Technically speaking, Sears Holdings Corp (NASDAQ:SHLD) did relatively well last quarter. Unfortunately, the absolute results indicate that Sears stock is a difficult stock to own. That’s because SHLD has yet to prove to anyone that it has a reasonable shot at ever being viable again.
For its fiscal second quarter, Sears booked an operating loss of $2.03 per share (a GAAP loss of $395 million) on $5.7 billion in sales. The per-share earnings figure compares favorably to last year’s Q2 loss of $2.40 per share and total operating loss of $256 million, though the top line fell 8% from the prior year’s Q2 revenue of $6.21 billion in revenue.
The second-quarter results also topped expectations. Analysts had collectively planned on SHLD reporting a loss $3.48 per share of Sears stock on revenue of $5.43 billion.
Same-store sales fell 3.3% for Kmart, and were 7% lower for Sears.
CEO Eddie Lampert commented:
“We continue to face a challenging competitive environment and while we continue to focus on our overall profitability, including managing expenses, we reported a net loss for the second quarter. We are encouraged by the year-over-year improvement in our Adjusted EBITDA and feel we are making progress in our transformation as we remain focused on our best stores, our best members and our best categories to drive our business and enhance the member experience.”
The quarter extended the losses in Sears stock by about 4% in Thursday’s premarket trade. It also extended a long, storied and well-documented deterioration of the company — partly because brick-and-mortar retailing is a losing ground to highly fragmented online shopping, and partly because SHLD has made a long string of arguably bad decisions.
The Man With the (Bad) Ideas
Most observers and Sears stock holders ultimately blame hedge fund manager and majority shareholder Eddie Lampert. He has proven to be a value-finding wiz and once hailed as the next Warren Buffett. However, his foray into retailing with the 2004 purchase of bankrupt Kmart and subsequent merger with Sears has been disastrous. The company is now into its 10th straight year of falling revenue, and hasn’t turned a profit since 2010.
While the headwind of online competition is nothing to dismiss, Lampert has demonstrated a penchant for selling good real estate to prop up the struggling retailing operations. That’s his alternative to finding someone to repair — or find someone to repair — what’s actually going wrong inside its stores.
Since Lampert took the helm as CEO in 2013, he has closed hundreds of locations, selling the real estate to infuse cash into the coffers. He also has spun off a handful of Sears-owned companies like Lands’ End, Inc. (NASDAQ:LE) and Sears Hometown and Outlet Stores Inc (NASDAQ:SHOS) to garner new funding for the transformation. Last quarter he shed another $176 million worth of real estate and other assets. But none of the cash was used in a way that reignited growth or rekindle the value of SHLD stock.
Sears’ Turnaround Tactics
Still, the struggling retailer continues to try new things.
One of the boldest efforts yet materialized in June, with the company’s debut of Kenmore-branded smart TVs and smart appliances. That was an attempt to leverage a familiar name associated with Sears’ once-great home appliance business. SHLD did the same with DieHard, putting the moniker on tires sold by its auto service unit.
And there’s little doubt that Sears is at least entertaining the idea of turning up the heat on its appliances business. In May it unveiled a new small-footprint appliance store concept that Sears hopes will be focused enough to compete in a crowded space.
Sears also has a highly respected e-commerce platform in place. The key fault is that nobody wants to buy what it’s selling. With the right products and push, though, it could serve as a foundation for growth.
The question surrounding all these initiatives and weapons is time. Can Sears show signs of viability to the remaining owners (there are only a few left, but they each own a lot of SHLD stock) of Sears stock before the retailer runs out of money?
Last quarter didn’t offer much encouragement on this front.
Why Sears Stock Still Is in Trouble
Take the highly touted EBITDA figure, for instance. On the surface, it appeared to be something of a victory. The press release explained that the EBITDA loss of only $191 million improved from the prior year’s Q2 loss of $226 million.
But a closer look at the numbers reveals that as a percentage of sales, EBITDA isn’t getting significantly better. Last quarter, the EBITDA loss totaled 3.3% of Sears’ total revenue. In the same quarter a year ago, the EBITDA loss was 3.6% of sales. Revenue may need to approach zero before EBITDA turns positive.
Still, the company itself maintained a positive game face for owners of SHLD stock, particularly on the liquidity front. CFO Rob Schriesheim said:
“During the first half of 2016, we have demonstrated our ability to finance our transformation strategy with the levers available to us through our portfolio of assets and businesses. The sale of assets, combined with the previous closing of the $750 million Term Loan, together with the $500 million Secured Loan Facility, provided us with over $1.4 billion of financing during the first half of 2016. We have continued to demonstrate our flexibility in the third quarter of 2016 with the announcement of the recently received offer to provide $300 million of additional debt financing.”
That additional debt financing offer of $300 million is access to much-needed access to cash, in that Sears ended the quarter with only $276 million in the bank (less than many of the recent quarterly GAAP losses).
Just for the record, though, ESL Investments is Eddie Lampert’s hedge fund. The beleaguered retailer may not be getting any decent conventional loan offers from unrelated parties … an idea underscored by the fact that SHLD continues to sell revenue-bearing pieces of itself to remain afloat.
The mischaracterized EBITDA and glossed-over detail about its loan offer are just more layers of evidence that Sears is struggling to face the ugly fact that whatever it’s doing isn’t working.
The 4% loss that Sears stock logged just after Thursday’s earnings news was released says investors don’t think it’s working either.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.