Shares of Sears Holdings Corporation (NASDAQ:SHLD) gained over 31% Monday after the cash-strapped broad-line retailer revealed through a Securities & Exchange Commission (SEC) filing that it is forming a Real Estate Investment Trust (REIT), in a bid to enhance its financial flexibility and improve operating performance. The company will issue rights offering of this planned REIT to its current shareholders.
Sears Holdings stated that it will sell about 200 to 300 stores to the newly formed REIT and lease them back. With this sale-leaseback deal, Sears Holdings will be able to continue its operations at these locations while generating substantial proceeds from them.
Revenue of a REIT company mostly comes either from rent or mortgage payments. The companies have an obligation to distribute at least 90% of its taxable income to the investors in the form of dividend. A REIT company does not have to pay taxes at corporate level.
The company’s recent move suggests that it is strategically enhancing its liquidity position well ahead of the holiday shopping season. We believe that this will help Sears Holdings to assure vendors of its capability to pay for merchandises in spite of deteriorating sales and widening losses.
Of late, Sears Holdings has been grappling with deteriorating top and bottom line performances. However, we commend the company’s efforts to improve its financial performance and liquidity position through various strategic measures, including the last month’s move of raising approximately $625 million through a right offering of 8% unsecured senior notes, maturing in 2019, along with leasing seven retail locations to Primark.
In the beginning of fiscal 2014, the beleaguered retailer had set a target of raising its liquidity position by $1 billion, which it fulfilled from the recent $400 million loan from ESL investment and approximately $665 million raised by spinning off its Land’s End Inc. (NASDAQ:LE) business and sale of some properties. Apart from this, the company, in early October, raised $380 million through right offerings of its stake in the Canadian subsidiary, Sears Canada.
Furthermore, Sears Holding, which currently sells products through store-based networks, is looking for opportunities to transform its business to a member-centric model through its Shop Your Way program. Sears Holdings is also focusing on cost containment, inventory management and merchandise enhancement initiatives to turn its losses into profit.
We believe that these strategies have the potential to bring the company back on growth trajectory but it still has a long way to cover.
Other Stocks to Consider
Other stocks in the retail discount sector are Burlington Stores Inc. (NYSE:BURL) and Ross Stores Inc. (NASDAQ:ROST), both carrying a Zacks Rank #2 (Buy).