Sears Holdings Reports Fifth Straight Quarterly Loss

Retailer’s net loss widens to $748 million from $454 million in Q3 FY16

s1Integrated retailer Sears Holdings Corp. (NASDAQ: SHLD) announced its Q3 FY16 financial results on December 08th, 2016. The Hoffman Estates, Illinois-based Company is the parent company of Kmart Holding Corp. (Kmart) and Sears, Roebuck and Co. (Sears).

The Company operates through two segments: Kmart and Sears Domestic. It also offers Shop Your Way, a member-based social shopping platform that offers rewards and personalized services. Its brands include Kenmore, Craftsman and DieHard. It maintains a range of apparel and home offerings, including labels such as Jaclyn Smith, Joe Boxer, Route 66, Cannon, and Levi’s and also offers Lands’ End merchandise in its Full-line stores. Sears operates 1,503 full-line and specialty retail stores in the US, operating through Kmart and Sears as well as websites sears.com and kmart.com. Read more about Sears Holdings’ financial results below.

Q3 FY16 financial highlights

During Q3 FY16, Sears’ revenues plunged $721 million, or 14.3%, to $5 billion compared to $5.8 billion in the year-ago period, mainly due to having fewer Kmart and Sears Full-line stores in operation, which accounted for $323 million of the decline. Sears has not posted an increase in quarterly sales over the past five years. Revenue also fell due to a 7.4% decline in comparable store sales during the reporting quarter, which accounted for $304 million of the revenue decline.s2

During Q3 FY16, comparable store sales at Kmart decreased 4.4% due to declines in the grocery & household, consumer electronics, and pharmacy categories, partially offset by comparable store sales growth in the apparel, jewelry, and outdoor living categories. Sears’ Domestic comparable store sales fell 10% during the reporting quarter due to decreases in the home appliances, apparel, and consumer electronics categories.

Continuing with the dismal trend, Sears’ Q3 FY16 gross margin dollars plunged to $962 million from $1,262 million in the year ago same period due to the above noted decline in sales, as well as a decline in gross margin rate in both the Kmart and Sears Domestic segments. The fall in margins in both segments was mainly due to a decline in gross margin performance in the apparel business, as well as an overall increase in markdowns.s3

Selling and administrative expenses in Q3 FY16 decreased to $1,543 million from $1,630 million in the prior year’s quarter. Excluding significant items, selling, and administrative expenses declined $224 million, primarily due to a decrease in payroll expense. In addition, advertising expense declined as Sears shifted away from traditional advertising to the use of Shop Your Way points awarded to members, the expense for which is included in gross margin.s4

In all, Sears’ Q3 FY16 operating loss swelled to $624 million from $382 million in the year ago comparable period. As a result, Sears went deeper into red with losses ballooning to $748 million, or $6.99 loss per diluted share, from a loss of $454 million, or $4.26 loss per diluted share, for the prior year period. Adjusted net loss in Q3 FY16 widened to $333 million, or $3.11 loss per diluted share, compared to a net loss of $305 million, or $2.86 loss per diluted share, in the prior year’s third quarter.

Sears’ quarterly earnings, marked by plunging sales and very high levels of unprofitability, sees no improvement in the near-term even after selling the majority of its real estate for $2.7 billion, lagging behind the slight improvement seen with other department stores such as Kohl’s Corp. (NYSE: KSS), Macy’s Inc. (NYSE: M), and The J.C. Penney Company (NYSE: JCP). Apart from cost-cutting measures, Sears is reducing unprofitable stores, reducing space in operational stores (including through the Seritage lease arrangement), reducing investments in underperforming categories, improving gross margin performance, and managing expenses relative to sales in key categories.

Segmental highlights

s5Kmart: During Q3 FY16, Kmart’s comparable store sales fell 4.4% due to declines in the grocery & household, consumer electronics, and pharmacy categories, which was partially offset by growth in the apparel, jewelry, and outdoor living categories. Merchandise sales and services amounted to $1,888 million during the quarter under review. Gross margin dollars plunged to $283 million from $473 million in Q3 FY15, while gross margins fell to 15% from 21.1%. As a result, operating loss widened to $262 million from $127 million in the prior year’s same period. Kmart ended Q3 FY16 with 801 stores.

As part of its strategic initiatives, Sears is improving its Home Services business and expanding its capabilities including home warranty offerings.

Sears Domestic: During Q3 FY16, Sears Domestic’s comparable store sales fell 10 due to decreases in the home appliances, apparel, and consumer electronics categories. Merchandise sales and services amounted to $3,141 million during the quarter under review. Gross margin dollars plunged to $679 million from $789 million in Q3 FY15, while gross margins fell to 21.6% from 22.5%. Operating loss widened to $362 million from $255 million in the prior year’s cmparable period. Sears Domestic ended Q3 FY16 with 702 stores.

Other highlights

Partnership with Citi Retail: Sears has entered into a partnership with Citi Retail Services Inc. to bring together the Sears MasterCard and Shop Your Way offer. Starting November 01st, 2016, more than five million current Sears MasterCard holders whose cards are linked to the Shop Your Way program can earn more Shop Your Way points at their favorite places.

s6Partnership with Uber: Sears has entered into a partnership with Uber Technologies Inc. that allows its drivers and riders to earn Shop Your Way points on trips made with Uber, leveraging the scale of Shop Your Way and the footprint of Sears Auto Centers to provide unique benefits for drivers and riders.

Cash balance: The Company’s cash balances were $258 million as of October 29th, 2016, compared to $238 million as of January 30th, 2016. Short-term borrowings totaled $618 million at the end of Q3 FY16 compared to $797 million as of January 30th, 2016.

Inventory: Merchandise inventories were $5 billion as of October 29th, 2016, compared to $6.2 billion in the year ago same period, while merchandise payables were $1.6 billion and $2.3 billion as of October 29th, 2016, and October 31st, 2015, respectively.s7

Credit facility: As of October 29th, 2016, Sears utilized $1.0 billion of its $1.97 billion revolving credit facility due in 2020 (consisting of $370 million of borrowings and $660 million of letters of credit outstanding). The amount available to borrow under its credit facility was about $174 million. Total long-term debt (current portion of long-term debt and capital lease obligations) was $3.7 billion and $2.2 billion as of October 29th, 2016, and January 30th, 2016, respectively.s8

Strategic initiatives: On May 26th, 2016, Sears stated that it plans to explore alternatives for its Kenmore, Craftsman, and DieHard brands and its Sears Home Services business through potential partnerships that could expand distribution of its brands and service offerings to spur growth. The Company continues to evaluate opportunities for these businesses, including potential externalization through non-Sears Holdings channels.

Guidance for FY16

Sears’ ongoing cost-cutting measures are yet to bear fruit, given that the Company faces intense competition in appliance sales and other categories such as home appliances, apparel, and consumer electronics. In the face of a challenging retail environment, Sears expects to generate mid-single digit positive comps in the next few quarters banking on the robust job growth data and wage rises over the past few months.

Stock Performance

s9Sears Holdings’ stock ended the day at $10.41, gaining 0.97%, at the close on Friday, December 16th, 2016, having vacillated between an intraday high of $10.48 and a low of $10.00 during the session. The stock’s trading volume was at 1,900,992 for the day. The Company’s market cap was at $1.10 billion as of Friday’s close.

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