Sears Strikes an Iceberg

Let's face the truth: Fewer customers want to shop at Sears Holdings (Nasdaq: SHLD  ) anymore. Nor at Sears' sibling Kmart, for that matter.

For more than two years now, the once-venerable discount retailer has seen customers return to its stores less and less often. Same-store sales (which measure growth at a company's existing stores, filtering out sales growth from newly opened locations) sank like the Titanic yet again: 4.3% at Sears, and 3.7% at Kmart.

Since the company emerged from bankruptcy a few years ago, Sears' stock has been on a tear, rising with the hope that a latter day Warren Buffett -- in the form of CEO Eddie Lampert -- would be able to remake the retailer the way middle-market retailers J.C. Penney (NYSE: JCP  ) and Kohl's (NYSE: KSS  ) have been able to do.

Yet the competition is really too much. It can't compete on price the way discounters Wal-Mart (NYSE: WMT  ) and Target (NYSE: TGT  ) do, and the premiums that some of its products carry -- like its Craftsman tools -- can find equal quality at other stores like Home Depot (NYSE: HD  ) or Costco (Nasdaq: COST  ) .

Was anyone really surprised at the lower comps? I would have raised an eyebrow had they actually gone up, so it shouldn't be much of a surprise that profits were much lower this time around, too. In fact, they were off 40% from last year to $176 million.

That's because there were no magic bullets to boost results this time around -- no Carpathia to rescue survivors. Last year, the company recorded a $22 million gain from an antitrust settlement with Visa and MasterCard, and Lampert's exotic total return swaps posted a slight gain of less than $1 million this quarter.

The company narrowed its guidance a few weeks ago, raising the low end and dropping the top. At the time, it seemed to please Wall Street, but it was apparently only the tip of the iceberg. Sears' stock has fallen from its highs. It was starting to move back up, but today's earnings report underscored that Sears suffers from don't-want-it-itis. Customers don't want its merchandise, and with the stock down 3% today, investors don't want its stock.

The only one buying Sears stock lately has been Sears, which burned through $1.5 billion of its cash repurchasing 9.6 million shares -- at some pretty steep prices, it seems. That looks like a foolhardy venture for a store that should be buying up goods that its customers actually want.

The one thing Sears does have that's in demand -- but the one thing Lampert has denied any interest in undermining -- is its real estate. CEO Alwyn Lewis has said again and again that he's looking to make Sears Holdings a successful retail operation. Today, he stated that the company is "enhancing our marketing message to more clearly articulate the advantages of our products and service offerings."

Jawboning about the operations won't salvage this sinking ship. I think it's time to face facts and scuttle Sears. Despite a still-healthy balance sheet (it has $2.6 billion in cash still), I don't think the retailer has what it takes to compete anymore. Rather than waste more trying to prop up the stock with buybacks, Sears could devise better ways to create shareholder value and return money to investors.

Instead of Buffett, Lampert here is more closely emulating the heroic Wallace Hartley, the Titanic's bandleader, who played "Nearer My God To Thee" as the ship sank beneath the icy waters. He's kept a similarly stiff upper lip, but unlike Wallace, someone needs to guide Lampert to a lifeboat.

Sail on with these related Foolish articles:

Costco is a recommendation of Motley Fool Stock Advisor. Wal-Mart and Home Depot are stock selections of Motley Fool Inside Value. A 30-day risk-free trial subscription to any of the Fool's investment newsletters will help keep your portfolio afloat.

Fool contributor Rich Duprey owns shares in Wal-Mart but does not have a financial position in any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool's disclosure policy is king of the world!

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Related Tickers

10/27/2016 4:00 PM
SHLD $11.17 Up +0.23 +2.10%
Sears Holdings CAPS Rating: *
COST $150.86 Down -0.12 -0.08%
Costco Wholesale CAPS Rating: ****
HD $122.26 Down -0.45 -0.37%
Home Depot CAPS Rating: ****
JCP $8.31 Down -0.10 -1.19%
J.C. Penney CAPS Rating: *
KSS $43.70 Down -0.05 -0.11%
Kohl's CAPS Rating: **
TGT $67.62 Down -0.97 -1.41%
Target CAPS Rating: ***
WMT $69.83 Up +0.24 +0.34%
Wal-Mart Stores CAPS Rating: ***