Sears Holdings Corp.’s third-quarter losses narrowed and the Kmart division posted a 0.5 percent rise in comparable-store sales, but Wall Street is skeptical about company chairman Edward Lampert’s retailing skills.

This story first appeared in the November 20, 2009 issue of WWD. Subscribe Today.

Sears, like many of the broadlines and mass retailers who reported results Thursday, showed modest improvement as stores battle for consumer dollars in an environment marked by high unemployment, tight credit and an increasingly discretionary approach to spending on apparel.

The Bon-Ton Stores Inc. and Stage Stores Inc. reduced their third-quarter losses, and Stein Mart Inc. returned to profitability. Off-pricer Ross Stores Inc. continued to prosper in a value-focused economy.

But analysts said Sears is at greater risk than its competitors because of weak sales, sweeping cuts and the uncertain retail vision of hedge fund titan Lampert.

“It is not clear how he expects this to be a surviving retailer over the long term with just little to no investment in the store or the product or the systems or the operational procedures,” said Bill Dreher Jr., a Deutsche Bank analyst who maintained his “sell” rating on the stock. The company has cut selling and administrative expenses by $373 million this year.

Dreher said Lampert, the billionaire who masterminded the 2005 Sears-Kmart merger, might be looking to take the retailer private. He noted the $358 million of stock the company has repurchased this year amounted to 24 percent of the shares that float publicly.

“Their strategy as a retailer is really unclear, and it really does not look promising,” Dreher said. “Their exit strategy does seem pretty clear.”

Dreher said it appeared Lampert wants to use cash flow from the retailer to fund broader investments, similar to what Warren Buffett has done with Berkshire Hathaway Inc.

On an operating basis, Sears stores in Canada were the company’s only profitable division in the third quarter, with income of $89 million. Kmart reported operating losses of $72 million, and the Sears U.S. unit recorded losses of $123 million.

Credit Suisse analyst Gary Balter said the Canadian division has not seen the same “massive” expense cuts or “management by reduction” that have characterized the U.S. businesses. “It may work in other sectors, and can work in the short run in retailing, but the gap in productivity catches up over time,” he wrote in a research note.

Balter, who has an “underperform” rating on the stock, said Wal-Mart was more than four times more productive than Kmart and Sears’ U.S. stores continue to lose market share.

Losses attributable to Sears’ shareholders totaled $127 million, or $1.09 a diluted share, compared with a year-ago deficit of $146 million, or $1.16. Adjusting for certain items, such as store closures and pension expense, losses came in at 81 cents a share. Revenues for the quarter ended Oct. 31 slipped 4.4 percent to $10.19 billion from $10.66 billion. Comps fell 4.6 percent at the Sears U.S. division.

“We saw some encouraging signs of progress in the third quarter,” said W. Bruce Johnson, interim chief executive officer and president, pointing to Kmart’s comps improvement and reduced expenses.

Shares of Sears fell $2.82, or 3.7 percent, to $72.95 after the disclosure of earnings.

The S&P Retail Index dropped 3.64 points, or 0.9 percent, to 400.81, apparently more in reaction to general economic concerns than the wave of retail results. While the retail index briefly dipped below the 400 mark, the Dow Jones Industrial Average remained comfortably above 10,000 despite a 93.87 point, or 0.9 percent, contraction to 10,332.44. The S&P 500 and Nasdaq Composite dropped 1.3 and 1.7 percent, respectively.

Of all department store issues tracked by WWD, none performed better than Bon-Ton, whose stock jumped $1.94, or 18.1 percent, to $12.66 after the department store exceeded third-quarter expectations with narrower losses.

The York, Pa.-based retailer’s losses totaled $4.2 million, or 24 cents a share, compared with the $14.3 million, or 85 cent, deficit registered a year ago. The company trimmed selling, general and administrative expenses by $27.1 million. Revenues for the quarter ended Oct. 31 slid 3.4 percent to $722.6 million from $747.7 million, and comps fell 2.6 percent.

