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Is The Party Just Getting Started for Sears?

By Daniel Jones – Jan 15, 2014 at 11:20AM

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A look at Sears's terrible results and how the company stacks up to rival J.C. Penney.

Friday was a terrible day for shareholders of Sears Holdings (SHLDQ). After Sears released sales results for the first two months of its fourth quarter of 2013, its shares fell 13.77% to $36.71. Following the company's decline in share price, analysts and investors alike asked if the $3.91 billion retailer has a future. In an attempt to answer this question, I dug into Sears' results and brought to light the good, the bad, and the ugly about the company so that the Foolish investor can get a glimpse of the company's situation.

Sears is having a rough quarter
According to the company's release, its comparable-store sales have fallen a whopping 7.4% since the start of its fourth quarter. Sales at the company's Sears domestic stores declined an astonishing 9.2% quarter-to-date. While these metrics are terrible, they were cushioned a bit by the company's Kmart operations, which saw sales fall 5.7% on a comparable-store basis. Sears Canada (SCC), the company's 51%-owned subsidiary, saw its sales fall 4.4% over the same time-frame.

If management's estimates are correct, then this decline in revenue will result in a net loss for the quarter somewhere in the range of $250 million to $360 million. On a per share basis, this means that the company will likely lose between $2.35 and $3.39 per share for the quarter. This is significantly below analyst estimates of -$0.20 for the quarter. These results pale in comparison to Sears' $4.61 per share loss for the same quarter a year ago.

While these results look bad, they are comparatively worse than you might think. For the quarter, the company expects to book pension, severance, and restructuring charges, all of which will negatively impact earnings. Assuming these are one-time events and factoring them out of the company's earnings for the sake of comparability, the company should have booked a loss per share between $2.01 and $2.98. Factoring the company's one-time expenses out of the equation for the same quarter a year earlier, the company earned $1.12 per share, which means that this year's results show a deteriorating business rather than an improving one.

For the year, the company now believes that its net loss will come in between $1.3 billion and $1.4 billion. On a per share basis, this implies that the company will lose between $11.85 and $12.88. This, too, is far more than the $6.20 loss that Mr. Market previously anticipated and gives credence to those who believe that Sears, like rival J.C. Penney Company (JCPN.Q), is on its way out.

Sears has been struggling for a long time, so what else is new?
In order to truly comprehend how bad Sears' situation is, investors need to look at the company's performance over the past few years. Over the last five years, sales at the giant retailer have fallen dramatically. Between 2009 and 2013, revenue dropped 14.8% from $46.8 billion to $39.9 billion. Although this is bad, it's not quite as poor as the 25% decline in revenue experienced by Sears Canada, which saw its top line fall from $5.7 billion (in Canadian dollars) to $4.3 billion over the same time-frame.

The worst on the list, however, was J.C. Penney, whose sales declined a jaw-dropping 29.8% from $18.5 billion to $13 billion. The retailer saw a massive consumer exodus after its new (and now former) CEO, Ron Johnson, eliminated the company's coupon sales and replaced them with everyday low prices. Initially, management hoped that the move would reinvent the company's brand but it only served to disenfranchise its customer base and left the business struggling by the time Johnson was ousted.

Sears has also come up short on a net income basis. Between 2009 and 2013, the company's bottom line declined from a gain of $53 million to a net loss of $930 million. In all fairness, a lot of the company's bottom line woes came about from significant non-cash impairment charges and restructuring charges, but this shouldn't necessarily leave investors jumping for joy.

Despite declining sales for Sears Canada, the company's net income has performed well in comparison to Sears. Over the same time-frame, Sears Canada's net income fell 65.2% from $290.7 million to $101.2 million. This is far from strong, but at least it beats the large annual losses experienced by Sears over the past two (soon to be three!) years.

J.C. Penney has been, over the same time-frame, more like Sears than Sears Canada. Like Sears, the retailer has been hit with losses for each of the past two years, but its bottom line hasn't been quite as bad. Net income at J.C. Penney has fallen from a five-year high of $572 million in 2009 to a net loss of $985 million in 2013.

Foolish takeaway
Friday was a terrible day for Sears, as demonstrated by its dramatic collapse in share price. The fact is, sometimes Mr. Market overreacts, but in this case that doesn't appear to be what's happening. Rather, Mr. Market may have the right idea about Sears's value proposition now. While it is possible that the company's asset value could provide a good buffer against further share price declines, the underlying business is deteriorating and doing so rapidly.

Investors can take solace in knowing that Sears isn't the only retailer who's having a difficult time. J.C. Penney has also been struggling, along with a string of retailers that include Wet Seal, Abercrombie & Fitch, and Aeropostale, to name a few. Moving forward, it will be interesting to see what transpires with these companies, but one thing is clear; the situation at Sears doesn't look like it's getting any better. If anything, the party might just be starting.

Daniel Jones has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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