Will Sears Holdings Ever Make Money Again?

Tomorrow, Sears Holdings (SHLDQ) will release its latest quarterly results. The key to making smart investment decisions on stocks reporting earnings is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise. That way, you'll be less likely to make an uninformed, knee-jerk reaction to news that turns out to be exactly the wrong move.

Sears Holdings has struggled for years as it has been unable to pull its retail business out of its doldrums. With the company facing weak revenue and a lack of profitability, it's unclear what exit strategy CEO Eddie Lampert has in place for long-suffering shareholders. Let's take an early look at what's been happening with Sears Holdings over the past quarter and what we're likely to see in its quarterly report.

Stats on Sears Holdings

Source: Yahoo! Finance.

The key to a Sears Holdings recovery
Interestingly, analysts have gotten a bit less pessimistic about Sears recently. They still see the company losing money for the next several years, but they've narrowed their April-quarter loss estimates by $0.18 per share, with even larger improvement of more than $0.70 and $0.85 per share for the current and next full fiscal years. The stock has seemed to share that enthusiasm, rising 23% since mid-February.

Much of the recent enthusiasm came from Sears' previous quarterly report, in which the retailer reported a narrower loss than expected on only a minimal drop of between 1% and 2% in revenue. The results were an important sign of Sears' success in cutting costs, which was one of the key planks of the retailer's overall strategic plan to return to profitability.

Yet Sears still faces the same challenges as its retail rivals. Both Wal-Mart (WMT -0.15%) and Target (TGT -1.02%) have faced some difficulties related to the increase in payroll tax rates, and adverse weather in many areas of the country has led to weak same-store sales comparisons through the retail industry.

Moreover, rivals are taking aggressive steps to make their stores look more attractive. Even long-suffering J.C. Penney (JCPN.Q), which has also been losing substantial amounts of money, has invested heavily in store improvements. With J.C. Penney potentially moving back to a discount model, Sears could face even more competition in the space.

But Sears Holdings isn't giving up yet. The company's Kmart division had strong marketing success in April with a new free ship-to-store promotion. Despite offering the same service that many other retailers do, Kmart's ad got more than 5 million YouTube hits and proved that the company can connect with potential customers to at least some extent.

Moreover, Lampert renewed his commitment to Sears by spending $55 million more on Sears stock in early March. Even if investors don't fully understand how Lampert plans to make his investment in Sears profitable, it's still comforting to see him put even more money behind his strategic moves for the retailer.

In Sears' quarterly report, watch for management comments on the company's decision earlier this month to offer customers a lease-to-own option for major purchases. As important as it is to appeal to shoppers of modest means, Sears will have to prove that adding on a somewhat complicated option won't have an adverse impact to the rest of its business.

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