Sears' Quarterly Loss Was Ugly -- and the Outlook Isn't Any Better


NEW YORK (TheStreet) -- Sears (SHLD) had a brutal third-quarter net loss, but the challenges outlined by chairman and CEO Eddie Lampert should be of equal concern to investors.

The retailer, with some 1,831 Sears and Kmart stores in the U.S., reported a loss of $5.15 a share vs. $5.03 a share a year ago. Adjusted earnings before interest, taxes and depreciation amounted to $296 million. The result was toward the low-end of a $275 million to $325 million adjusted EBITDA loss outlined by Sears on Nov. 7.

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Same-store sales at Sears Domestic declined by 0.7%, worse than the 0.1% fall last year, paced by lackluster sales of consumer electronics, apparel and auto services at Sears Auto Center. Kmart's same-store sales rose 0.5% vs. a 2.1% decline a year ago. The improvement came from greater demand for apparel. 

Unlike competitors Walmart (WMT) , Target (TGT)   and J.C. Penney (JCP) , Sears provided no update on its holiday sales trends, suggesting sluggish sales and absent profits have continued into the fourth quarter.

Sears made it a point to highlight that adjusted EBITDA was in line with its Nov. 7 guidance. Further, the company waxed poetic that Kmart's same-store sales are on the mend.

But comments by chairman and CEO Eddie Lampert on the pre-recorded earnings call shed light on the challenges the company faces in trying to remain in business.  A key rival in the mall, Macy's (M) , now has same-day delivery options in eight major markets. J.C. Penney is expected to launch a same-day delivery service sometimes in 2015. Walmart and Target each continue to seek ways to sell more fresh produce and meats.

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"The fact of the matter is that a number of our stores are simply in the wrong place and are often too large for our needs," said Lampert, adding that "restoring these locations to profitability is unlikely."

Sears has closed or announced the closure of 235 stores in 2014. Lampert's comments hint that hundreds of stores, mostly from the Kmart brand, will have to be shuttered over the next few years to reduce costs and expenses.

Despite 133 fewer Kmart stores in operation in the third quarter year-over-year, the division still produced an operating loss of $149 million. Adjusted for one-time items, Kmart's operating loss was $97 million.

The number of Sears Domestic stores fell by 54 in the third quarter vs. the prior year, yet like Kmart, the division was unprofitable. Reported operating loss was $310 million. Adjusted, it tallied to $199 million.

Other hurdles the company will have to overcome include selling more electronics at Sears Domestic and groceries at Kmart.

"Our electronics business continues to negatively impact the Sears format," said Sears CFO Robert A. Schriesheim on the call. He added, "We are addressing this decline by transforming the business from one which is focused primarily on selling TVs into a business focused on providing connected solutions for our members."

Sales of consumer electronics at Sears declined by an undisclosed amount in the third quarter.

Any attempt by Sears at transforming its electronic business may be stunted by Best Buy (BBY) , which has added Sony (SNE) , Samsung (SSNLF) , Intel (INTC) and GoPro (GPRO)  shops to its sales floor this year. Further, the electronics retailer has invested in extensive employee training in order to help consumers understand new technologies in the connected home and 4K TV categories.

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And Kmart could certainly use a traffic boost to its locations from an improved assortment of food and other household essential items.

Like Sears with electronics, weak sales of food and household items like cleaning products continue to plague Kmart.

"The consumer electronics and grocery & household business continue to negatively impact the Kmart format, which we intend to address moving forward as part of our transformation," said Schriesheim. 

Sales in the grocery and household business at Kmart have declined for more than a year, and fell again by an undisclosed amount in the third quarter.

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This article is commentary by an independent contributor. At the time of publication, the author held no position in the stocks mentioned.

TheStreet Ratings team rates SEARS HOLDINGS CORP as a Sell with a ratings score of D. TheStreet Ratings Team has this to say about their recommendation:

"We rate SEARS HOLDINGS CORP (SHLD) a SELL. This is driven by a few notable weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its deteriorating net income, generally high debt management risk, disappointing return on equity, poor profit margins and weak operating cash flow."

You can view the full analysis from the report here: SHLD Ratings Report

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