Supplier pullbacks should raise the alarm for any retailer and are sometimes even a cause of bankruptcy, as we saw with Toys R Us.
While dozens of other retailers, including some household names, have fallen into Chapter 11 this year, Sears so far has escaped that outcome. The reasons why are pretty straightforward: asset sales (including its stores and the Craftsman tool brand), corporate cost cuts, store closures and loans from the hedge fund controlled by the retailer's chief executive. The move announced on Wednesday doesn't really signal a bankruptcy filing, according to Emma. "That could benefit them in bankruptcy as well as out of bankruptcy," he said.
How long Sears can keep doing those things, in the absence of a major turnaround in the trajectory of its sales, is an open question. The company's string of quarterly losses and sales declines has been largely unbroken for years.