Sears Just Doesn't Cut It

The verdict is out -- Sears Holdings' (Nasdaq: SHLD  ) old stores are so boring and uninviting that customers are heading elsewhere. Sales at Sears have been sliding for the last four years, with third-quarter losses nearly doubling, as demand for consumer electronics and clothes fell at its Kmart stores and also as a result of the less-than-inspiring performance in its Canadian operations. Let's dig in.

Uninspiring, unattractive
Movement in Sears' top line was negligible this quarter, with revenues declining by 1% to $9.5 billion. The decline in revenues was the 19th straight quarter the top line has shrunk. Same-store sales fell by 0.7% and Kmart stores declined 0.9%.

Sears Canada, which has been contributing consistent numbers, saw same-store sales decline 7.8%. The loss, according to the company, would have been greater had it not been for exchange rate gains. Things are going to get even tougher in Canada as competition heats up. Target (NYSE: TGT  ) is looking to roll out nearly 200 stores there in the next decade and expects to generate nearly $6 billion in revenue.  

Since 2005, when hedge-fund billionaire Edward S. Lampert combined Sears and Kmart, Sears has not remodeled its old and aging stores. No wonder customers have shied away and chosen to visit more modern and comfortable stores. As a result, rivals such as Macy's (NYSE: M  ) and Target have in a way stolen Sears' customers away. Retailers are finding it tough to attract customers with consumer confidence in the U.S. at a two-year low. An uncertain economic environment has also resulted in middle-income shoppers tightening their purse strings. 

Coming back to Sears, rising apparel sales, thanks to the Kardashian Kollection, were offset by a drop in the sales of appliances and consumer electronics. New York-based retail consultant Walter Loeb has said that Sears found it difficult to attract store traffic since its apparel isn't attractive enough. Loeb called the stores "antiseptic." Another problem was that the one line (i.e., the Kardashian) that did do well wasn't efficiently promoted. Thus, an all-round uninspiring performance saw the retailer widen its quarterly losses.

The dreaded ax
We all know what a company does when it looks to cut costs. The answer is simple. Job cuts. Last quarter, Sears, in an effort to reduce costs, announced it would lay off 250 workers. Earlier in the year, the company axed 700 Kmart employees. Sears once again is planning cuts. In an attempt to see profits again, Sears is cutting jobs and also plans to shut down a number of its underperforming stores rather than revamp them.

What lies ahead
Sears has been focusing more on online commerce rather than investing in stores. In fact, online was one shining light in an otherwise downbeat quarter, with sales from it rising 19%.

Sears needs to understand that it has to reinvent itself and make its stores more attractive to lure customers. For the time being, the retailer is going to find it tough to compete with their low traffic count. And it isn't getting better -- in the fourth quarter, the company is going to face fiercer price competition as peers Home Depot (NYSE: HD  ) and Lowe's (NYSE: LOW  ) up the ante by promoting their appliance products ever more aggressively.

To follow the price wars and see what Sears has up its sleeve as it looks to attract customers, click here to add the stock to your free watchlist.

Fool contributor Shubh Datta doesn't own any shares in the companies mentioned above. Motley Fool newsletter services have recommended buying shares of Lowe's Companies and The Home Depot. Motley Fool newsletter services have recommended writing covered calls in Lowe's Companies. 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.


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