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Sears' Disturbing State Explained by This One Data Point

NEW YORK (TheStreet) -- The second-quarter, 10-Q filing from department store icon Sears (SHLD - Get Report) is a whopping 68 pages, detailing everything from credit agreements, to the number of store closures, to sales by merchandise department.

Investors need only pay attention to a single line item to grasp the prolonged financial tailspin at the retailer: gross profit margin.

See More: 12 Photos That Show How Macy's Is Dismantling Sears

In the second quarter, gross margin at Sears' Kmart division fell 250 basis points year over year, amid "decreases experienced in a majority of categories, particularly apparel, home and grocery & household," Sears said. Sears said domestic gross margin at its namesake division shed 330 basis points year-over-year due to "decreases experienced in a majority of categories, most notably apparel, home appliances, tools and footwear."

For comparison, the U.S. divisions of Walmart (WMT) and Target (TGT) registered year-over-year gross margin declines of 7 basis points and 100 basis points, respectively.

Not only does Sears continue to be burdened by a great deal of fixed costs rooted in a vast store network, but the company is giving away its margins via its Shop Your Way rewards program and traditional promotional marketing in the hopes of securing transactions. The problem for Sears: It doesn't have much to show for these investments in the form of consistently positive same-store sales. 

Watch More: Walmart's Financial Problems Explained in 5 Photos and One Vine Video

Sears reported net sales of $8.01 billion, short of the $8.17 billion forecast of Wall Street analysts as compiled by Yahoo Finance. Sales were led by the domestic Sears business, which had a 0.1% same-store sales increase vs. a year earlier drop of 0.8%. The increase at domestic Sears reflected "increases in the home appliances and mattress categories, partially offset by decreases in the consumer electronics and lawn & garden categories, as well as a decline in Sears Auto Centers."

In the 10-Q filing, the company presented investors with year-over-year sales declines ranging from a staggering 31.25% in apparel and soft home to a 33.33% fall in food and drug, and a meager 3.2% increase in a category classified as "other."

A total of eight Sears stores were closed during the quarter, bringing the number to 21 that have been shuttered in 2014.

From a competitive standpoint, Home Depot (HD - Get Report) had a double-digit percentage same-store sales increase in its appliance category in the second quarter aided by an expanded selection of name brand offerings.  The company also benefited from a turnaround in demand from the first quarter in seasonal categories. CEO Frank Blank noted "in the second quarter, our spring seasonal business rebounded."

Sears' Kmart division had a 1.7% same-store sales decrease, following a 2.1% fall in the year-ago quarter. "The decline at Kmart primarily was driven by declines in the grocery & household, appliances and consumer electronics categories," Sears said. The Kmart division's sales weakness could be attributed to declines in the hardline (-8.77%), apparel and soft home (-6.77%), and food and drug (-8.04%) departments.

Both Walmart and Target's domestic businesses had unchanged same-store sales in the second quarter, besting Kmart.


At the time of publication, the author held no positions in any of the stocks mentioned. This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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