Sears Holdings Q2 Loss Widens Y/Y, Revenue Slump Continues - Analyst Blog

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Sears Holdings Corporation ( SHLD ) is finding it increasingly difficult to stabilize as it continues to grapple with a deteriorating top and bottom line. The beleaguered retailer delivered a huge loss for the second quarter of fiscal 2014 as it failed to draw customers despite giving huge discounts on merchandise.

The company's second-quarter adjusted loss widened to $2.87 per share compared with a loss of $1.56 in the year-ago quarter. Including special items, the company's reported loss reached $5.39 per share compared with a loss per share of $1.83 in the prior-year period.

Quarterly Details

Revenues declined 9.7% to $8,013 million compared with $8,871 million in the year-ago quarter. The year-over-year decline was mainly due to weak sales performance of the Home Services business, and the ongoing major transformation in the company's business model.

Segment-wise, sales at Sears Domestic fell 9.9% to $4,310 million, while Kmart sales declined 7.7% to $2,923 million. Moreover, sales at Sears Canada registered a decline of 15.2% to $780 million.

Consolidated domestic comparable store sales (comps) inched down 0.8% primarily due to weak performance of Kmart stores partially offset by improved performance at Sears Domestic. Despite soft performance of the consumer electronics, lawn & garden and Sears Auto Centers businesses, the company witnessed a marginal improvement of 0.1% in Sears Domestic comps in the quarter. Moreover, excluding the negative impact of the consumer electronics and grocery & household categories, Sears Domestic's comps for the quarter increased 0.4%.

Comps at the company's Kmart stores registered a 1.7% fall primarily due to weak sales of appliances, consumer electronics and grocery & household goods. Moreover, comps at Sears Canada witnessed a decline of 6.8% during the quarter.

Adjusted gross profit declined 15.2% to $1,753 million compared with $2,067 million reported in the second quarter of fiscal 2013. Consequently, gross profit margin contracted 140 basis points to 21.9%. The company's adjusted selling and administrative expenses declined 3.7% to $2,066 million from $2,145 million.

Adjusted loss before interest, tax and depreciation (EBITDA) in second-quarter fiscal 2014 was $313 million, substantially higher than the year-ago comparable quarter figure of $78 million. Adjusted operating loss came in at $440 million, as against a loss of $253 million in the year-ago quarter.

Balance Sheet and Cash Flow

Sears Holdings ended second-quarter fiscal 2014 with cash and cash equivalents (including restricted cash) of $839 million and long-term debt and capitalized lease obligations of $2,815 million, compared with a cash balance of $681 million and long-term debt and capitalized lease obligations of $1,911 million at the end of second-quarter fiscal 2013. The company's shareholder's equity was $919 million as of Aug 2, 2014.

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.

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, the company is heavily investing in its Shop Your Way program while strategically reducing its store count and divesting its underperforming businesses. One such initiative that the company is opting for is to sell its Sears Auto Center business as well as the remaining 51% stake in Sears Canada.

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). Other stocks worth considering in the broader retail industry are Citi Trends Inc. ( CTRN ) and The Men's Wearhouse Inc. ( MW ), both carrying a Zacks Rank #1.

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

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

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