Shares of Sears Holdings Corporation (SHLD) have dropped 4.4% since the company posted another loss along with deteriorating top line, in its third-quarter fiscal 2014 results, which were released yesterday.
The beleaguered retailer’s quarterly adjusted loss came in at $2.71 per share, narrower than the loss of $2.96 per share in the year-ago quarter. However, on a GAAP basis, the company's loss widened to $5.15 per share compared with a loss per share of $5.03 in the prior-year period.
Quarterly Details
Revenues plunged 12.9% year over year to $7,207 million, owing to the segregation of the company’s Lands' End business during the first quarter of fiscal 2014, along with lower sales from Kmart and Sears Full-line stores, on account of store closures. Further, the de-consolidation of Sears Canada in Oct 2014 also impacted quarterly sales negatively.
Segment-wise, sales at Sears Domestic plunged 12% to $3,889 million, while Kmart’s sales declined 7.2% to $2,707 million. Moreover, sales at Sears Canada registered a steep fall of 34.8% to $611 million.
Consolidated domestic comparable store sales (comps) inched down 0.1% primarily due to weak performance of Sears Domestic, partially offset by improved performance at Kmart stores. Comps at Sears Domestic slipped 0.7%, battered by unfavorable consumer electronics industry trends. On the other hand, Kmart comps witnessed a 0.5% rise on the back of strong apparel, outdoor living and toys business, offset partly by the adverse impact of consumer electronics and grocery & household goods.
Sears Holdings is on track to convert to an Integrated Retail Platform, where it can operate via stores, web and mobile. Its efforts seem to be bearing fruit, as the company’s online and multi-channel sales jumped roughly 9% year over year.
Deeper Insight
Gross profit declined 17.1% to $1,601 million compared with $1,931 million reported in the third quarter of fiscal 2013. Consequently, gross profit margin contracted 110 basis points (bps) to 22.2%.
The company's selling, general and administrative (SG&A) expenses declined 11.1% to $2,011 million from $2,262 million, benefiting from a drop in advertising expenses.
Domestic adjusted loss before interest, taxes, depreciation and amortization (EBITDA) in third-quarter fiscal 2014 was $296 million, narrower than a loss of $310 million in the year-ago comparable quarter. Operating loss came in at $490 million, as against a loss of $497 million in the year-ago quarter, reflecting the improvement in SG&A.
Balance Sheet and Cash Flow
The company’s balance sheet at the end of the quarter doesn’t include Sears Canada results, due to its rights offering announcement, made in Oct 2014.
Sears Holdings ended third-quarter fiscal 2014 with cash and cash equivalents (including restricted cash) of $326 million and long-term debt and capitalized lease obligations of $2,769 million, compared with a cash balance of $607 million and long-term debt and capitalized lease obligations of $2,862 million at the end of third-quarter fiscal 2013.
The company's shareholders’ equity was $126 million as of Nov 1, 2014, compared to $2,327 million as of Nov 2, 2013. Further, as of Dec 3, 2014, the company had $1.5 billion available under its credit facility. .
Store Update
So far this year, Sears Holdings has shut down or declared the closure of nearly 235 stores which were underperforming, with most of them being Kmart stores. However, in an attempt to retain maximum sales from these lost stores, the company anticipates transferring sales from these to other networks.
Looking Ahead
Of late, Sears Holdings has been grappling with dismal top- and bottom-line performances. However, we commend Sears Holdings’ efforts to improve its financial performance and liquidity position through various strategic measures.
Sears Holdings is looking for opportunities to transform its business to a member-centric model through its Shop Your Way program. As part of this remodeling, the company is heavily investing in its Shop Your Way program while strategically reducing its store count and divesting its underperforming businesses. This is evident from the company’s move of selling maximum stake in Sears Canada.
The company is also implementing integrated retail customer strategies to boost online sales. Moreover, it is trying its best to improve its financial position to make the most of all opportunities and fulfill obligations. So far in the current fiscal, the company has generated nearly $2.2 billion in liquidity. Further, it intends to continue managing its assets and allocating resources efficiently and parallel to its transformational needs.
We believe that these strategies have the potential to bring the company back on the growth trajectory, though it still has a long way to cover.
Other Stocks to Consider
Stocks performing well in the same industry include Dollar General Corporation (DG), Dollar Tree, Inc. (DLTR) and Ross Stores Inc. (ROST), each carrying a Zacks Rank #2 (Buy).
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