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No, Sears Holdings Did Not Just Turn a Corner

By Daniel B. Kline - Updated Dec 1, 2017 at 3:38PM

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The company may have lost a little less money, but it's still on a clear path down.

Sears Holdings (SHLDQ) CEO Edward Lampert has a clear talent for getting people to see the positive amid a sea of terrible news. He has done that again with the company's most recent quarterly report, in which the company reported losses of over $550 million along with a same-store sales drop of 17% at Sears and 13% at Kmart.

In addition, Sears Holdings saw its overall revenue shrink from $5 billion in Q3 last year to $3.7 billion in the third quarter this year. Over half of the decline came from the loss of revenue from closed stores, the company said.

Despite those numbers, which appear to show a company in a state of rapid decline, Lampert sees good news. He acknowledged challenging market conditions in the company's Q3 earnings press release, but continued to push the idea that his turnaround plan remains on track.

"In the third quarter, we continued to narrow our losses and delivered another quarter of Adjusted EBITDA improvement of at least $100 million," he said. EBITDA is earnings before interest, taxes, depreciation, and amortization. "With the challenging retail landscape continuing to pressure sales, the improvement in Adjusted EBITDA is reflective of the success of the strategic priorities we outlined earlier this year to streamline our operations, reduce inventory and minimize operating expenses," Lampert said.

The exterior of a Sears store.

Sears has been closing stores and selling assets in an effort to remain in business. Image source: Sears Holdings.

Where does Sears actually stand?

On the positive side, the company cut its loss to $558 million ($5.19 loss per diluted share) compared to a loss of $748 million ($6.99 loss per diluted share) in the same period in 2016. It also, as Lampert noted, cut its adjusted EBITDA from a loss of $375 million last year to a loss of $275 million in 2017.

That's good news, in the sense that your emergency room doctor telling you that you have only been shot 11 times, not the 12 he originally believed, would be good news. Sears remains a shrinking company that has steadily lost money since 2013, with the only recent exceptions being quarters in which it benefited from a one-time sale of assets.

Sears has lost over $1.6 billion in 2017 so far, following a $2.2 billion loss in 2016, and a $1.1 billion loss in 2015. It also has, as of the end of Q3, total assets of $8.1 billion, down from $10.8 billion at the end of Q3 2016. Additionally, it has $12 billion in total liabilities, down from $14.2 billion a year ago.

That means the company has fallen slightly more underwater over the past year. At the end of Q3 2016, liabilities exceeded assets by $3.3 billion and at the end of Q3 2017, that number had climbed to $4 billion.

It's hard to see any good here

Sears has continued to exist because it has been able to raise cash by selling assets and because hedge funds controlled by Lampert have loaned it money. Its actual operations continue to lose money and while those losses may have marginally shrunk, there's no reason to believe that a return to profitability is imminent or even possible.

The chain appears on pace to equal or surpass its 2016 loss and it's running out of assets to sell. It's also losing store count with its total number of stores dropping from 1,503 at the end of Q3 2016 to 1,104 at the end of the same period this year.

Lampert has a sales pitch for the drop in stores as well. He noted in his earnings release remarks that "our Shop Your Way membership program and Integrated Retail Strategy remain a key focus for us in order to meet the needs of our members." Both of those refer to helping people shop the way they want to shop, even if that's not in a physical store.

His statement would ring a lot truer if there were any sign that sales being lost in stores were being made up through digital sales. The numbers, however, tell a very different story and there's no way to put a positive spin on that.

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