Sears Shows A Glimmer Of Hope

By Greg Sushinsky | November 24, 2009 AAA

Sears Holdings (Nasdaq:SHLD), owner of Sears and Kmart stores, reported another quarterly loss, this time in its recent third quarter, which was less than last year's loss in the same quarter. Finally helped a bit by Kmart, where same store sales were up 0.5%, Sears hopes to have at least stemmed the tide of growing losses. Revenue declined slightly also, as Sears continues to re-configure its operations under Edward Lampert. This long process of re-tooling began with Kmart, which emerged from bankruptcy in 2003 and was taken public, followed by Sears which was acquired in 2005; it has been a patchy merger.

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Sears Earnings

Revenue dropped in Q3 from $10.66 billion in last year's third quarter to $10.19 billion this year. There was a loss of $127 million this third quarter, or a loss of $1.09 per diluted share, compared to a loss of $146 million, or a loss of $1.16 per share in last year's quarter. Excluding certain items, the EPS loss was 81 cents this year's quarter versus 90 cents last year's quarter.

How Sears is viewed varies, maybe not widely, but it varies. Jim Cramer had a positive take on the report, mentioning what he felt were strong points including "Sears generated more cash than expected," and "that it is now able to refinance debt."

Another commentator called Sears "sad Sears" and detailed the extensive problems the retailer has had and still faces, including that Standard & Poor's expects Sears Holdings' same store sales to drop by 7% in fiscal 2010 and 6% in 2011, along with the "intense pressure" Sears faces from other department stores.

Competitors
The issue of competitors may be the key for Sears. Kohl's, for example (NYSE:KSS), is living in that operational sweet spot where they've gotten things just right in terms of their merchandise and their approach, whereas Sears still struggles with getting the most out of its brands.

Also, Kmart only has 3.7% of the U.S. market, while Kohl's continually grows its market share. The competition for Sears-Kmart is wider than even department stores and department store discounters, though, as it has to go up against such well-run companies as off-price apparel retailer TJX (NYSE:TJX), which owns TJ Maxx and Marshall's. TJX had a huge earnings increase in its last quarter, and is simply a powerhouse right now.

Image and Identity Crisis
While Kohl's has struck the right balance between value and style as a retailer, and TJX has nailed their discount apparel sector, Sears is much like other department stores such as Macy's (NYSE:M) and JCPenney (NYSE:JCP), which painfully find themselves with a more nebulous image or identity. While Macy's tries to be both Saks (NYSE:SAKS) and Kohl's at the same time, and Penney has occasional flings into both the higher and lower end, Sears' identity is still probably the hardest of all to figure out.

Sears tries to sell everything to everybody and in doing so, tries to appeal to that impossibly wide category of everybody. The result is that Sears does nothing as well as it competitors, and all of this effort just confuses consumers.

The Bottom Line
The historical overhang of Kmart's bad years of merchandising its image as a loser - and Sears' many marketing shifts over the years - have given consumers great incentive to leave. Whether Sears and K Mart will win customers back over the long term is still an open question. Sears needs to do more. (Read Analyzing Retail Stocks to learn about the most important metrics to look at when analyzing retail stocks.)

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