Sears Holdings (SHLD +0.00%) posted first-quarter earnings on Monday, and while the report did have a few positives, it was still a characteristically ugly quarter for the retailer.
Companywide, same-store sales fell 10.9%, dropping 7% at Kmart and 14.5% at Sears locations. Despite the decline in comparable sales, gross margin at both divisions improved due to cost-cutting efforts. The company's net loss narrowed modestly from $3.79 per share to $2.85 per share.
Sales in the quarter fell by $2 billion or 25% to $5.9 billion as the company spun off Lands End and sold part of its stake in Sears Canada, and closed several stores. The decline in comparable sales led to $558 million decrease in revenue.
Rewards ain't enough
As Sears continues to focus on selling assets to fund its hopeful turnaround, management still seems out of touch with the realities on the ground. CEO Eddie Lampert told investors, "During the first quarter, we made significant progress in our transformation from a traditional, store-network based retail business model to a more asset-light, member-centric integrated retailer leveraging our Shop Your Way platform." Regardless if that description, Sears is still a very traditional brick-and-mortar retailer.
Management has been touting its Shop Your Way rewards program for a while, noting that rewards members made up 74% of sales in the quarter. However, at a time when rivals like Amazon.com, Wal-Mart and others are moving to offer speedier delivery and other perks for loyal customers, the advantages of Sears' Shop Your Way program seem dubious.
Unlike Amazon Prime or a Costco membership, the program is free to join, meaning there is little commitment required on the part of the consumer, who only has to give their email address. Once, the customer has joined they are eligible to receive rewards points, making its program identical to ones offered by nearly every other major retailer. Finally, the fact that 74% of sales are already from rewards customers and comparable sales are falling by double digits should be a sign to management that that program is not stemming the losses, nor is it going to save the company.
The spinoffs continue
The first-quarter loss, the company's 20th consecutive one, left Sears with just $286 million in cash and $726 million in an available line of credit, which under ordinary circumstances would leave the company at risk of going bankrupt in a year or so, but Sears has more asset sales planned. In an attempt to raise more cash to fund ongoing operations, just the day after its earnings report the company issued a rights offering for shares in Seritage, a subsidiary REIT it created. Sears plans to sell 235 of its stores to Seritage, and is selling shares in Seritage to fund the purchase. Management expects the completed transaction to yield the company $2.6 billion in cash, and also expects to open a new credit facility of $2 billion.
While that cash influx would seem to give Sears plenty of time to turn around operations, the underlying problems with the business still remain. Sears' stores are poorly maintained, often in undesirable locations, and the company's reputation has declined along with its performance.
Across the board, traditional department-store chains like J.C Penney and Macy's are facing challenges from changing consumer demands, and organic growth even for a well run brick-and-mortar operation is difficult. Considering the secular headwinds facing Sears and the self-inflicted wounds that have come with 20 straight quarters of losses, there seems to be little reason to bet on the company's eventual success no matter how many levers it can pull to generate cash.