“We are certainly encouraged by the improvement in traffic that we saw in the third quarter,” Bud Bergren, president and ceo, said on a conference call.

Bon-Ton adjusted its guidance for the year to losses of $1.20 to $2.30 a share, from the $2.50 to $3.70 in losses previously projected.

The company plans to keep a conservative financial strategy to maintain cash flow and liquidity. Bon-Ton ended the quarter with $15.7 million in cash and said it had about $246 million in excess borrowing capacity under its revolving credit facility.

Stein Mart’s shares got a positive bump on Thursday when it reported that cost-cutting helped nudge it back into the black for the third quarter. The stock rose $1.04, or 10.2 percent, to $11.26.

The Jacksonville, Fla.-based firm posted profits of $3.2 million, or 7 cents a share, compared with year-ago losses of $14.1 million, or 34 cents. The bottom-line improvement was driven by a $20.2 million reduction in expenses, lower inventory levels and less clearance activity. Sales for the quarter ended Oct. 31 fell 9.6 percent to $270.2 million from $298.8 million, and comparable-store sales dropped 6.2 percent.

Analysts, on average, had expected a loss of 7 cents.

Shoppers should be hearing more from Stein Mart this quarter as it tries to drum up traffic.

“In the third quarter, we diverted ad dollars to increase our marketing spend in the fourth quarter,” David Stovall Jr., president and ceo, said on a conference call with analysts. That translates into more TV and newspaper advertising from the firm.

While Ross Stores’ growth accelerated in the third quarter as the Pleasanton, Calif.-based off-pricer generated an 83.5 percent increase in profits on an 8 percent comp increase, its shares fell $1.22, or 2.7 percent, to $44.85.

In the three months ended Oct. 31, net income rose to $105.1 million, or 84 cents a diluted share, matching analysts’ estimates and blowing past the $57.3 million, or 44 cents, in the 2008 period. Sales rose 12.1 percent, to $1.74 billion, from $1.56 billion.

Michael Balmuth, vice chairman, president and ceo of the nation’s second-largest off-price chain, noted operating margin rose 385 basis points to 9.9 percent of sales, while gross margin picked up 340 basis points. “The gross margin improvement was from a combination of healthy merchandise gross margin gains, much lower-than-expected shortage results, a decline in freight and distribution expenses as a percent of sales, and leverage on occupancy costs.”

Ross stuck with its guidance for comps gains of between 5 and 6 percent in the year’s final quarter and earnings per share of 88 to 94 cents.

Meanwhile, Stage Stores reported a smaller-than-expected third-quarter loss and provided a more positive holiday outlook, citing improved sales trends. Investors appeared unenthusiastic as shares pulled back 44 cents, or 3.6 percent, to $11.90.

In the three months ended Oct. 31, the Houston-based department store operator registered a net loss of $7.3 million, or 19 cents a diluted share, 2 cents better than analysts’ consensus estimates. That compared with a loss of $102.8 million, or $2.66 a share, which, exclusive of a $95.4 million pretax charge for goodwill impairment, translated to $7.4 million, or 19 cents. Sales in the quarter receded 2.6 percent to $324.9 million from $333.8 million as same-store sales fell 5.4 percent, a little more than half the 10.3 percent decline of last year’s third quarter.

Andy Hall, president and ceo, pointed out gross profit improved to 22.6 percent of sales from 22.4 percent in last year’s comparable period, even as selling, general and administrative expenses were reduced $1.2 million despite the addition of 27 stores.

Stage operates 759 stores under nameplates including Stage, Bealls and Peebles.

Fourth-quarter EPS guidance was raised to a range of 56 cents to 66 cents, from 54 cents to 65 cents, and the pullback in same-store sales is now expected to be between 4 and 7 percent, instead of the 5 to 8 percent drop-off projected in August.


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