Weeks after tax deal, Sears announces store closings

Just two weeks after Gov. Pat Quinn signed a bill to keep Sears Holdings Corp. in Illinois, the retailer said Tuesday it would close up to 120 Sears and Kmart stores, affecting hundreds of jobs.

The news about the struggling retailer didn't surprise analysts. But state officials were upset in light of their recent battles with the retail giant and threats of moving its headquarters and thousands of jobs out of Hoffman Estates. Instead, the company will eliminate jobs nationwide, although no announcement has been made regarding store locations.

State Sen. Ron Sandack, a Downers Grove Republican, was critical of the state tax breaks deal from the beginning. He said Sears should have been more up front about plans to close stores before lawmakers voted.

“I'm disappointed I hadn't heard that was something being considered in the short term, considering the tax breaks that were being sought,” Sandack said.

Closing the Kmart and Sears stores will generate about $140 million to $170 million of cash from inventory sales and the leasing or sales of the locations, the Hoffman Estates company said in a statement.

At an unrelated appearance this morning, Gov. Quinn defended the Sears tax breaks he signed into law, saying that keeping the headquarters and jobs in Hoffman Estates was worth it.

“I'm never happy to hear that a company is not doing well,” Quinn told reporters.

“The headquarters is a very important part of that company,” he said. “And it's good to be here in Illinois.”

Quinn sought to deflect questions about the widespread store closures.

“That isn't good news, but doesn't directly affect this agreement,” he said.

State Rep. Fred Crespo, a Hoffman Estates Democrat who helped engineer the Sears breaks, said that the timing is unfortunate, but that Sears' announcement Tuesday and its decision to keep its headquarters local was unrelated.

His goal, Crespo said, was to keep jobs at the headquarters in Hoffman Estates.

“That, from my perspective, was the endgame for my district,” he said.

Sears spokeswoman Kim Freely declined to provide an overall number of employees who are expected to lose their jobs or whether severance packages and outplacement services would be provided.

“I am not going to speculate on the impact to employees,” Freely said.

She also said a final determination of the stores to be closed has not been made.

These latest closings won't be the last, said retail analyst John Melaniphy Sr., principal with Melaniphy & Associates in Chicago.

“I think the store closings will continue,” Melaniphy said. “You can't put out a big fire with a squirt gun.”

He speculated that smaller, nonperforming stores could be closing, although some anchored at major malls have been struggling as well. The retailer also tried capitalizing on its popular brand names, like Kenmore and Craftsman, but that hasn't been working either.

“The company keeps hoping the recession will end and consumers will spend again, but people have just lost interest in Sears,” said Melaniphy.

Edward Lampert, who along with his hedge fund owns 60 percent of Sears, has presided over 18 consecutive quarters of declining sales. Before Tuesday's announcement, Sears had closed 171 of its large U.S. stores since merging with Kmart in 2005. To revive growth, Lampert has been leasing space to other retailers, accelerating franchising and turning to smaller store formats.

“They are not making the investments in the stores so customers are not coming,” said Gary Balter, an analyst with Credit Suisse Group AG in New York.

“There is this philosophy that you don't need to make as much of an investment in the stores if you have a brand. That has not worked,” added Balter, who rates Sears' shares as “underperform.”

Sears has more than 4,000 stores in the U.S. and Canada. Total same-store sales fell 5.2 percent in the eight weeks that ended Dec. 25, according to the statement. Comparable sales at Sears namesake locations dropped 6 percent, driven by declines in consumer electronics and home appliance categories. Sales at Kmart fell 4.4 percent, also hurt by lower demand for electronics, as well as declines in apparel and layaway sales.

As a result, earnings before interest, depreciation and amortization in the fourth quarter will be less than half of last year's $933 million, Sears said.

“There is not enough value in the real estate to do much with,” Balter said. “Who is going to buy the stores? There are no buyers. There is no one growing in U.S. retail.”

The company plans to reduce fixed costs by $100 million to $200 million, according to the statement.

In his annual investor letters, Lampert has identified the smaller Hometown and Sears Outlet stores as sources of growth and profit. The company opened 122 of those “specialty” stores last year, he said in his 2011 letter, and now has 945 — less than a quarter of the total.

The company is allowing other retailers to sell its DieHard, Craftsman and Kenmore products and is licensing those brands.

Excluding the effect of the store closures, the company expects to reduce 2012 peak domestic inventory by $300 million. Sears is scheduled to report fourth-quarter earnings on Feb. 23.

Bloomberg News contributed to this report.