Overall, retail stocks have performed well recently. In fact, shares of the SPDR S&P Retail ETF have risen more than 450% over the past five years. During that period, Home Depot (NYSE:HD) shares rose 385%, and shareholders of CVS Caremark (NYSE:CVS) saw their holdings increase by 230%.
Although the S&P retail index has performed well in aggregate, it has not been without its laggards. A prime example of this is Sears Holdings (NASDAQ:SHLD), shares of which appreciated by a meager 6.3% during the past half-decade. A closer look at any these companies reveals that shares of Sears have under-performed for good reason, and likely will continue to do so.
Consistent contraction of revenue in every major segment
As the result of a 2004 merger with Kmart, 2005 revenue increased markedly from the year before for Sears. The combined entity managed to increase revenue one more time before kicking off a six-year losing streak. The company has only reported two quarters worth of results this year, and revenue is down 7.5%.
All four of Kmart's segments are in decline and capital expenditures have slowed to a dribble, making a meaningful reversal highly unlikely. And Kmart isn't even the company's worst performing asset -- sales are falling even faster at Sears Canada. It's not a sure thing, but it seems a safe bet that the streak of revenue declines will continue for a seventh straight year.
Cash is being rapidly consumed
Sears Holdings generated negative operating cash flows of $275 million in 2011 and $303 million in 2012. Through the first six months of 2013, operating cash flow is negative $715 million, a bigger loss than the previous two years combined. Operations are producing losses, and the company has to deal with more than $200 million in annual interest expenses.
On top of that, the company's now-frozen pension plan is massively underfunded. While the majority of employees are no longer earning benefits, accumulated obligations are immense. The company estimates its domestic pension plan contributions for 2014 will exceed $500 million.
In contrast, Home Depot generated nearly $7 billion in operating cash flow during fiscal 2013, and has had operating cash flow of more than $4.5 billion in each year for the past decade.
For CVS, 2012 brought $6.7 billion in operating cash flow, extending the streak of record years to eight. For Home Depot, being awash in cash has led to large increases and a steadily increasing dividend. Meanwhile CVS more than doubled its share repurchases, and nearly doubled the amount it pays out it annual dividends, between 2010 and 2012.
The managements of highly profitable companies can reward shareholders in a variety of ways. But as Sears struggles, its share repurchases have disappeared, and dividend payments have been frozen.
Foolish bottom line
Sears has been floundering for several years and is in a fight for survival. Buying unprofitable businesses with boatloads of debt and huge pension liabilities hardly ever works out well. Practically the only possible saving grace for Sears' investors is the company's extensive portfolio of real estate. Betting on an ailing retail giant that hopes to turn itself around by selling real estate is downright foolish.
Fool blogger Ryan Palmer has no position in any of the stocks mentioned in this article. The Motley Fool has no position in any of the stocks mentioned in this article. 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.