Sears Holding Corp: SHLD Remains Doomed on Awful Q4 Numbers

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Well, here’s a bit of news that won’t surprise anyone who’s bothered to keep tabs on Sears Holdings Corp (SHLD) — it bombed. Again.

Sears Holding Corp: SHLD Remains Doomed on Awful Q4 NumbersIn a bid to raise some much-needed cash, SHLD is culling more stores. Same old, same old. Already in a multi-month downtrend, SHLD stock fell considerably more on Tuesday in the wake of the warning, setting a new 52-week low as a result.

While it would be clever journalism to say last quarter’s numbers marked the point where it decidedly became a matter of when rather than if SHLD as we know it is doomed, that wouldn’t be an accurate assessment.

Sears has been doomed for a while now. Last quarter’s numbers were just another layer of evidence in that bearish argument, and this just marks the point where the death spiral accelerates.

Warning to Sears Stock Owners

The fourth-quarter numbers reported on Tuesday weren’t official or complete. The official filing and full-results press release will be posted on or about Feb. 25. Tuesday’s announcement was a preliminary report of some of the key numbers expected to be part of the official filing. Namely, sales and EBITDA figures.

And they weren’t encouraging.

For the quarter (which included the all-important) holiday season, revenues are expected to roll in at $7.3 billion, down from $8.1 billion in the same quarter a year ago.

In the retailer’s defense, it’s not a completely fair comparison. Sears has continued to sell assets in the meantime, and simply didn’t have as much capacity to generate revenue last quarter. On the flipside, same-store sales — which negate the impact of a diminishing number of stores — were down 7.1% overall.

It gets worse the deeper one moves into the middle of the income statement. EBITDA, which the company had been touting as evidence that the turnaround was taking hold, took a considerable-sized step in the wrong direction. SHLD anticipates an EBITDA loss of between $50 million and $100 million, vs. a positive EBITDA figure of $125 million in the same quarter a year earlier.

No specific profit guidance was given, but if sales were down (on a same-store and overall basis) and EBITDA turned negative, there’s no way to think the operational bottom line isn’t going to be ugly.

Time to Face Facts

The weak results top off a ninth straight year of declining revenue, and what will almost certainly be a fifth straight year of net losses. True, the losses themselves are getting smaller, but that’s hardly reason for hope. Operational cash flows have been negative for five years now, and that negative number has gotten progressively bigger in each of those years.

With that as the backdrop, the comments the company added to the fourth-quarter warning were almost comical were they not so sad. Specifically, Sears said:

“Based on this performance, we are taking further actions to accelerate our transformation, which is focused on our Shop Your Way membership program and our Integrated Retail offerings. We will accelerate the closing of unprofitable stores, including, but not limited to, roughly 50 stores that we recently announced would be closing in the next few months. We also intend to continue to evaluate and optimize our cost structure, including optimizing store-level marketing expenditures and overall staffing levels, and we will be taking action to reduce our fixed costs, and to improve our inventory management and gross margin realization.”

Fair enough. That is what a struggling retailer should be doing.

To use phrases like “taking further actions to accelerate our transformation” and “continue to evaluate and optimize our cost structure, including optimizing store-level marketing expenditures and overall staffing levels,” though, implies the organization hasn’t been doing everything it can possibly think of on those fronts.

It has. It’s just that none of it is working.

Eight straight years of declining revenue and five straight years of worsening negative cash flow is more than ample evidence that a tweak here and an adjustment there isn’t going to fix the clearly bigger problem.

Bottom Line for Sears Stock

For better or worse, the warning doesn’t appear to have fazed investors, perhaps because in the grand scheme of things the warning was neither surprising nor unusual.

Either way, the fact that EBITDA is starting to deteriorate again is a red flag, as is the decision to sell 50 stores as a means of carving out expenses.

Shedding assets has arguably done more harm than good. Yes, it cuts out some expenses in the short run (though not by as much was suggested), but in the long run it crimps the company’s ability to generate cash flow.

The whole point of more stores is to achieve greater scale, share more expenses and widen margins. That’s a two-way street, though, and smaller scale means fixed expenses aren’t spread out among more stores.

Sears has successfully sold properties, but hasn’t scaled back corporate overhead accordingly. That reality, coupled with the fact it’s just not driving enough sales in its stores, offers no reason to hold out hope.

In other words, Sears is now circling the drain at a much faster pace. It shouldn’t be much longer now.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/02/sears-stock-shld/.

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