Will Sears Holdings Even Try to Beat J.C. Penney and Best Buy?

Sears Holdings (SHLDQ) will release its quarterly report on Thursday, and investors have recently pushed its share price to its highest levels in more than a year. Yet with so many of Sears' initiatives focusing on financial-engineering tactics like spinoffs, can its core retail business ever truly compete against Best Buy (BBY -0.12%), J.C. Penney (JCPN.Q), and the other retailers that are in the same areas that Sears serves?

Sears Holdings has been an extremely complex investment to understand lately, as much of the investing thesis behind the stock relates to the value of the company's underlying assets rather than the prospects for its businesses going forward. Recent efforts to break off valuable pieces of the company only highlight that disparity, even as Sears still seeks to compete against Best Buy in the appliance and electronics area and against J.C. Penney in apparel. What's ahead for Sears as it continues to develop its overall long-term strategy? 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 report.

Stats on Sears Holdings

Source: Yahoo! Finance.

Which direction will Sears Holdings earnings move this quarter?
Analysts have downgraded their views on Sears earnings recently, widening their October-quarter loss estimates by $0.36 per share and boosting their full-year losses for the current and next fiscal year by about a quarter and a third respectively. The stock, though, has risen 53% since mid-August.

Sears kept suffering coming into the just-ended October quarter, as it released fiscal second-quarter earnings in August that showed the retailer's continuing woes. Losses widened by about half on a 6% revenue decline for the company, and same-store sales declined as well, showing the overall weakness of Sears' retail business.

Of course, the entire retail industry is struggling right now. J.C. Penney has worked hard at manufacturing a turnaround, but its task is almost as formidable as what Sears has faced, and its success has been mixed at best. At Best Buy, investors have been much more positive about the company's progress, especially as appliance sales showcase the advantages of its local presence even as they go up against Sears' appliance business directly.

But Sears managed to rebound based not on improving retail prospects but rather because of moves that the company has sought to make. Essentially, the bullish case for Sears involves breaking up the company's lucrative brands, which include tool specialist Craftsman, battery business DieHard, Kenmore appliances, and the company's Lands' End retail apparel line. Sears has started to move forward in realizing that vision, with real-estate moves including subleases of portions of its anchor mall locations or even repurposing of those large spaces for office or residential space. Through its Seritage Realty Trust subsidiary, Sears could start competing against major real-estate investment trusts to monetize its real estate more effectively.

Last month Sears went even further, suggesting that it would spin off Lands' End and its Sears Auto Centers business. The company wouldn't seek to raise cash from those transactions, instead giving shareholders the right to trade shares of those businesses separately. Yet the moves only heighten the sense that Sears is seriously distracted from what is nominally its core business in competing against Best Buy and J.C. Penney. Sears followed up on the moves last week when its Canadian majority-owned subsidiary decided to liquidate some of its Canadian joint ventures, raising $315 million in the process.

In the Sears Holdings earnings report, watch to see how well the company's retail operations hold up compared to its more financially motivated corporate moves. If Sears ever wants to compete against Best Buy and J.C. Penney again, it needs to complete its restructuring and free up the retail business to make strategic moves undistracted by other shareholder-motivated transactions.

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