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Sears Needs to Change

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Sears Holdings (Nasdaq: SHLD  ) reported a hefty $2.4 billion loss for the fourth quarter while announcing plans to boost liquidity by spinning off and disposing some of its stores.

Boosting liquidity is all well and good, but what Sears didn't mention in its earnings release was how it plans to correct its flagging sales, which have been a major problem for the Illinois-based retailer.

I don't want to go there...
Sears' revenue tumbled 5% to $12.48 billion in a quarter that sits pretty on holiday sales and normally proves fruitful for retailers. Domestic same-store sales for the company declined by 3.4%, with comps at Sears' stores falling 4.1% and those at Kmart dropping 2.7%.

While Sears struggled during the holiday season, peers such as Target (NYSE: TGT  ) and Wal-Mart (NYSE: WMT  ) had reason to cheer. Target's fourth-quarter sales rose 3.3%, accompanied by a 2.2% rise in same-store sales. Wal-Mart reported its second consecutive quarter of same-store sales gain as comps rose 1.5%.

Sears blamed a fall in demand for consumer goods and appliances for the decline in domestic sales, but as Ron Friedman, a partner at Marcum's retail and consumer products wing, puts it, the problem lies in the fact that Sears' stores are "old and they're run down." Sears' stores have been wearing the same look since 2005, when hedge-fund billionaire Edward S. Lampert combined Sears and Kmart into one, and the same company hasn't made any effort to remodel. It is no surprise that more swanky and modern retailers have managed to lure Sears' customers away.

Are spin-offs and closures the way to go?
Instead of fixing this problem, Sears is looking to shutter stores and spin off some businesses. The company will spin off its Hometown and Outlet businesses, as well some hardware outlets, which include nearly 1,250 stores. That's not all: Sears will sell another 11 stores for $270 million to General Growth Properties (NYSE: GGP  ) by April. In December, Sears had announced the closure of 120 of its underperformers. Through these initiatives, Sears expects to raise around $1 billion.

The retailer ended the year with over $3.2 billion liquidity, and CFO Rob Schriesheim said it has access to another $1 billion through its credit facility and a further $760 million via a second lien loan. What Sears seriously needs to do is invest in itself and overhaul its uninspiring image. According to research by the International Strategy & Investment Group, retailers such as Wal-Mart spend somewhere between $6 and $8 per square foot on updating store image, which includes new cash registers, floor tiles, and various touch-ups. Sears spends around $1.50 to $2 per square foot. This calls for a major change.

Shuttering stores and getting rid of failing businesses is one thing, but changing its image can go a long way in attracting customers and boosting sales. Maybe it could do well by taking a page out of retailer JC Penney's book -- who knows?

What do you think? Leave your comments below. At the same time, stay up to date on Sears by adding the stock to your watchlist. It's free; click here to start using the service now.

Fool contributor Shubh Datta doesn't own any shares in the companies mentioned above. The Motley Fool owns shares of Wal-Mart Stores. Motley Fool newsletter services have recommended buying shares of Wal-Mart Stores. Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart Stores. 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 (2) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 13, 2012, at 3:23 PM, keithgl wrote:

    Ron is right but, with the loss in sales, how much remodeling can they do? Good employees with proper training will grow revenues regardless of how the property looks. And Sears needs that anyway. Then use the profits for that much needed makeover.

  • Report this Comment On March 14, 2012, at 10:13 AM, EEasyMoney wrote:

    The only reason I can see that the stock has risen lately is that it appears liquidation is on the horizon. That's the whole reason the stock was so high after Lampert took over. Who really sees Eddie Lampert as a retail guy? The real value in this company is what it will become long after all of the Sears and KMart stores are gone. What will Lampert do with the cash? Investors want to see a parallel story of a dying textile company called Berkshire Hathaway and a young chairman named Buffett. The idea of sprucing up the stores to compete with Walmart, Target, and Penney's is a joke. Before the internet, there was room in this counrty for so many big retailers. Those days are gone. The best days of Sears stores and KMart stores were decades ago and are not coming back. Let the hedge fund manager manage the money and let's see what this company can become.

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