Earnings Preview: Sears Holdings (SHLD) (TGT) (WMT)

Zacks

Sears Holdings Corporation (SHLD) is scheduled to release its first-quarter 2011 results on Thursday, May 19, 2011. The Zacks Consensus Estimate pegs a loss per share of $1.12 for the first quarter of fiscal 2011 compared with the earnings of 14 cents in the prior-year quarter.

Fourth Quarter Performance

Sears Holdings reported fourth-quarter 2010 adjusted earnings of $3.67 a share, surpassing the Zacks Consensus Estimate of $3.50 a share. However, it fell short by 2 cents from earnings of $3.69 a share in the prior-year quarter. Including special items, earnings per share came in at $3.43 compared with $3.74 in the prior-year quarter.

For the fourth-quarter 2010, revenue declined by 0.8% to $13,144.0 million compared with $13,247.0 million in the prior-year quarter. However, revenue surpassed the Zacks Consensus Estimate of $12,907.0 million. The decline in quarterly revenue was primarily driven by a 1.2% decrease in domestic comparable store sales, which includes a 4.5% fall at Sears Domestic and a 2.5% increase at Kmart.

Segment wise, during the reported quarter, sales at Kmart grew by 1.6% to $4,999.0 million. However, sales at Sears Domestic and Sears Canada dropped 3.0% to $6,686.0 million and 1.5% to $1,459.0 million, respectively.

Earnings Guidance

Sears Holdings after suffering a decline in earnings of just 0.5% in the fourth quarter of fiscal 2010 expects to incur a loss in the first quarter of fiscal 2011. The company anticipates net loss in the range of $145 million to $195 million, which entails loss per share of $1.35 to $1.81. The company had earned 14 cents a share in the prior-year period.

Agreement of Analysts

Over the last 30 days, all 3 analysts moved their estimates in the downward direction with none of the analysts revising their estimates upward, for the first quarter of fiscal 2011. The estimate for fiscal 2011 follows the same trend over the last 30 days.

In the last 7 days, none of the analysts have moved their estimates in either direction, implying no remediation to the lackluster outlook seen over the past one month.

Magnitude of Estimate Revisions

The magnitude of estimate revisions for Sears Holdings depicts a negative outlook for the upcoming quarter and fiscal 2011. Over the last 30 days estimates for the first quarter and fiscal 2011 have gone down by $1.15 and 84 cents to a loss of $1.12 and earnings of 15 cents a share, respectively.

Earnings Surprise

Considering earnings surprises, the stock has not been steady over the last four quarters, with a mix of positive and negative surprises ranging between negative 84.1% to a positive of 14.3%. The average remained a glaring negative at 17.6%.

Our Recommendation

Sears Holdings is one of the largest broadline retailers in the U.S. The merged company operates a network of 3,965 full-line and specialty stores across the U.S. and Canada. In an effort to drive customer footfalls, the company is continuously taking prudent steps to improve its merchandise and realigning its inventory with sales trends.

The company has also revamped its organizational structure and operating model in an effort to simplify its business lines and enhance managerial focus. The new structure is based on five business units namely, operating businesses, support, brands, online and real estate. Each unit operates separately to facilitate greater focus on profitability of the unit and rapid decision-making to capitalize on opportunities and mitigate risks.

However, the company’s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels, and high household debt levels, which may negatively affect their discretionary spending and, in turn, the company’s growth and profitability.

Also, Sears Holdings operates in a fiercely competitive industry, which includes retailing giants such as Wal-Mart Stores Inc.(WMT) and Target Corp. (TGT). Moreover, the company also faces competition from regional departmental stores, home improvement stores, consumer electronics dealers and specialty retailers. Consequently, Sears Holdings is under severe stress to maintain profitability.

Sears’ shares maintain a Zacks #4 Rank, which translates into a short-term Sell recommendation. Our long-term recommendation on the stock remains Neutral.

SEARS HLDG CP (SHLD): Free Stock Analysis Report

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WAL-MART STORES (WMT): Free Stock Analysis Report

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