Eddie Lampert letter to Sears shareholders.
LETTER FROM THE CHAIRMAN AND CHIEF EXECUTIVE OFFICER DATED FEBRUARY 27, 2014
February 27, 2014
To Our Shareholders, Associates and Members:
I am writing to you after my first full year serving as both your Chairman and Chief Executive Officer.
While our financial results remain challenged, 2013 may have been the year that justifies why so many people across Sears Holdings have been working for several years on our transformation from a traditional, store-based retailer to a membership company that serves its members across an integrated retail platform.
Furthermore, if the way the entire American retail industry ended 2013 is any indication, I believe 2014 may well be a year in which Sears Holdings begins to clearly demonstrate the advantages of this transformation.
That may sound odd given our financial results, but this letter will detail why I believe that. To be clear, it is not because our performance is where we need it to be. It isn’t. But not only do I believe that we are headed in the right direction in important ways, I believe the entire retail industry is headed to where we already are.
LOOKING BACK AT 2013
First, the financials. Net loss attributable to Sears Holdings’ shareholders was $358 million and $1.4 billion, respectively, for the fourth quarter and full year of 2013. This compares to net loss attributable to Sears Holdings’ shareholders of $489 million and $930 million, respectively, for the prior year fourth quarter and full year. Adjusted EBITDA was $12 million and $(337) million, respectively, for the fourth quarter and full year of 2013. Adjusted EBITDA for the prior year fourth quarter and full year was $429 million and $536 million, respectively.
The fact that none of this is new news—our performance is in line with the guidance we provided back on January 9, 2014—only slightly mitigates the impact of these numbers.
Nevertheless, 2013—especially the tough-to-terrible holiday season for Sears Holdings and for so many other retailers—brought into stark relief just how irrevocably retail has changed. And, 2013 highlights just how important all of our work is to transform Sears and Kmart from traditional brick-and-mortar stores that
simply sell products into an integrated platform. We build relationships with our members, anticipate their needs and serve them in the manner most convenient for them – whether in store, at home or on-the-go. This change is resulting in improved member engagement, which is not only a key component of our member strategy, but in my view may prove to be most important in the year ahead.
RETAIL TRANSFORMATION MOVING FROM OUR RHETORIC TO WIDELY RECOGNIZED REALITY
On January 17, 2014, The Wall Street Journal ran a prominently placed story suggesting that beyond all of the retailers reporting poorer profits,
“(T)here is a deeper malaise at work: A long-term change in shopper habits has reduced store traffic—perhaps permanently—and shifted pricing power away from malls and big-box retailers… Instead, they seem to be figuring out what they want online then making targeted trips to pick it up from retailers that offer the best price. While shoppers visited an average five stores per mall trip in 2007, today they only visit three… Meanwhile, online stores have further sharpened purchase decisions and prices, leading some shoppers to come into the stores only when they can cherry pick discounted items.”
All of these dynamics are ones for which Sears Holdings has been preparing for years. Readers of these annual letters have time and again heard about how the strategy we have been pursuing is positioning us to help our Shop Your Way members manage their lives better through their relationship with us. As I have described before, the five key pillars of our strategy are:
Creating lasting relationships with members by empowering them to manage their lives
Attaining best-in-class productivity and efficiency
Building our brands
Reinventing the company continuously through technology and innovation
Reinforcing “The SHC Way” by living our values every day
Our two key platforms—Shop Your Way Rewards and Integrated Retail—continue to become more prominent both in how we run the company and in how we serve our members. Some larger retailers and some specialized retailers continue to perform relatively better than the rest, but even they aren’t immune to the drastic shifts in customer behavior and the competitive landscape.
Certain key metrics we follow show us that our execution of our core member-centric strategy is enabling us to increase engagement with our members. Sales
from Shop Your Way members comprised 72 percent of all sales in Sears Full-line and Kmart stores in the fourth quarter of 2013, up from 58 percent during the fourth quarter of 2012. Overall, Shop Your Way members made up 69 percent of our sales in 2013, up from 59 percent for all of 2012.
Others in our industry are struggling to figure out how to adjust their business models to deal with the combination of changing consumer behavior and intense business model competition. We believe that these Shop Your Way results show that even with the challenging results across the industry and in our stores, our integrated retail strategies give us the opportunity to address this changed consumer behavior and to evolve our business model.
More importantly, many of the changes that other retailers are making to survive today follow innovations that were either pioneered or significantly advanced in Sears and Kmart locations, like converting physical stores to be able to fulfill online orders and emphasizing ship-to-store and ship-from-store programs.
These are areas where much of our investment has been focused over the years, despite the widespread and, we believe, incorrect belief among many outside commentators that what our stores need most are hundreds of millions of dollars more in décor and fixtures. We believe that the developments in the entire retail industry validate our decisions to shift much of our investment instead to digital and integrated retail.
OUR WORK IN 2013
In 2013, we continued our efforts to simplify and focus our company, while simultaneously creating long-term value for our shareholders. We announced that we are evaluating the separation of our Lands’ End business through a spinoff to shareholders and have made filings with the SEC to accomplish this through a pro rata distribution to our shareholders. We also are considering strategic alternatives for our Sears Auto Center business, subject to board approval and other conditions. We expect that through these actions, and through working with the Sears Canada board and management with a goal of increasing and realizing the value of our investment in Sears Canada, we will raise in excess of $1 billion in proceeds to Sears Holdings in 2014, creating value and helping to fund our transformation.
We generated $2 billion of liquidity during 2013 versus an objective of $500 million through $1 billion in proceeds from real estate and $1 billion in a five-year term loan. We reduced inventory at our peak by $620 million versus an objective of $500 million. We also reduced our fixed expenses by approximately $200 million, in line with our stated objective.