Sears Holdings (SHLDQ) has a lot in common with The X-Files. Some people want to believe, even when common sense and most evidence suggests they shouldn't.
What happened
Investors were happy that Sears Holdings reported a profit of $182 million in the fourth quarter. They should be because the retail chain, which owns both Sears and Kmart, has rarely managed a profitable quarter over the last five years.
In fact, the only times the company has been profitable were when the profit came from something other than ongoing operations. That's what happened here: Sears Holdings didn't really make money in Q4. In fact, revenue fell from $6.1 billion in the year-ago quarter to $4.4 billion.
In addition, total comparable-store sales fell by 15.6% in the fourth quarter. Sears' comparable-store sales declined by 18.1% while Kmart's dropped by 12.2%.
Sears Holdings saw a major drop in comparable-store sales in Q4. Image source: Sears Holdings.
So what
Sears Holdings reported its $182 million Q4 profit because of a noncash tax benefit of approximately $470 million related to tax reform. Without that benefit, the company would have lost money in the quarter.
Despite the nature of its profit, investors rewarded the company for showing one at all. Shares closed February at $2.24 and climbed to $2.67 at the end of March, a 10% gain, according to data provided by S&P Global Market Intelligence.
Now what
For Sears Holdings to succeed it has to actually make money. There are few signs that will happen, but its CEO Edward S. Lampert remains eternally optimistic.
"We made progress in 2017, with a return to positive Adjusted EBITDA and another quarter of year-over-year improvement in our financial results," he said in the Q4 earnings release. "In addition, we entered important partnerships, such as our agreement to sell Kenmore appliances and related services through Amazon, that broaden the reach of our brands."
That's a positive spin, but it doesn't make up for falling sales. Sears and Kmart simply don't have enough customers. At some point, it's impossible to remain an ongoing concern if you can't fix that.
