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Sinking Feelings Over Sears' Sales

The ongoing decline sparks concerns about Ed Lampert's strategy.

Yoga Berra used to talk about "déjà vu all over again." Investors might be having similar feelings about

Sears Holdings

(SHLD)

.

Shares of the retail empire were sliding $9.22, or 4.9%, to $179.10 Friday after the company forecast first-quarter profits below Wall Street's expectation while reporting further same-store sales declines at its two chains, Kmart and Sears.

The sales decrease is just the latest in a long slide for Sears Holdings, which is run by renowned hedge fund manager Ed Lampert. But the declines go hand-in-hand with Lampert's focus on improving profits by slashing costs and reining in capital spending rather than increasing sales.

Critics of the company complain that Sears is making too many wrong mistakes, as Yogi would say. They maintain that the company is not doing enough on the store level and is losing ground to competitors like

J. C. Penney

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,

Target

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and

Wal-Mart

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.

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"You can only cut costs so much," says Michael Appel, a restructuring specialist with Quest Turnaround Advisors. "You have to fix the fundamentals of the business. I think they have a lot of work to do. I think that they really attacked the costs and that's certainly helped the results, but comps have been trending down for some time.

"At some point you have to start seeing some revenue gains," he adds. "Otherwise they're not going to make it."

For the first quarter, Sears said that same-store sales, or comps, fell 4.7% at Kmart and 2.4% at Sears. Same-store sales represent sales at stores open at least a year.

The company expects to report earnings of $1.30 to $1.53 a share for the period, including several items that are expected to result in a net gain of 27 cents a share.

The estimate suggests that earnings before the gain would be $1.03 to $1.26 a share -- below Thomson Financial's average analyst forecast of $1.46. A year earlier, Sears had earnings of $1.14 a share.

Sears also said that some of its one-time gains will be offset by losses from total return swap investments, a derivative trading tactic that has boosted profits in prior quarters. Craig Johnson, president of Customer Growth Partners, points out that the focus on moves such as these are stealing attention away from the stores.

"Management's focus seems to be on extracting non-retail value out of the organization rather than running the core business," Johnson says. "They've made some very interesting and innovative strides on the financial engineering side of things and that's all to the good. But the issue remains: who's minding the store and what are they doing to rebuild store growth in either franchise?"

Johnson says that Sears and Kmart have lost their knowledge of customers.

"Right now, from a positioning point of view, the average consumer has little if any idea what Sears stands for in the marketplace," he says. "They have little idea what Kmart stands for in the market place. Why should someone shop there? What is their

raison d'etre

?"

Scott Rothbort, founder of LakeView Asset Management and a contributor to

StreetInsight

, was less distressed by the company's comp-sales slide and described the first-quarter results as "a bump along the road."

"Does this really change what Ed Lampert is trying to achieve at Sears?" he asks. "The answer is no. He's going to continue doing what he thinks is good for the shareholders; he's going to continue to buy back stock and expand the company's reach."

Rothbort says that Sears' mention of weakness in household hard goods is not surprising, given the slow housing market and nasty weather in the first quarter. Other the hand, he says, apparel sales, which have been a weak point, have improved.

"If you want instant gratification," he says, "go somewhere else."