Steer Clear of Sears

If Wal-Mart (NYSE: WMT  ) can't fix its biggest problem in this climate, Sears Holdings (Nasdaq: SHLD  ) sure can't.

In May, I described Sears as a shambling, soulless wreck of a stock, and things haven't improved in the ensuing months. Sears most recently reported a second-quarter net loss of $146 million, or $1.37 per share, versus a net loss of $39 million, or $0.35 per share, in the year-ago period.

Total revenue for Sears and Kmart declined by 1.2% to $10.3 billion, and same-store sales fell 1.2% at Sears U.S. and were flat at Kmart. Sears also had to mark down prices to move inventory out the door.

Sears shares have shed a quarter of their value since Aug. 1, but that doesn't make them a better bargain than they were in the spring. Its competitive position stinks, with Wal-Mart's hungry to turn around its fortunes in the U.S. market, and discounters like Target (NYSE: TGT  ) and Costco (Nasdaq: COST  ) also providing formidable competition.

In this retail environment, Sears -- which also recently announced that it's closing 29 stores -- is less relevant than ever, and it resonates with consumers far less than the aforementioned discounters.

Furthermore, Sears is saddled with a problem that can be toxic for companies in low-growth economies. It has only $658 million in cash, compared to a vast $3.74 billion in debt. Note Borders' sad fate for a good idea of worst-case scenarios for competitively weak, overly indebted companies in recessionary times.

The strongest stocks can become golden bargains in volatile markets, but beware the stocks of weak companies. Stay away from Sears.  

Alyce Lomax does not own shares of any of the companies mentioned. The Motley Fool owns shares of Wal-Mart and Costco. Motley Fool newsletter services have recommended buying shares of Wal-Mart and Costco, and creating a diagonal call position in Wal-Mart. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (5)

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  • Report this Comment On August 24, 2011, at 5:01 PM, Becomeselfmade wrote:

    This is the dumbest article I have read. The author must be short sears. SHLD righ tnow is a screaming buy just based on the Charts and the launch of the Kardashian Kollection on August 25th 2011. I think this author is in for a rude awakening.

  • Report this Comment On August 24, 2011, at 7:22 PM, paxguy wrote:

    I think Sears is a good buy at current prices (below $60). SHLD currently is a Graham-Dodd cigar butt, that could bloom into a wide-moat business.

    No doubt, the recent quarterly report was horrible.

    But, a $6B market cap is ridiculous. They have $10 B in inventory (at their cost) and $10 B in real estate. They are the #8 internet retailer; 2010 revenues topped $3B. Throw in all the brands, Craftsman, Die Hard, Land's End, and the number one appliance brand, Kenmore, that all has to be worth something?

    However, with all the volatility, this equity is not for the feint of heart.

  • Report this Comment On August 24, 2011, at 9:54 PM, BTShine wrote:

    http://www.fool.com/investing/value/2007/01/17/the-best-reta...

    Are MotleyFool articles on Sears a contrarian indicator?

  • Report this Comment On August 25, 2011, at 12:42 AM, investspec wrote:

    Sears credit rating (lt debt) is B+/Negative which is speculative grade. If the economy worsens, S&P could downgrade their rating. They are in a "turnaround" situation. The way I view Sears is that it is an "old school" retailer. Sears has to change that brand image among the teenage to 30-ish crowd. ....And this is probably the reason why Sears went with the Kard. Kollection.

    Yeah....the appliance/hardware section has a lot of merit based on the branding. We are currently in an economic downturn still. ...And the appliance/hardware section competes with the big box retailers like Walmart, Target, Lowes, Home Depot, and etc. There is a lot of competition in this space.

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