Sears’s retooling cannot fix everything

Sears’s retooling cannot fix everything

There are investments and there are trades. The difference between the two is notable when it comes to U.S. Sears Holding Corp.

Since 2010, the once iconic retailer has become a shadow of its former self. Its share price has fallen to the USD 20s from the USD 90s, while its market value today is one-tenth of the nearly USD 26 billion it fetched a decade ago.

Shorter time horizons, though, have often told a different story. On nine occasions over the past five years, Sears’s shares have popped more than 20 % over two-week stretches.

Whether quarterly results were not as bad as expected, or Sears was unloading assets to bolster cash, the stock has provided savvy short-term traders with opportunities. Meanwhile, it has burned those of the buy-and-hold variety.

That is something to consider as Sears reports fiscal third-quarter results. Evercore ISI Group, one of the only firms to provide an estimate, expects a quarterly loss of USD 2.84 a share, slightly worse than a year ago.

Sears Holding Corp. said its loss narrowed last quarter on fewer one-time expenses but sales dropped 20%, hurt by store closings and weaker revenue from clothing and consumer electronics.

The Hoffman Estates, Ill., operator of Sears and Kmart department stores posted a net loss of $454 million for its third quarter ended Oct. 31 compared with a loss of $548 million a year earlier. Excluding items, the losses would have been $350 million and $288 million, respectively.

Faced with declining sales and waning shopper traffic, Sears has been cutting costs and unloading properties. Financial engineering has bought Sears more time as it attempts to transform itself in the digital age. Same-store sales, a measure that excludes store openings and closings, declined 7.5% at Kmart and 9.6% at Sears domestic stores. Sears stock price, down 42% so far this year, was off 6.9% at $19 apiece at 4 p.m. on December 3, 2015.

Sears spun off 235 properties into a real-estate investment trust earlier this year and has created joint ventures with three mall owners. Those moves generated $3 billion in proceeds.

The company had 1687 stores at the end of the quarter, down from 2249 a year earlier.

Revenue dropped to USD 5.75 billion from USD 7.21 billion.

Sears’s gross margin decreased to 21.9 % from 22.2 % while overhead costs increased to 28.3% of revenue from 27.9 %, the company reported.

Yet Sears still needs to cover its massive operating losses. Unless fundamentals drastically improve, Sears will likely need to embark on more financial maneuvering sooner than later. Evercore ISI estimates that Sears will keep burning through USD 1 billion in cash annually.

Any further engineering could indeed provide more short-term succor for traders. But they aren’t likely to alter the grim long-term trend.

Same-store sales, for example, have fallen in the past seven quarters, including double-digit percentage declines in each of the past two. Sears recently snapped a streak of 12 consecutive quarters in the red, but that was only because of its real-estate spinoffs.

Sears prowess at selling assets is not matched by much success selling merchandise. Until it is, the stock will be nothing more than a trader’s plaything.

Sears Holding Corp.’s market value was nearly USD 26 billion a decade ago.

www.sears.com

www.wsj.com


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