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Sears Holdings: Still Marching Toward its Doom

You know Sears Holdings Corp (SHLD) and its investors are in trouble when the best thing that can be said of the retailer’s most recent quarterly numbers is, they weren’t as bad as expected. It’s surprising SHLD stock wasn’t down more than the 3% it was off immediately after its results were released Thursday morning.

sears holdings eddie-lampert-sears-ceoYes, the saga of Sears under the leadership of hedge fund manager and acting CEO Eddie Lampert continues, and though there were admittedly a couple of bright spots buried in rubble of the company’s third quarter income statement and balance sheet, by and large it’s more of the same — and that’s the problem.

Sears Holdings Q3 Results

For the three month period ending on Nov 1, Sears Holdings lost $5.15 per share, versus a loss of $5.03 per share of SHLD stock in the same quarter a year earlier. Revenue fell from $8.3 billion a year earlier  to $7.2 billion this time around, though to be fair, almost all of that decline was attributable to store closures and the shedding of divisions like Land’s End, Inc. (LE) and Sears Canada (SRSC).

On the upside, same-store sales were up 0.5% for Kmart Corporation, and would have been up 1% for Sears stores if excluding  the impact of its shrinking consumer electronics business. They were down 0.7% for Sears stores factoring in consumer electronics.

And, the loss of earnings before interest, taxes, depreciation and amortization (EBITDA) was technically smaller, shrinking from to $296 million for the quarter compared to a loss of $310 million a year ago.

Still, from a holistic and unbiased view, the only progress Lampert actually seems to be making with Sears Holdings is reducing its ability to generate losses by shrinking the company itself.

Gross margins of 22.2% were still weaker than gross margins of 23.3% from Q3 a year ago, while selling and administrative expenses rolled in at 27.9% of revenue versus only 27.3% for the same quarter a year earlier.

The company’s net loss — even before any tax adjustments — as a percent of sales was 6.5% in the third quarter of this year, roughly in line with a figure of 6.6% in the third quarter of last year.

Said another way, SHLD stock owners aren’t really any closer to a recovery than they’ve been at any point in the last several years, despite the relatively rosy picture Eddie Lampert continues to paint.

Eddie Lampert Says …

Lampert offered his usual upbeat take on trailing results and the future by adding to Thursday morning’s release of last quarter’s numbers:

“We remain intently focused on delivering an unparalleled integrated retail experience for our customers through Shop Your Way and above all, returning Sears Holdings to profitability. During the quarter, we unveiled or expanded several integrated retail customer initiatives, which helped drive online and multi-channel sales. Our members are responding to our transformation, and we are encouraged by the year-over-year domestic adjusted EBITDA trends, which mark a positive departure from the prior six quarters. At the same time, we continue to enhance the company’s capital structure and liquidity to support our transformation into an integrated membership-focused company.”

It is true that online sales grew last quarter, to the tune of 9%. Clearly that growth wasn’t offset by the decline in sales at actual brick-and-mortar stores, though.

As for EBITDA progress, again, Lampert is technically correct — the EBITDA loss did shrink on a year-over-year basis. As a percent of sales, however, the EBITDA loss widened, from  3.7% to 4.1%.

Respectfully to Mr. Lampert, that’s not exactly progress even though the entire (stated) idea of store closures and asset sales was to rid yourselves of underperformers and unlock value…. the value of the organization’s real estate in particular.

Perhaps the most concerning of Lampert’s comments to current owners of SHLD stock, however, is his definition of “enhanced capital structure and liquidity.” Yes, liquidity and access to credit did improve. Sears now has access to $1.5 billion in credit, and ended the previous quarter with $326 million in cash.

It also ended the quarter with $2.1 billion worth of short-term borrowing debt, up from $1.75 billion a year ago, and with $2.76 billion in long-term liabilities, which was actually down a little from $2.86 billion worth of long-term liabilities at this point in the year in 2013. Overall, the company’s total financial obligations are up slightly from year-ago levels — not lower.

Besides, greater liquidity won’t mean a thing if Sears can’t actually solve it’s bigger problem, which is an inability to attract shoppers and sell them more merchandise at a profitable price.

Bottom Line

Unfortunately, it’s more of the same for those who have a stake in SHLD stock — a proverbial shell game on the liquidity front, more encouraging talk of the “transformation” that’s apparently been underway for years (but has yet to make any forward progress), and smoke and mirrors designed to distract the market away from the fact that Sears Holdings lost a total of $548 million last quarter, has lost $1.5 billion year-to-date, and has lost $6.9 billion since fiscal 2011.

If Sears Holdings going to survive, at this point it’s going to need more than liquidity to do so. It’s going to need sales and profit growth, which is the one thing Eddie Lampert doesn’t seem able to engineer.

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/2014/12/sears-holdings-shld-stock-eddie-lampert/.

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