Sears First-Quarter Loss Narrows as Retailer Trims Expenses

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Edward Lampert
Sears Holdings CEO Edward Lampert. Source: Sears Holdings Corp. via Bloomberg

Sears Holdings Corp., the retailer run by hedge fund manager Edward Lampert, posted a narrower first-quarter loss after cutting expenses and bolstering its margins.

The loss shrank to $303 million, or $2.85 a share, from $402 million, or $3.79, a year earlier, the Hoffman Estates, Illinois-based company said Monday in a statement.

Lampert, Sears’s chief executive officer and largest shareholder, has been reducing costs and lopping off assets, such as the Lands’ End clothing business. He’s also working on forming a real estate investment trust named Seritage Growth Properties, which will buy store locations and lease them back to the retailer. On Monday, the retailer said it expects that transaction to raise $2.6 billion.

“The operating results for Sears are a heck of a lot less important than the liquidity that spinning Seritage out is going to provide them,” said Matt McGinley, an analyst at Evercore ISI in New York.

The REIT deal, which lets the company generate cash from its sprawling property holdings, has helped fuel a rally in the shares. Sears’s stock rose 24 percent this year through the end of last week, following an 11 percent decline in 2014. The shares rose less than 1 percent to $40.75 as of 9:55 a.m. in New York.

The company’s retail operations remain mired in a slump. Comparable-store sales, considered a key gauge of retail performance, plunged 7 percent at Kmart and 14.5 percent at Sears last quarter. The companywide decline totaled 10.9 percent in the period, which ended May 2.

Profit Margins

The company, which has posted 12 straight quarters of losses, is working to lower expenses. It cut selling, general and administrative spending by about 20 percent over the previous year, whittling down its payroll and advertising budgets. It also benefited from costs eliminated by the spinoffs of Sears Canada and Lands’ End.

Gross margin -- the portion of profit left after subtracting the cost of goods sold -- widened at both Sears and Kmart. There were fewer markdowns in categories such as clothing and appliances, bolstering results.

Even with the improved profit margin, though, the magnitude of the same-store sales decline “shows that Sears is trading sales for margin,” McGinley said. He called the sales declines “much worse than expected.”

Credit Line

Sears also said it expects to reach an agreement in the current quarter to refinance and extend its $3.28 billion revolving credit line, which expires next year, to 2020.

The REIT transaction and other deals will further Lampert’s vision of an “asset-light retailer,” he said in Monday’s statement. The company is focusing on its Shop Your Way rewards program customers, who account for about three-quarters of sales. The chain will have fewer, smaller locations and offer more multichannel options, such as services that let customers reserve items online and then pick them up in stores.

“We will become more productive with our physical store space,” Lampert said.

Lampert has previously acknowledged that a lack of funds has hampered his plans since he merged Sears and Kmart in 2005.

“One of my regrets in helping steer Sears and Kmart over the last decade is that we haven’t had or generated the money to fund our transformation quickly enough,” he said in a blog post last month.

McGinley said he’s skeptical the once-mighty retail chain can regain its former glory.

“Sears as a concept doesn’t resonate with the consumer in the way it did 20 or 30 years ago,” he said. “Sears just doesn’t have a real reason to be anymore.”

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