Based on the company's weaker-than-expected quarterly results,
we have downgraded our long-term recommendation on
Sears Holdings Corporation
) to 'Neutral' from 'Outperform'. Moreover, the company has a Zacks
#3 Rank implying a short-term Hold rating.
Sears Holdings reported second-quarter fiscal 2012 adjusted loss
of 86 cents per share, wider than the Zacks Consensus Estimate of a
loss of 84 cents per share. Moreover, the company's net sales of
$9,467 million declined 6.6% from the prior year, missing the Zacks
Consensus Estimate of $10,138 million. The decline in quarterly
revenue not only reflects lower domestic comparable store sales,
but also reduced Kmart and Sears full-line stores in operation
during the quarter.
However, on a year-over-year basis, Sears' loss per share
narrowed from the prior-year quarter's loss of $1.18. The improved
results were primarily driven by the strategies it has undertaken
to reduce cost and strengthen liquidity along with inventory
management and merchandise initiatives.
In addition, we believe sluggish discretionary spending and
intense competition amid rapidly changing customer preferences is
also undermining the company's future prospects. Moreover, Sears
Holding's financial performance may be substantially affected due
to its significant presence in international market, which exposes
it to unfavorable foreign currency translations, economic or
political instability and other governmental actions on trade and
repatriation of foreign profits.
Sears has been grappling with weak top-line performances and
weaker bottom-line results. However, the measures undertaken to
revive the operating performance are showing some signs of
improvement, which is evident from the company's margin expansion
and narrower loss per share from the prior-year quarter.
Adjusted EBITDA for the second quarter of fiscal 2012 was $153
million, compared with $58 million in the prior-year quarter.
However, EBITDA margin expanded 100 basis points to 1.6% from 0.6%
in the prior-year quarter.
In an effort to optimize its financial performance, the company
recently announced a string of measures to enhance its growth
prospects by lowering investment in different sections that no
longer contribute significantly to its growth.
In addition to this, the company is focusing on cost
containment, inventory management, and merchandise initiatives to
improve margins through leverage on buying and occupancy
Sears Holdings is one of the largest broad line retailers in the
U.S. The company operates a strong network of over 4,000 full-line
and specialty stores across the U.S. and Canada to compete
effectively against rivals, such as
Wal-Mart Stores Inc.
Home Depot Inc.
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