Sears Posts Wider First-Quarter Loss as Sales Decline

Sears Holdings Corp. (SHLD), the retailer controlled by billionaire hedge-fund manager Edward Lampert, posted a wider first-quarter loss amid a sales decline that’s stretched into its seventh year.

The net loss in the three months through May 3 expanded to $402 million, or $3.79 a share, from a loss of $279 million, or $2.63 a share, a year earlier, the Hoffman Estates, Illinois-based retailer said today in a statement. Revenue fell 6.8 percent to $7.88 billion.

Lampert, the company’s chief executive officer, chairman and largest shareholder, has invested in online and loyalty programs as he tries to reverse 29 straight quarters of sales declines. To keep cash flowing, the company has hived off assets, including the spinoff of its Lands’ End clothing unit during the quarter.

“It would take almost an act of God at this point for them to turn this around,” Matt McGinley, managing director at International Strategy & Investment Group in New York, said in a phone interview yesterday.

One bright spot in the results was a 0.2 percent gain in comparable-store sales at U.S. Sears locations. The increase, the first in five quarters, is a rebound from a 2.4 percent decline a year earlier. Same-store sales would have risen 0.8 percent last quarter if not for weak consumer-electronics demand, Sears said.

Asset Sales

The company reiterated that it’s considering strategic options for its auto-service centers and said it’s hired Bank of America Corp. to help with the previously announced plan to sell its 51 percent stake in Sears Canada. Sears also repeated today that it expects to generate more than $1 billion this year in proceeds, including a $500 million dividend from the Lands’ End spinoff.

Sears rose 4.2 percent to $38.10 at the close in New York. The shares have dropped 4.1 percent this year, compared with a 2.4 percent gain for the Standard & Poor’s 500 Index.

Kmart’s same-store sales fell 2.2 percent, less than a 4.6 percent slide a year earlier.

The overall sales decline was driven by the smaller store base, lower revenue in its home-services and Sears Canada units and the separation of Lands’ End last month.

Sears is neglecting its stores at a time when competitors are excelling on all fronts, said Mary Ross Gilbert, managing director at Imperial Capital LLC in Los Angeles.

Not Executing

“They’re focused on the e-com business, but they’re not really focused on executing on the retail side,” Gilbert said in a phone interview yesterday. “If you look at real, true, omnichannel operators like Macy’s, they’re really executing well, and they make sure the stores are all up-to-date. They have to.”

In an interview today, Gilbert pointed to comments Sears made during its investor presentation that it tested radio frequency identification, or RFID, tags in 12 stores last year and plans to roll them out to more than 200 locations this year. The technology helps retailers track merchandise.

“Retailers have been using that technology for decades -- why is that new?” Gilbert said. “That’s what good retailers have already been doing. These types of moves that they’re making, it’s nothing new, it’s not transformational.”

Gilbert also questioned the company’s plans to put more emphasis on Shop Your Way reward points instead of discounts.

Customers “are not going to want points over dollars,” she said. “They want dollars.”

She has an underperform rating on the stock, the equivalent of a sell.

Digital Push

Lampert has said he’s investing in digital capabilities to reshape Sears into a leaner, member-focused merchant that can seamlessly sell to customers via any format. In the first quarter, the company’s online unit posted a 26 percent sales gain, and 74 percent of the retailer’s eligible sales came from Shop Your Way awards-program members. Sears said today that it has announced about 80 store closings this year and may shut more.

In today’s pre-recorded presentation, executives outlined cost-cutting steps, including reductions in inventory, lease expenses and pension obligations, which Lampert called a “constraint on our transformation” that should peak this year. Lampert said he expects the company’s pension to be fully funded by 2019.

“Transformations of this size and scale are challenging, and we may continue to experience challenges in our financial performance over the next several quarters,” Lampert said during the presentation. “As changes occur in and around retail, we intend to be in the mix, focused on investments and acquisitions that accelerate and improve our transformation.”

Seeking Results

The changes so far haven’t been enough to halt the company’s deterioration, McGinley said.

“They’re investing, but look at the results they’ve achieved with that,” he said in a phone interview yesterday. “They haven’t improved the free cash flow situation, they haven’t turned around the comp decline. They haven’t materially changed the profitability of the company.” His firm recommends selling the shares.

Asset sales helped boost cash reserves to $842 million as of May 3.

The operator of the Sears and Kmart chains has in the past three years spun off its smaller-format Hometown and Outlet stores, reduced its stake in the Canada business to 51 percent from 95 percent and sold store sites, including five leases in Canada for C$400 million ($366 million) in October. The company’s operations consumed $1.11 billion in cash last year.

Last week, Sears announced it’s considering the sale of its remaining stake in Sears Canada, the second-largest Canadian department-store chain. The unit had a market value of about C$1.54 billion yesterday.

“I don’t see that they have liquidity issues,” Gilbert said. “It’s just a deteriorating business.”

To contact the reporter on this story: Lauren Coleman-Lochner in New York at llochner@bloomberg.net

To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net Kevin Orland

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