Where Is Sears Holdings Headed with Its Turnaround? - Analyst Blog

By Zacks Equity Research,

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The shares of beleaguered retailer, Sears Holdings Corporation ( SHLD ) remained highly volatile throughout yesterday's trading session due to some positive as well as negative news, which captured market attention.

Though the company's shares opened at a lower price of $37.40, from the previous day's closing price of $37.69, it soon gained positive momentum after News Corporation's ( NWSA ) daily newspaper publishing arm, New York Post reported that the struggling retailer may avoid liquidation of its Canadian subsidiary, Sears Canada Inc., as Sycamore Partners is interested in buying the company.

Owned and managed by Stefan L. Kaluzny, Sycamore Partners is a private equity firm which primarily engages in consumer and retail investments. Over the last two years it has made two significant investments in the retail sector by acquiring Talbots and Hot Topic.

If the rumor came true then it will certainly help Sears Holdings in returning to the growth trajectory to some extent. Of late, Sears Holdings has been grappling with deteriorating top and bottom line performances. However, we commend Sears Holdings' efforts to improve its financial performance and liquidity position through various strategic measures.

One such initiative that the company is opting for is to sell its remaining 51% stake in Sears Canada. Sears Holdings has earlier revealed that the sellout of controlling interest will generate about $2 billion, which will be very helpful in reducing debts as well as financing its ongoing turnaround initiatives.

Sears Canada currently operates 176 corporate stores and 229 Hometown stores. Apart from this, it has 96 Sears Travel offices and operates over 1,400 catalogues and online merchandise pick-up locations, as well as a nationwide repair and service network.

Later in the day, the company came with an announcement that its wholly-owned U.S. subsidiary Kmart has partnered with Jillian Michaels, one of the America's favorite fitness gurus to launch a performance activewear collection for women to be known as 'Impact by Jillian Michaels.' This will enhance and strengthen the company's position in the health and wellness category.

The apparel and accessories launched under this product line will be available only at the Kmart stores, Kmart.com and shopyourway.com . The product lines which have been categorized as core training, running, yoga and lifestyle will be available online from Aug 10 and at Kmart stores from Aug 17.

The aforementioned news spread positive sentiments across the market, which helped Sears Holdings to touch the day's high of $38.39, up nearly 1.9% from the previous day's closing price of $37.69.

However, a sudden announcement from the company's Canadian subsidiary stole its thunder. Sears Canada, in the interest of consumer safety, announced the recall of its Nevada toddlers and girls moccasins in black, yellow and tan colors, which were sold between Jan 2014 and Jul 2014.

Though Sears Canada has not received any complaints regarding injuries caused from the products, it decided to recall them after discovering a high concentration of lead in these products. The customers will receive full refund on showing the receipt of sale or Sears Card statement. People returning the products without bills will get a refund equivalent to the lowest selling price.

The news raises concern regarding the subsidiary's performance in the upcoming quarters as it dragged down the parent company's share prices to the day's low of $37.04 before closing at $37.07.

Another negative news regarding product recall by Sears Canada, of Joe Boxer licensed boys 3-piece Eat Sleep Play Pyjama Sets, came after the market closed. The company revealed that the products are being recalled due to not meeting the flammability standards for children's sleepwear.

We believe that the recent product recalls at Sears Canada will further increase Sears Holdings' woes. The cash strapped beleaguered retailer may witness further deterioration in its revenue as well as profitability.

Sears Holding, which currently sells products through store-based networks, is looking for opportunities to transform its business to a member-centric model through its Shop Your Way program. As part of this remodeling initiative, the company is heavily investing in its Shop Your Way program while strategically reducing its store count and divesting its underperforming businesses.

The company's strategy of capitalizing on opportunities and returning to profitability through its simplified organizational structure and new operating model are noteworthy. Moreover, Sears Holdings is focusing on cost containment, inventory management and merchandise enhancement initiatives to inflate margins.

We believe that these strategies have the potential to bring the company back on the growth trajectory but it still has a long way to cover.

Sears Holdings currently carries a Zacks Rank #3 (Hold).

Other Stocks to Consider

A better-ranked stock in the retail discount sector is Burlington Stores Inc. ( BURL ) carrying a Zacks Rank #1 (Strong Buy). Another stock worth considering in the broader retail industry is Citi Trends Inc. ( CTRN ) which holds a Zacks Rank #1.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

SEARS HLDG CP (SHLD): Free Stock Analysis Report

BURLINGTON STRS (BURL): Free Stock Analysis Report

NEWS CORP NEW-A (NWSA): Free Stock Analysis Report

CITI TRENDS INC (CTRN): Free Stock Analysis Report

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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Stocks: SHLD , BURL , NWSA , CTRN

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