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SHLD Stock – Is This the Bottom for Sears?

No way - Sears stock is still doomed


Sears Holdings Corp. (SHLD) reported second-quarter earnings on Thursday, and for investors who hadn’t already had enough proof, Sears earnings proved once again why SHLD stock is doomed.

shld sears stock sears holdingsFirst, the broad strokes: Q2 numbers included a mammoth loss of $5.39 per share on revenue of $8.01 billion. That’s a much deeper-than-expected loss, and a double-digit decline in SHLD sales.

But beyond Sears earnings simply reinforcing the bearish sentiment as of late — SHLD stock is down more than 30% year-to-date in 2014 and off about 12% in the last month alone — these numbers prove out the bigger story of a company that has no way out of its current trouble.

Here’s why SHLD stock is destined for further declines as Sears earnings and sales continue to circle the drain:

Sears Profit Margins Stink: One of the best retail analysts in the biz is Brian Sozzi, and in a recent article for TheStreet he pointed to a gross margin tailspin as the ugliest figure in the entire Sears earnings report. Sozzi notes that a whopping 250-basis-point decline in Kmart margins and a 330-point decline for the flagship Sears division is incredibly disturbing. Compare that, Sozzi notes, with the more modest 7-basis-point decline at Walmart (WMT) and 100-basis-point decline at Target (TGT) — two retail stocks with big troubles of their own — and the pressures on SHLD stock look quite nasty indeed. It’s bad enough that revenue is stuck in a downward spiral, but couple that with falling margins, and it’s a race to the bottom for SHLD stock.

Balance Sheet Pressures: Sears is deep in junk territory, with a CCC+ rating from Standard & Poor’s — described as “Currently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments.” Not good. Furthermore, SHLD stock is saddled with $4.2 billion in total borrowings and on a market cap of just $3.6 billion. While bulls are quick to point out the property and equipment assets at Sears total north of $5 billion, keep in mind that figure actually is down dramatically from more than $5.7 billion at this time last year as Sears is literally selling the family silver to keep running. With deep losses since 2012, it’s crucial for operations to turn a profit soon before it runs out of options. Increasingly, sales and spinoffs like the recent Lands’ End (LE) move are simply creative ways to raise capital immediately — not deliver any long-term shareholder value.

E-commerce Pressures: The decline of retailers across the board — from Walmart to specialty retailers like Abercrombie (ANF) and Aeropostale (ARO) — is largely thanks to a host of online shopping options that are eating brick-and-mortar operations alive. Why go to a crumbling Sears store when you can get a good deal on unique housewares or fashionable clothes at a host of slick websites? While CEO Eddie Lampert was quick to trumpet “online and multi-channel sales” in his statement after Thursday’s Sears earnings report, the segment remains far too small to significantly impact the drag of its largely brick-and-mortar model.

Bottom Line

When you add it all up, along with the rather cutthroat and the much-maligned management structure enacted by Lampert, it’s hard to imagine a light at the end of the tunnel for SHLD stock in the next several months.

Sell Sears stock if you haven’t already.

Jeff Reeves is the editor of and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at or follow him on Twitter via @JeffReevesIP

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