Surprise! Sears Holdings Pockets a Profit

Count me among those standing in shock and awe at Sears Holdings' (Nasdaq: SHLD  ) surprise profit for the first quarter. The market was no less surprised, opening shares at 21% higher than yesterday's close.

The distressed retailer was able to post earnings of $47 million after excluding numerous one-time items on revenue of $10.1 billion. Analysts had pegged the company's sales number correctly, but they were way off on profit. They expected it to record yet another quarterly loss, this time at $0.88 per share.

Lest you think Eddie Lampert has Sears Holdings moving in the right direction, however, consider that total sales were still down 9% from last year. The company also maintained its unenviable string of declining annual same-store sales, a record that goes back to at least 2005. Comps once again fell by a frightening 7.4% in the first quarter.

There were improvements, to be sure. Inventory was reduced to $9.5 billion from $10.3 billion in the year-ago period, and the company was able to cut its debt by half a billion dollars, to $3 billion. By better managing its inventory, Sears Holdings was able to raise its gross margins 130 basis points, despite the faltering sales.

Sears Holdings might have enjoyed a brief respite from the bad news because of the demise of Circuit City. The company said that, whereas apparel continued to be a blight on sales, home electronics showed surprising strength in domestic stores. Industry leader Best Buy (NYSE: BBY  ) was also able to beat analysts' earnings expectations this past quarter and further expand its market share because it had one less rival to contend with. Nevertheless, the Commerce Department reported that sales at electronics and appliances stores fell 2.8% in April. The closing of Circuit City seemed to have depressed sales in this segment, as consumers went bargain-hunting.

Wal-Mart (NYSE: WMT  ) , of course, is the biggest beneficiary of consumers' migration to cheaper stores, and it is expanding its electronics offerings to take advantage of the influx. Sears Holdings' stores have been losing market share to Wal-Mart and Target (NYSE: TGT  ) , although the latter -- which generates more than 40% of its revenue from non-essentials such as home goods and clothing -- found itself in a similar position as Sears Holdings, and it watched comps fall 3.7% in the quarter.

Sears Holdings ought to read into those numbers and make some kind of effort to keep what customers it did attract coming back for more. Lampert thinks consumers rank his Sears stores between Target and Macy's (NYSE: M  ) , though some thoughtful Fools would peg it significantly below either of them.

Also important to the retailer, however, was its ability to renegotiate a credit agreement with Bank of America (NYSE: BAC  ) . The lender, extending part of the original agreement that was set to expire in March out until 2012, provided Sears Holdings an additional $1 billion next year if it needs the cash.

Not having the necessary credit to purchase merchandise was an ongoing source of concern for investors and analysts, and the new agreement alleviates much of that worry. What has not changed is the anxiety they face over the company's inability to attract more customers to its stores. It's great that they've received credit to buy merchandise, but if no one is willing to buy it, then all the funding in the world doesn't really matter.

The quarterly profit was a surprise, no doubt. It will be even more surprising, though, whether Sears Holdings can repeat the effort next time around.

Sears Holdings, Best Buy, and Wal-Mart Stores are Motley Fool Inside Value recommendations. Best Buy is a Stock Advisor selection, and the Fool owns shares of it. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Rich Duprey owns shares of Wal-Mart but has no financial position in any of the other stocks mentioned in this article. You can see his holdings. The Motley Fool has a disclosure policy.


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  • Report this Comment On May 22, 2009, at 3:37 PM, nolatom wrote:

    They certainly did improve margins. It would be interesting to know in what categories they were able to do that, but Sears does no conference calls so there will be no info forthcoming.

    Inventory decreased 8% on a 9% decrease in sales and they said last year they had too much inventory, therefore they seem to have too much now, so it seems tough to keep those margins going.

    They still are losing ground to retailers like Lowe's and HD and Kohl's and Target (and of course WM). Macy's and JCP maybe not so much, though the product mix is different so it's hard to compare.

    SHLD aggressively went after stimulus checks in the 2Q last year and that probably helped sales and hurt margins, so another double digit sales decline with better margins may occur in the 2Q too.

  • Report this Comment On April 01, 2010, at 10:33 PM, tonym144 wrote:

    Do you know why profits are down? Aside from foolish things like being open on Easter (one of the worst shopping days of the year), articles keep giving their "opinion" of what to expect, telling people that the sales will be down and the retailer is in trouble. This CAUSES, not informs people of, the downward trends. This happened after The Wall Street Journal did the same thing. Telling people that they expected Sears Holdings Inc to be out of business in a couple years basically said to their readers, "Don't shop at Sears, they won't be there to take care of you if there's a problem." In my opinion, if someone is going to write an article, KEEP YOUR OPINION TO YOURSELF. Just report the facts and let US decide what we want to do.

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