Sears Holdings (NASDAQOTH:SHLDQ) CEO Edward Lampert still wants investors to believe his department store chains have a path back to success. And as he delivered the company's fiscal first-quarter report this week, he continued to promote that idea, despite overwhelming evidence that neither Sears nor Kmart have any hope for a recovery.
Lampert's theory has long been that he can slim the chains down into a profitable base of stores. In fact, one can almost picture the embattled executive on a day in the not-too-distant future, standing in the very last Sears, shutting down a few aisles, but optimistically telling people that his turnaround plan remains on track.
The reality is that Sears has been in steady decline. It shrank from 2,601 stores in the third quarter of its fiscal 2012 to just 899 as of May 5, the end of the last quarter -- and plans are ongoing to close another 72. During that time frame, the retailer's revenues fell from a high of $12.28 billion in fiscal Q4 2012 to $2.9 billion last quarter.
It's not just bad, it's awful
Shuttering all those locations has not helped drive customers or sales to the ones that remain. In Q1, Sears' comparable-store sales dropped by 13.4%, while Kmart locations reported a 9.5% comps decline. The company also lost $424 million ($3.93 per-diluted-share), continuing a steady pattern of losses that has only paused in quarters when the company sold off major assets like the Craftsman brand or parts of its real estate portfolio.
Sears currently has $7.28 billion in assets and $11.39 billion in liabilities. It also has $466 million in cash available (most of it through borrowing agreements), and long-term debt and capital lease obligations of $3.5 billion as of May 5 -- up from $3.2 billion on Feb. 3.
Lampert continues to insist that everything is just fine. His statement in the Q1 earnings release seems to ignore the actual results the company's turnaround plan has delivered.
In a challenging quarter, we continued to focus on our strategic transformation, identifying additional opportunities to streamline operations and adjust inventory and operating expenses while staying focused on our Best Members, Best Categories and Best Stores. Our Shop Your Way membership program and Integrated Retail Strategy are our key priorities, and we continue to look for new ways to leverage our Shop Your Way ecosystem to drive improvements in value for our members and to increase the frequency and amount of their engagement.
The most troubling aspect of this statement is the mention of "Shop Your Way," the company's digital rewards/membership program. Sears doesn't break out digital sales figures in its earnings reports, but its overall sales drop makes it clear that the company hasn't been converting enough brick-and-mortar customers into digital ones.
No miracle is coming
Shrinking isn't helping return Sears to profitability -- it's simply drawing out the end game. The company has only lasted this long because it had a portfolio of brands and real estate it could sell off for the cash it needed to survive. It should go without saying that in order for a retailer to succeed, it needs to make a profit by selling goods -- not its core assets.
Lampert has kept Sears alive, but he has done nothing to alter its terminal diagnosis. You can't watch loses mount and same-store sales decline steadily for more than five years, and still say that your transformation plans are on track. They're not. The only suspense left in this story lies in the question of whether it will be a lack of cash or vendors refusing to ship merchandise that finally forces this company into bankruptcy.