We maintain our long term 'Neutral' recommendation on leading
U.S. broad line retailer,
Sears Holdings Corporation
), as the company continues to narrow down year-over-year losses
in every quarter since the beginning of fiscal 2012. However, we
remain cautious regarding the company's Kmart stores'
performances, which were significantly hit by
) and dollar stores' aggressive pricing and expansion strategies.
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Sears Holdings is one of the largest broad line retailers in the
U.S. The company operates a strong network of over 2,600
full-line and specialty stores across the U.S. and Canada to
compete effectively against rivals, such as Wal-Mart and
). Furthermore, in order to boost customer footfall, the company
is continuously taking prudent steps to improve its merchandise
and realign its inventory with sales trend.
Sears Holdings reported third-quarter 2012 adjusted loss of $1.99
per share, narrower than the loss per share of $2.55 reported in
the prior-year quarter. The robust bottom-line comparisons from
last year resulted from the company's ongoing cost reduction
initiatives, which helped lower selling and administrative
expenses during the quarter, offset by a decline in sales that
pulled down gross profits. Additionally, the company has managed
to effectively reduce merchandise inventory levels to $9.6
billion at the end of the quarter compared with $10.9 billion at
the end of third-quarter 2011.
Revenue for the quarter decreased 5.8% to $8,857 million compared
with $9,405 million in the prior-year quarter, driven by the
reduction in the number of Kmart and Sears full-line stores in
operation during the quarter as well as lower domestic comparable
Over a reasonable span of time, Sears Holdings has successfully
revamped its organizational structure and operating model in an
effort to simplify its business lines. The new structure is based
on five business units - operating businesses, support, brands,
online and real estate. Each unit operates separately to
facilitate greater focus on profitability and rapid
decision-making to capitalize on opportunities and mitigate
risks. We believe that the company's strategy of capitalizing on
opportunities, while increasing profitability through its
revamped organizational structure and new operating model, will
boost its top and bottom lines.
Further, the cash-strapped Sears Holdings announced a string of
measures to enhance its growth prospects by reducing investments
in those sections, which no longer contribute significantly to
its growth. These measures are mainly focused on optimizing the
company's financial performance.
As a major step in this direction, Sears Holdings completed the
partial spin-off of 45% of Sears Canada's common shares to the
company's shareholders on November 13, 2012. The company also
successfully completed the separation of Sears Hometown and
Outlet Stores Inc. on October 11, 2012, raising $446.5 million in
Apart from this, the company has been focusing on cost
containment, inventory management, and merchandise initiatives to
improve margins through leveraging buying and occupancy expenses.
Though the above mentioned traits project an overwhelming picture
of the company positioning itself for incremental future growth,
we remain a little concerned about the performance of the
company's divisions - Kmart stores and Sears Canada. These
divisions have been posting significant comps decline over the
past few quarters. The business at Kmart stores have been
severely hit by Wal-Mart and dollar stores' aggressive pricing
and expansion strategies as these players are significantly
increasing their store count in the Kmart's market.
Moreover, intense competition, macroeconomic issues and exposure
to adverse foreign currency translations may undermine Sears'
future operating performance.
While our recommendation on Sears Holdings rides on the company's
improving earnings performance driven by its cost containment
measures, weakness in Kmart and Sears Canada, threats of
competition and foreign currency translation, keep us on the side
lines. The company retains a Zacks #3 Rank, implying a short-term
Hold rating. This is also consistent with our long-term Neutral
view on the stock.