Sears Holdings Throws Another Shovel's Worth of Dirt on Its Grave

Spin as he might to put some life back into Sears Holdings'  (NASDAQ: SHLD  ) first-quarter results, chairman and CEO Eddie Lampert can't mask the pallor of the retailer's true state of health. With sales down another 7% as it closed 185 stores over the past year and Sears Canada -- which it just announced it would spinoff -- continuing to decline, Sears remains on a downward spiral that not even the singularity of positive comparable sales at its domestic namesake stores can alter.

Where Lampert intones that "Sears is undergoing a significant transformation, and we fundamentally are changing the way we do business," you'll be forgiven for thinking that's a way to describe how to run a retailer on widespread losses, which worsened to $402 million, or $3.79 per share, compared to the $279 million, or $2.63 per share, it lost last year. Part of the explanation, though, lies in the greater emphasis being placed on the Shop Your Way program.

The customer-loyalty program now accounts for three quarters of eligible sales, up from 68% a year ago, but it also serves as a drain on profits with gross margins tumbling $328 million to $1.8 billion, a good portion of which was due to Lampert spinning off Lands' End, but also because the promotional environment the Shop Your Way program contributes to affected Sears' margin rate, which declined by 220 basis points.

Much of the mess was caused by Sears reliance on electronic goods that served to drag down by the Sears stores themselves, as well as Kmart. Comps at Sears domestic stores were down 1% overall, but 2.2% at Kmart and 0.2% higher at its eponymous stores. If you removed consumer electronics from the equation, however, Sears' comps would have been up 0.4% and Kmart's decline would have been a more tolerable 0.4%.

Source: Sears Holdings SEC filings

So, just like that, Lampert will no longer focus on electronics but, as he detailed on the conference call, will instead concentrate on some concept called "connected living" that will tie together fitness equipment, electronics, appliances, home services, and auto services. Yeah, that should work out well; it's done wonders for Best Buy, no?

Rather, what we're likely to see is the continued dismantling of Sears Holding. Lampert underscored he's in the process of closing 80 more stores this year, but that number could go even higher. And the sale or spinoff of its automotive division remains on the table as a number of third parties have been engaged in discussions about its future. From Orchard Supply to Sears Hometown & Outlet, Sears Canada to Lands' End, the slow-motion deconstruction of the once venerable retailer is nearly complete. Beyond auto services, there aren't too many more aces Lampert has in the hole: Craftsman tools, Diehard batteries, and Kenmore appliances are all that's available before he's empty. By that point the retailer's burial will be complete.

Yet the markets apparently liked Sears Holdings earnings report yesterday, causing its stock to rise by more than 4% on the news, but the euphoria should be short lived as the reality the retailer is still a zombie will once again sink in. I wouldn't be surprised if investors will once again hang black crepe and go into mourning over what was once a vital retail outlet.

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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 May 24, 2014, at 11:47 PM, Jarky wrote:

    Pardon me for sayin' so, but you guys documenting their downward spiral ain't helpin' any.

  • Report this Comment On May 25, 2014, at 12:30 PM, katnip56 wrote:

    Motley Fool is an appropriate name for this organization. there must be a paycheck or bonus to write the same story that Sears is dying, Sears is no Walmart, it is a matter of time, blah, blah blah.... and so on. For crying out loud who cares? Can you NOT write about something else or do you have people assigned to specifically attack certain stores. Yes you are right Sears is not in a good place and will probably die, but your little ninja reporters could think of something more interesting to write about instead of getting paid to regurgitate the same puke. Totally boring and always repeating the same story, all you do is just take the same info and re-organize it.

  • Report this Comment On May 27, 2014, at 3:44 AM, deadspace wrote:

    Your story misses the most important asset of all - the real estate value.

    Even after all these businesses are spun out there is still real estate that could be sold or leased. It all adds up to more than the current stock price even with a few more years of loses. So whats your point?. Yes sears is dead but as an investment its potentially very good!

  • Report this Comment On May 27, 2014, at 11:53 PM, Vanmusicblues wrote:

    The Real Estate was written up on the books in 2005 and they have already sold off the cream. The remaining big box real estate is worth less, on average than its book value. Mall property valuations are down 17% since the time they wrote the assets up.

    There is bunch of ghetto RE on the books too. Tear- downs

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Rich Duprey

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow me on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.


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