Sears Profits by Paring Advertising Expense

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The conventional wisdom is that the expense management at Sears Holdings SHLD has been nothing short of fantastic.

But what if a large portion of the earnings gains actually stemmed from slashing advertising expense? That wouldn't really be a good thing, would it, if same-store sales continue to plummet?

The reduction in advertising expense isn't mentioned, as far as I can see, in this morning's press release. But a look at last quarter's 10-Q indicates that reduced advertising expense accounted for a whopping 29 cents a share, or about a third of the company's year-over-year pro-forma earnings gains.

I'm not entirely down on Sears, because I believe there was a great deal of fat to begin with, and management has been able to stem the sales declines pretty well at Kmart. As a financial engineering story -- which is what this is -- it's been a pretty good experience for shareholders.

From a retailing perspective, however, it looks as if current profits are being boosted at the expense of brand equity. I never liked Sears as a stand-alone: It's been a terribly run chain for years and the stores -- mostly empty save for the hardlines -- continue to lose customers. Same-store sales at Sears Domestic fell 6.3% in the most recent quarter, following a 8.4% decline in the first quarter of the year. This is no surprise, however -- these sales have been in a long, almost secularlike decline.