Sears: Turnaround Is Occurring At A Much Slower Pace

Nov.19.12 | About: Sears Holdings (SHLD)

Shares of Sears Holding (SHLD) lost almost a fifth of their value on the final trading day of the week. The retailer operating Kmart, Sears and Roebuck stores reported its third quarter results on Thursday after the close.

Third Quarter Results

Sears Holding reported third quarter revenues of $8.86 billion, down 5.8% on the year. Domestic comparable store sales fell by 3.1% on the back of a 1.6% decline of Sears US and 4.8% decline at Kmart. Same store sales fell by 5.7% for Sears Canada. Revenues did beat analysts consensus, who were looking for sales of $8.58 billion.

The company reported and operating loss of $428 million during the quarter, down 4% on the year. Net losses increased to $498 million on the back of higher income taxes, for losses of $4.70 per diluted share. Last year, the company received money back from the Internal Revenue Service.

Adjusted losses, which exclude expenses related to store closings and severance payments, narrowed to $1.99 per diluted share. Adjusted net losses came in at $211 million, much wider than analysts expectations of $91 million.

CEO Lou D'Ambrosio commented on the results,

For the 3rd quarter and year-to-date, we improved EBITDA, accelerated our strategic actions and generated significant cash by delivering on the actions we outlined at our Annual meeting. Our EBITDA improvement in the quarter came from some of our most important categories like Appliances, Apparel, and Home Services as we introduced new offers, honed pricing, effectively managed costs and implemented better inventory management.


Sears ended its third quarter with $622 million in cash and equivalents. The company operates with $4.0 billion in short and long term debt, for a net debt position of $3.4 billion.

For the first nine months of 2012, Sears generated revenues of $27.6 billion. The company net lost $441 million, or $4.16 per diluted share for the period. The company is on track to generate annual revenues of $39 billion and will post a significant loss for the year.

Factoring in Friday's decline, the market values Sears at roughly $5.0 billion. This values the firm at roughly 0.13 times annual revenues.

Given the operational difficulties, Sears does not pay a dividend.

Investment Thesis

Year to date, shares of Sears have risen some 50%. Shares started the year at $30 in January and quickly rose to highs of $85 in March. Shares fell back to levels around $50 from that point in time, rebounding to $65 earlier in November. Shares are currently exchanging hands at $47.50 per share.

Shares have lost roughly 75% of their value from their all time highs around $185 in 2007. Shares fell to $50 in the financial crisis to rebound to $120 in 2010. From that point in time shares have been under continued pressure. Between 2008 and 2012, annual revenues fell from $46.7 billion to an expected $39 billion this year. The company reported modest profits over the past years, followed by a massive $3.1 billion loss last year.

Sears furthermore announced that it completed the spin-off of part of Sears Canada. Sears will distribute 44.5% of shares in Sears Canada on a pro rata basis to Sears Holdings shareholders. Following the completion of the deal, Sears holds a 51% ownership interest in Sears Canada. The divestiture of the sizable stake in Sears Canada follows the separation of the Hometown and the outlet business. Sears furthermore sold real estate and cut back on inventory in an attempt to boost free cash flows.

The latest results indicate that consumers stay away from Sears' stores despite the company's initiatives. Sears loyalty program and investments to revamp stores fail to boost comparable store sales growth. The rapidly changing retail environment and strong competition from retail mammoths including Wal-Mart (WMT), Target (TGT) and Costco (COST) make a quick turnaround difficult.

The latest sell-off is understandable. The pace of the turnaround remains utterly slow, which is a concern among investors. The company remains far away from reporting quarterly profits.

I remain on the sidelines. I think the pullback is warranted as investors price in the much lower pace of the turnaround story.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.