Outside a Sears store.

Declines in Sears Canada, consumer electronics and Kmart apparel, as well as charges for pension expense, contributed to another dismal quarter.

NEW YORK — Edward Lampert’s grand experiment in retailing keeps getting more wobbly.

This story first appeared in the November 18, 2011 issue of WWD. Subscribe Today.

Sears Holdings Corp. on Thursday turned in another dismal quarter, fueling speculation about the long-term viability of the company as it exists today. The group that owns Sears, Roebuck & Co. and Kmart saw losses increase as a result of declines in Sears Canada, consumer electronics and Kmart apparel, as well as charges for pension expense. Net losses for the quarter ended Oct. 29 were $421 million, or $3.95 a diluted share, compared with $218 million, or $1.98 a diluted share, in 2010.

 

Read more on Sears’ credit rating here >>

 

The results were substantially worse than Wall Street expectations — and the company’s shares fell sharply in a generally down day for global stock markets. Analysts expected a smaller net loss of $2.14 a share. Excluding the pension expense and other items, Sears’ net loss was $2.57 a share.

Sears Holdings’ stock on Thursday lost 4.55 percent of its value, closing at $65.19, down $3.11 on Nasdaq.

“They haven’t shown any indication that they’re going to turn this big ship around,” said Matt McGinley, a retail analyst at ISI Group. “The plan for them seems to be not to invest materially in stores and invest money online, where they have a decent business that’s growing.”

Since Lampert, the company’s chairman, took over Sears and combined it with Kmart, there have been few indications of a long-term strategy at the group. Some experts believe that Sears will eventually become an e-commerce retailer with fewer, smaller stores that will in essence be product showrooms.

Further increasing pressure on the chain is that Sears’ cash is decreasing and its debt is rising. The company had cash balances of $632 million on Oct. 29, down from $806 million a year earlier. Total debt on Oct. 29 was $4.6 billion.

Operating loss for the third quarter was $459 million, compared with $292 million in 2010, and gross margin declined $110 million to $2.4 billion in the 12-week period. In the second quarter, the company’s loss widened to $146 million, or $1.37 a share, from a loss of $39 million, or 35 cents, a year earlier, missing analysts’ expectations.

Revenue in the third quarter declined 1 percent to $9.57 billion from $9.68 billion, missing Wall Street’s estimate of $9.63 billion. The decline in total revenue for the quarter was mainly due to a 0.8 percent decrease in domestic comp-store sales and the effect of having fewer Kmart and Sears full-line stores in operation. The domestic same-store sales decrease included a comp decline of 0.7 percent at Sears stores and a drop of 0.9 percent at Kmart. Sears Canada’s same-store sales fell 7.8 percent versus last year’s third quarter. Retail analysts noted that competition in Canada will only get stiffer with Target’s entrance into the market in 2013.

Revenue at Sears Holdings has fallen in the past four quarters. Revenue declined 1.2 percent in the second quarter compared with the quarter ended July 31, 2010. In the first quarter, revenue fell 3.4 percent from the previous year’s first quarter, and declined 0.8 percent in the fourth quarter of the last fiscal year from the prior-year quarter. The third quarter of the last fiscal year saw revenue fall 5 percent.

Lou D’Ambrosio, Sears Holdings’ president and chief executive officer, said, “While we are not satisfied with our performance, we saw improvement in some core areas. Sears’ full-line stores saw improvement, as Sears apparel achieved both comparable-store sales and margin rate increases in the quarter. We also saw nearly 20 percent growth in our domestic online business. Despite improvements in these areas, our overall results were down, led by declines in Sears Canada, consumer electronics and Kmart apparel. Despite heavy promoting, sales of appliances were down.”

Sears is giving iPad and iPod Touch devices to sales associates in 450 stores so that they can check inventory and help customers order products online. D’Ambrosio said Sears will further align its online, mobile and store-based services. Online sales increased 19 percent in the third quarter.

No matter how promising, Sears’ online business can’t fix the problems at the stores. “When you look at the big picture, this is an extremely large and unproductive asset base,” McGinley said. “There are about 200 good stores, 1,000 stores that are average or below average and a few hundred stores that need to be closed. Whenever you see Sears close a store, it’s said to free cash flow. Closing stores is never a cash-generative event. There’s lease severance costs and inventory liquidation costs. Sears waits until a lease expires. Unfortunately, Sears has very long leases and it doesn’t have enough money to break the leases. This probably could have been addressed several years ago when Sears was generating cash. They don’t generate cash now.”

In a memo to employees obtained by WWD, D’Ambrosio focused more on digital than on the store base. “We’re in the midst of an exciting transformation of our company,” he wrote, adding that Sears is using disruptive technologies such as digital, social media and mobile to reinvent itself. “We are positioned to be the first major retailer to move beyond multichannel to truly integrated retail. Our challenges are dwarfed by our assets: our dedicated people, our leading products and services and, most of all, our loyal members and customers. We can exceed the expectations of our customers because we know so much more about them through our Shop Your Way Rewards program. Let’s use our assets to delight our customers — every single day — in the fourth quarter and always.”

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