Will Sears Go for Broke?

We won't utter the word "bankruptcy" just yet -- OK, I just did -- but it's one of the scenarios investors need to ponder as they look at the continued dismal performance of Sears Holdings (Nasdaq: SHLD  ) . After a few years of using gimmicks to post profits -- selling off real estate, using total return swaps, failing to make capital expenditures to upgrade stores, buying back expensive shares -- Chairman Eddie Lampert's bag of tricks has apparently run dry.

For the first time in three years, Sears failed to report a profit, instead posting a $56 million net loss, or $0.43 per share (a loss of $0.53 a share, excluding favorable gains on the sale of assets). The top line fell 5.2% to $11.1 billion, and total domestic comps -- sales at stores open for at least a year -- plummeted 8.6% from the year-ago period.

Not that falling comps are any surprise. Sears hasn't posted a single increase in this important retail metric in years.

The new game plan for supposedly turning Sears around is to reorganize the company into five autonomous pieces that will all be held separately accountable for making good on progress. Without question, Sears has some well-known brands that it could tap and exploit -- DieHard batteries, Land's End clothing, Kenmore appliances, and Craftsman tools -- but it seems that a new distribution model is necessary, because consumers simply don't want to shop at Sears.

Instead, they're heading to Wal-Mart (NYSE: WMT  ) , Costco (Nasdaq: COST  ) , and Target (NYSE: TGT  ) , all of which reported higher sales. The combination of low price and quality are bringing in consumers looking to stretch their dollars.

Despite the new strategy, it looks like Lampert is returning to his old financial-engineering ways. The board of directors approved another half-billion worth of stock buybacks. When combined with the amount remaining from previous authorizations, that gives Sears nearly $650 million to spend. Over the past year, the company's buybacks haven't proven beneficial to shareholders' returns; management bought shares as high as $150 a stub that are worth less than $85 today. Sure, the shares seem cheap to repurchase now. But if conditions continue their current trend, they might seem as richly priced as those previous certificates it retired.

Sears is running out of time, if not cash. With more than $1.4 billion in the bank and a substantial $4 billion line of credit, it can hold on for a while longer. However, if the once-venerated retailer continues to bleed through its cash, it might not be too long before we're once again discussing the dreaded "B-word."

Discuss Sears with these related Foolish articles:

Wal-Mart Stores and Sears Holdings are Motley Fool Inside Value picks. Costco Wholesale is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Rich Duprey owns shares of Wal-Mart, but he does not have a financial position in any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (8)

Comments from our Foolish Readers

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  • Report this Comment On May 30, 2008, at 1:52 PM, madmilker wrote:

    kiss!

  • Report this Comment On May 30, 2008, at 1:52 PM, madmilker wrote:

    your the fool if you red...oops! read anything on this site!

  • Report this Comment On May 31, 2008, at 11:58 AM, newyorkman wrote:

    it is about time people started to realize that sears will go under. it is an old company, that is behind the times.

  • Report this Comment On May 31, 2008, at 4:22 PM, TurkeyBreath wrote:

    It would surprise me if this buy-back program were not used for the big boys to exercise their stock options. This may well allow them to collect their golden parachutes before Sears goes belly-up.

    TB

  • Report this Comment On August 16, 2008, at 10:56 PM, Cruiser1964 wrote:

    I have an idea for all those who hate Sears so much.....quit complaining about it and go shop some place else. Amazes me how people can just bark and bark and bark about certain things but yet I guarantee you, when it comes "clearance" times and "Tax Free Weekends"..there they are just a shopping away...at Sears no less. I am an employee of Sears and it astonishes me what people expect to get for "free"...40% off isn't enough, 50% off isn't enough even 60% isn't enough...seems most just want you to just put it in a bag and say, "There ya go...free and clear!". And as far as the credit cards are concerned...if you dont want one...dont get it! Anyone who has ever had a credit card know how those things work...whether Sears, Macy's, Sak's, Gas cards.....whomever. If you dont want a bill....dont get a credit card. Pay cash. But don't apply for it...get it, use it...THEN start complaing. Noone told you to get that or any other card. Noone was twisting your arm to apply. You have the option to just simply say "No thank you'. And any adult with a card should know to read the fine print THEMSELVES and not let someone talk you into it. If your that weak minded to get talked into getting a credit card without reading the fine print...then you are not adult enough to have one. If you want to remain debt free and complaint free...dont have any credit cards period, no matter who issued it to you.

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