29 May, 2008

Retail Pressure hurting Sears Holdings, Posts loss

Another quarter in the books for Sears Holdings (SHLD), and another lackluster effort on the retail front. These days it seems hopes for profit come only from the Holdings rather than the Sears as Hedge Fund manager turned executive Ed Lampert has been unable to turn around the retail division with any amount of success in recent quarters.

It was during the difficult retail sales quarters in the past years that Lampert was able to keep the company generating profits by using the Holdings cash reserves seemingly as a large hedge fund, but with the current quarter in the books, Sears has swung to a loss. Sears posted a net loss of $56Million ($0.43/share). On the top line, Revenue fell almost 6% to $11.07Billion. Compared to expectations it does not paint a bright picture, as analysts were hoping Sears would deliver $11.4Billion in Revenues and a profit of $0.15/share.

The ever important margin question has to be posed here. How fast are margins actually shrinking at Sears? In fact gross margins declined by 1% to 27%. As the economy weakened in the United States, it became clearer that bigger ticket items would have a hard time generating sufficient demand. Sears noted its highest sales rate drops in items such as Home Appliances and Lawn and Garden items. With Sears sales down in the US by almost 10% and K-Mart sales down by 7% it brings up another question, can Lampert turn this around, or will the weakening economy further deteriorate Sears margins and in turn earnings (losses)?

As they say, 1 things for sure, 2 things for certain, Sears is struggling amidst a declining economic picture domestically, and secondly any plan that involves simply buying back more stock will not lead to sustainable turnaround in "core-business". Sears was "Suffering Retail Blues" back in its November quarter and nearly 6 months later, the picture hasn't gotten any clearer, and may have in fact, with this latest posted loss, gotten more polluted.

Disclosure: Author does not own SHLD

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