By  on August 18, 2011

Sears Holdings Corp. continued to lose ground in the second quarter, with losses widening to $146 million as it cut prices to move seasonal goods.

The decline is the latest setback for the company led by chairman Edward S. Lampert — a financier and retail contrarian whose austere approach to managing the company’s fleet of more than 2,300 Sears and Kmart doors has drawn, at times, sharp criticism from analysts.

The net losses attributable to the retailer translated into $1.37 a diluted share and compared with losses of $39 million, or 35 cents, a year earlier. Adjusted losses fell to $1.13 a share from 19 cents a year earlier.

Sales for the three months ended July 30 slipped 1.2 percent to $10.33 billion from $10.46 billion. Comparable-store sales fell 1.2 percent at the Sears unit and were flat at Kmart.

But the company has been making some changes lately — cutting back dramatically on inventory and inking exclusive deals for the Kardashian Kollection at Sears and Sofia by Sofia Vergara at Kmart, and named Edgar Huber to head up the Lands’ End business. And Lou D’Ambrosio, the former IBM executive who became chief executive officer and president of Sears in February, is certainly looking ahead.

In a memo to employees Thursday, D’Ambrosio noted the company’s online sales rose by more than 30 percent in the second quarter. “We also more effectively managed our inventory,” he said. “Our [first-quarter] inventory was $416 million higher than 2010, while in [the second quarter] it was $75 million lower. These are encouraging trends and we will continue to build on this momentum.”

But the company, which employs about 300,000, also laid off about 250 workers in support functions and is taking other steps to reduce costs.

“In any journey, there are always highs and lows, and the critics and skeptics will say whatever they want to say,” D’Ambrosio noted. “Do not be fooled. We have what it takes. Together we will emerge victorious and write the next great chapter of our company’s history.”

Just what “the next great chapter” will look like is a matter of much speculation.

“The key issue at Sears is not so much what’s happening on the income statement, but what’s happening on the balance sheet and how they’re generating cash,” said Matt McGinley, managing director at research firm International Strategy & Investment. “They’re burning cash at a very fast rate. They need to get very smart in how they manage their working capital. If they don’t reduce their inventory they could burn between $500 million and $750 million in free cash flow in 2011.”

McGinley said the company spent about $1.50 to $2 per square foot on its stores last year, noting, “We would estimate for a retailer to maintain share and to keep people coming into these stores, you would need to spend $6 to $8 a square foot in maintenance expenditures.”

The result is what the analyst sees as a subpar retail experience and a chain that continues on, in part, because it is important to its vendors and its landlords.

“It’s a zombie retailer,” McGinley said.

A Sears spokesman noted, “We continue to work on improving the [store] environment, it’s something that we’re committed to here.”

The company’s current financial travails notwithstanding, Lampert did in fact face a daunting challenge when he took on Sears.

Michael Dart, senior partner at consultancy Kurt Salmon, has a bit of sympathetic take on Lampert, noting that Sears has long been besieged by an ever-growing number of competitors, from do-it-yourself stores such as The Home Depot to Kohl’s.

And even though Dart said Sears and Kmart could have done a better job at improving its stores, the company has been in a tough spot in a retail market generally seen as overstored.

“The silver bullet for Sears, I think, actually is sears.com,” Dart said, noting the company can pull cash out of its ailing retail operations to fund e-commerce. “In many ways, given the proprietary brands, given the infrastructure, they have customer awareness, they could be quite formidable,” he said.

And that for Sears, which started as a catalogue operator and helped transform American culture and commerce, would mark a full turn of the retail wheel.

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