SHLD Stock – Is This the Bottom for Sears?

by Jeff Reeves | August 22, 2014 8:18 am

Sears Holdings Corp. (SHLD[1]) reported second-quarter earnings[2] on Thursday, and for investors who hadn’t already had enough proof, Sears earnings proved once again why SHLD stock is doomed.

First, 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[3]. 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[4]) and 100-basis-point decline at Target (TGT[5]) — 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[6]) 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[7]) and Aeropostale (ARO[8]) — 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[9] is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks[10]. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com[11] or follow him on Twitter via @JeffReevesIP[12]. 

Source URL: https://investorplace.com/2014/08/shld-earnings-sears-stock/

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