Sears' Unveils Fiscal 2012 Outlook - Analyst Blog

One of the leading broad line retailers in the United States, Sears Holdings Corporation ( SHLD ) has recently provided an update on its fourth-quarter to-date results for the period ended on December 29, 2012. Apart from this, the company provided outlook for the fourth quarter and fiscal 2012.

The company's total comparable-store sales (comps) for the nine-week period ended on December 29, 2012, declined 1.8% primarily due to weak performance at its consumer electronics category. Comps at Sears Domestic inched up 0.5%, while comps at Kmart stores fell 3.8%.

The increase in comps at Sears Domestic was primarily driven by continued momentum in its apparel category. A massive sales fall in consumer electronics along with a decline in pharmacy, grocery & household and drug categories dragged down comps at Kmart stores.

Comps at the company's subsidiary, Sears Canada, declined 5.8% during the nine-week period primarily due to unfavorable weather conditions in most parts of Canada.

Fourth-Quarter Guidance

The company now expects adjusted EBITDA for the fourth-quarter, ending February 2, 2013, to be between $365 million and $465 million of which, adjusted EBITDA from Sears Domestic is anticipated to be in the range of $325-$395 million. Moreover, adjusted EBITDA at its Sears Canada subsidiary is expected to be down 50% from the year-ago quarter's level.

For the fourth quarter, Sears Holdings anticipates loss per share in the range of $2.64-$3.40, on a reported basis. However, excluding non-cash charges and one-time expenses related to pension, Sears Holdings expects earnings per share between $1.25 and $2.00.

Full-Year Guidance

Sears Holdings expects adjusted EBITDA for the fiscal year ending February 2, 2013 to be in the range of $560 to $660 million. Further, on a reported basis, loss per share is expected to be in between $6.80 to $7.56.

However, excluding charges related to pension, store closure and restructuring activities, loss will come in the band of $1.16-$1.92 per share. Currently, the Zacks Consensus Estimate stands at loss per share of $2.91.

As of December 29, 2012, the company's net debts were $2.4 billion, almost $400 million lower than the year-ago comparable period. Cash increased to $1.1 billion from $0.9 billion.

The company continues to take the actions required to create value and retain the flexibility to invest in its strategic priorities. Continuing with its strategy of asset re-configuration, Sears Holdings has generated $1.8 billion worth of liquidity.

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.

The company expects to create nearly $500 million of additional liquidity over a period of one year. Further, it will generate about $300 million in cash by reducing its inventory level by $500 million in 2013. Sears Holdings is expecting to lower its fixed cost expenses by $200 million in 2013.

In a separate announcement, the company revealed that Edward S. Lampert will be the new Chief Executive Officer (CEO) form February 2, 2013, in addition to his existing role of Chairman of the Board of Directors. The current CEO, Louis J. D'Ambrosio has decided to give up his role due to his family health issues.

Our Recommendation

Though the abovementioned traits project an overwhelming picture of Sears 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 Stores Inc. ( WMT ) and other dollar stores' aggressive pricing and expansion strategies as these players are significantly increasing their store count in Kmart's markets.

Moreover, intense competition, macroeconomic issues and exposure to adverse foreign currency translations may undermine Sears' future operating performance. Thus, the company retains a Zacks Rank #4, implying a short-term Sell rating.

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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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