(Reuters) - Sears Holdings Corp (SHLD.O) plans to raise about $770 million spinning off a business of about 1,250 stores and selling some prime real estate, hoping to convince Wall Street that the struggling chain has enough assets to tap to pay down debt.
The news boosted shares of the operator of Sears department stores and the Kmart discount chain by nearly 19 percent, the biggest jump in more than three years, and quelled some concerns about the financial health of the retailer which on Thursday also posted a $2.4 billion quarterly net loss and a 19th straight quarter of declining sales.
The moves were seen by the market as boosting Sears' liquidity profile, but did not erase the other problems plaguing the retailer, which had $747 million in cash at the end of the fiscal year, down from $1.36 billion a year earlier.
"The actions announced today buy time, they do not buy success," Credit Suisse analyst Gary Balter said. "They are steps in the right direction, but we believe that the hole that has been created will not be as easy to climb out of as investors believe."
Balter said it would be tougher for Sears to reach previous levels of profitability as it spins off some of its best-returning assets. He has an "underperform" rating on the stock.
Ratings agency Moody's said its "negative" outlook on the retailer's credit rating remained unchanged.
"They can close stores, reduce inventory, terminate employees and raise capital, but nothing is being done to improve their image or products in the stores," said Ron Friedman, a partner with accounting firm Marcum LLP.
Chairman and top shareholder Edward Lampert rejected criticism that his perceived underinvestment in Sears' retail operations was one of the major causes of dwindling sales.
"Despite what some believed, increased marketing spend and increased inventory dollars do not automatically generate higher sales or higher profit," Lampert said in letter to shareholders. "More marketing and inventory dollars are not required to generate higher sales or profits, especially in a company that already spends over $1.5 billion in marketing and has over $8 billion invested in inventory."
Sears Holdings' struggles are well-documented. The company's sales have fallen every year since hedge fund manager Lampert merged two of America's iconic retail chains - Kmart and Sears Roebuck and Co - in 2005 in an $11 billion deal.
The chain, home to iconic brands such as Craftsman tools and Kenmore appliances, is a victim of the weak economy, stiff competition and its own missteps. In addition to problems such as run-down stores and dowdy merchandise, Sears also faces cut-throat competition from the likes of Home Depot (HD.N), Lowe's (LOW.N), Wal-Mart (WMT.N), Target (TGT.N), Best Buy (BBY.N),JC Penney (JCP.N), Macy's (M.N) and Kohl's (KSS.N).
In late December, the company said it will close as many as 120 of its Kmart and Sears discount and department stores.
Graphic-Sears vs other department stores: link.reuters.com/dam76s
Graphic-Valuation of top U.S. retailers: r.reuters.com/gam76s
Lampert's letter: link.reuters.com/ten76s
The company has also been kept on a tight leash by CIT Group (CIT.N), one of the lenders that provides short-term loans to Sears suppliers while they are waiting to be paid by the retailer.
"I hope this ... will finally quiet the skeptics who recently predicted their short-term demise," said Bobby Cohen, chief executive of Lochem Capital. His firm serves as an intermediary between buyers and suppliers.
Analysts have long looked for Lampert to consider selling some of Sears' real estate or otherwise try to tap the value of the company's assets beyond the retail operations.
"The actions of the asset sales and business separations of the outlets and hometown stores is management showing the Street that it can pull liquidity levers if it so chooses," Morningstar analyst Paul Swinand said.
Sears stressed that it had substantial liquidity and strong assets even as it needs to improve operating performance.
"Sears Holdings has a profit problem, not a liquidity nor an asset problem," Lampert said. He is Sears' largest shareholder and owns directly and through related entities about 59 percent of the retailer.
Sears also said it planned to reduce its borrowing needs by managing inventory better. For instance, Sears is planning to cut inventory during the October-to-November peak period.
Sears' shares, which lost more than half their value in 2011, had risen almost 64 percent this year before Thursday's gains. Analysts tie the 2012 share surge to short sellers trying to cover their positions rather than an improvement in Sears' fundamentals.
According to Data Explorers, about 12 percent of Sears shares were being shorted as of Wednesday, as investors bet the stock price would fall. That represented about 93 percent of what was available to short.
Sears said it would spin off its Sears Hometown and Outlet businesses and certain hardware stores through a rights offering that expects to raise $400 million to $500 million. Designed for small to mid-size markets, the Sears Hometown Stores consist of hundreds of independently owned and operated U.S. stores.
Lampert has called the Hometown and outlet stores avenues of growth in the past.
Sears also said it had reached a deal to sell 11 stores to No. 2 U.S. mall owner General Growth Properties (GGP.N) to generate $270 million in cash proceeds in the next 60 days. The stores General Growth is buying from Sears are in its own malls.
One of those stores is in Ala Moana in Honolulu, arguably the highest revenue-generating mall in the United States, with sales per square foot of over $1,200. The Ala Moana store accounted for between $200 million and $250 million of the $270 million, a source familiar with the deal said.
The Honolulu mall is heads above the average high-quality malls, also called "class A" which typically generate over $400 a square foot. Two others in the group of 11 are class A, Fashion Place, in Murray Utah, and The Woodlands Mall, in Woodlands, Texas. Three others are above average, generating sales of $300 per square foot to $450 per square foot. The other three are below that, said Benjamin Yang, analyst at Keefe, Bruyette & Woods.
General Growth COO Shobi Khan said in a statement that the deal boosted the mall owner's opportunities to add selling space as well as attract a new tenant to the anchor space.
Sears reported a huge fourth-quarter net loss after a poor showing during the holiday season. The net loss was $2.4 billion, or $22.47 a share, after a number of charges, compared with a profit of $374 million, or $3.43 a share, a year earlier.
Excluding one-time items, Sears earned 54 cents a share.
Sales fell $518 million to $12.5 billion for the quarter that ended January 28. Sales at its U.S. stores open at least a year fell 3.4 percent, including a 4.1 percent decline at its namesake department stores and a 2.7 percent fall at Kmart.
On Wednesday, the company's Canadian unit, Sears Canada Inc SCC.TO, posted a more than 50 percent drop in quarterly earnings.
Sears Holdings shares closed 18.7 percent higher at $61.80 on Thursday on the Nasdaq. General Growth shares closed up 2.8 percent at $16.64 on the New York Stock Exchange.
Reporting By Dhanya Skariachan; Additional reporting by Ilaina Jonas, Phil Wahba and Brad Dorfman; Editing by John Wallace, Maureen Bavdek and Matthew Lewis