Sears Holdings (SHLD) last week released quarterly earnings that stunk, but because they weren't quite as awful as Wall Street had been expecting, shares of the retailer soared. That's nuts.
Be forewarned: Sears Holdings is not a deeply discounted "value play" that merits risk-taking, as some foolishly bullish analysts argue. It's poison for any portfolio that holds it.
Many retirement investors are denying reality and sticking with Sears, against the evidence, because they've been holding the stock for years in their 401(k)s and Individual Retirement Accounts (IRAs). It's time for them to think more clearly.
Sears shares were up slightly in Thursday trading.
Last Thursday, the company announced that revenue took a year-over-year tumble from $7.3 billion to $6.1 billion. Comparable sales cratered by 10.3%. Keep in mind that these results are for the holiday quarter, usually the most lucrative for retailers.
However, adjusted earnings per share (EPS) improved, from -$1.70 in the fourth quarter of fiscal 2015 to -$1.28. And adjusted EBITDA grew year over year from -$137 million to -$61 million.
Sears's management hinted that this EPS "improvement" indicates the beginning of a comeback for the ailing company. And apparently, enough investors were suckered into believing this, leading to the stock price jump.
But this delusional crowd psychology doesn't reflect a glorious turnaround in the making. Sears and its stock are mortally wounded. There are better places to invest your money.
With its portfolio of iconic brands such as Craftsman and Kenmore, Sears was once considered one of the country's most trustworthy brands. The growth of Wal-Mart was seen as a huge obstacle, so the company went on the offensive by purchasing retailer Kmart. Problem solved!
But then e-commerce changed everything for bricks-and-mortar retailers. As with many other department stores, Sears didn't take the threat of Amazon seriously enough. After all, people would still buy merchandise such as apparel and appliances in stores, rather than online, right?
Wrong. Consider this harsh fact: Amazon is poised to overtake Macy's in apparel sales this year. As it became clear that practically everyone would rather shop from the comfort of their homes or offices rather than venturing to the mall, Sears scrambled to beef up its online presence. But it was too late, and the company didn't do enough.
The company already has tried to survive by selling assets, including real estate through a real estate investment trust (REIT) spinoff known as Seritage Growth Properties. It scuttled its popular Lands' End clothing brand. And it has agreed to sell Craftsman to Stanley Black & Decker.
But with hemorrhaging sales and plunging revenues, these measures can only do so much. Sears will soon face the unavoidable: bankruptcy. And when that happens, you'll be glad you weren't a Sears investor.
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