The good news is that Sears Holdings (SHLD) did better last quarter than investors were expecting it to … in terms of its bottom line. The bad news is that, despite the earnings beat, Sears Holdings is still a train wreck, and anyone who owns a stake in SHLD is likely to end up disappointed sooner or later.
However, investors seem not to be panicking on the heels of superficially good news.
And therein lies the rub — if SHLD is such a liability, why is the stock only down a couple of percentage points after earnings? Primarily because the market has yet to take a close look at all the numbers.
Sears Holdings, By the Numbers
In its first fiscal quarter, on an operational basis Sears Holdings lost $2.00 per share on sales of $5.88 billion. Analysts were looking for a top line of $6.08 billion, and were projecting a loss of $2.59 per share of SHLD.
For comparison, the company lost $2.20 per share of SHLD on sales of $7.88 billion in the same quarter a year earlier. On a bottom-line basis, Q1’s loss of $303 million was considerably smaller than the $402 million loss Sears Holdings logged for the first quarter of last year.
Fans and followers of what Eddie Lampert is trying to do with Sears Holdings will quickly point out that comparing last year to this year is comparing apples and oranges.
Specifically, the sale of several stores as well as the exit of its stake in Sears Canada (SRSC) — in addition to the spinoff of Land’s End (LE) halfway through the first quarter of the previous fiscal year — made last quarter’s results look worse than they really were.
The Problem Is…
While a lot has changed between then and now, not everything has changed for the better with SHLD.
First and foremost, the fact that the loss was smaller than expected and smaller than the year-ago loss means nothing. See, Eddie Lampert is simply reducing the company’s capacity to book losses.
For example, Sears touted the fact that EBITDA improved on a year-over-year basis, from a loss of $178 million a year earlier to a loss of only $141 million this time around. As a percentage of total sales, however, Q1’s EBITDA was 2.4% of the company’s revenue, versus 2.3% of revenue for the comparable quarter a year earlier.
In other words, the retailer is simply shrinking its way toward profitability. It’s not a viable long-term plan for success.
The biggest red flag of all, however, is same-store sales.
In the first quarter, Sears Holdings reported a 10.9% decline in domestic same-store sales. In other words, when it comes right down to it, the average store is selling less and less merchandise to the average shopper. Until the company starts to grow the top line on a per-store basis, there’s no evidence any of the company’s turnaround (or “transformation”) initiatives have been worth it.
Giving credit where it’s due, gross margins are getting better. Gross profits improved from 23.2% a year ago to 25.8% during the first quarter of this year. Even so, with the average apparel retailer producing gross margins of 31% of sales, Sears Holdings is still miles away from where it needs to be.
In other words, it’s more of the same for SHLD, which isn’t a good thing for anyone who owns Sears stock.
Lampert Gives Investors (False) Hope
So why isn’t SHLD tanking in following the earnings announcement? Bluntly, CEO Eddie Lampert has once again offered the market just enough hope to keep investors on the hook. Lampert added to the earnings report:
“During the first quarter, we made significant progress in our transformation from a traditional, store-network based retail business model to a more asset-light, member-centric integrated retailer leveraging our Shop Your Way platform. As our improved EBITDA results over the last three consecutive quarters demonstrate, we are successfully enhancing our margin rates and EBITDA performance.”
Again, EBITDA as a percentage of sales moved in the wrong direction last quarter. As for everything else, the so-called transformation has been underway for years, and results have yet to be transformed into anything better.
Lampert went on to say:
“With the completion of the joint venture transactions with three leading shopping mall owners and operators, and the advanced formation of the Seritage REIT, we will become more productive with our physical store space. This will position Sears Holdings for long-term success consistent with our focus on our best stores.”
The establishment of a REIT that will require some stores to start paying rent (when they haven’t been burdened by a lease payment before) in no way will make Sears Holdings more productive with its physical store space. It will simply further crimp margins, though it will enrich owners of the REIT.
To that end, the rights offering for the REIT will likely be extended to current SHLD shareholders on June 12, giving current investors a chance to buy what they already own — a portion of the company’s real estate.
Bottom Line for SHLD
Regardless of what Lampert says, Sears Holdings is decidedly not on the mend. Above all else, the company needs to start selling more merchandise at a wider profit. Until that happens — if it ever happens — nothing else matters.
The fact that SHLD hasn’t completely cratered today is a mini-miracle in itself.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
