Sears Loss Narrows, But Misses

Sears Holdings Corp.’s (SHLD) fiscal 2010 second-quarter GAAP net loss narrowed to $39 million from a net loss of $94 million in the year-ago period. However, excluding special items, adjusted loss per share came in at 19 cents, missing the Zacks Consensus Estimate for a loss of 18 cents per share.

Quarterly Details

During the quarter, Sears’ total revenues declined 0.9% year-over-year to $10,458 million and came in behind the Zacks Consensus Estimate of $10,576 million. The company’s revenues in the quarter were affected by lower domestic same-store sales and fewer stores, partially offset by favorable foreign currency translations.

As the prolonged economic downturn has deterred shoppers to loosen their purse strings, same-store sales declined 1.4% and 2.8% at Kmart and Sears Domestic, respectively. At Kmart, food and consumables led the decline in comparable store sales, while power lawn and garden tools, as well as consumer electronics, experienced sluggish same-store sales at Sears Domestic.

Gross profit recorded a growth of 1.0% year-over-year to $2,823 million, while gross margin expanded 50 basis points (bps) to 27.0%. The higher gross margin was primarily driven by lower markdowns Kmart, partially offset by reduced margins at both Sears Domestic and Sears Canada.

Hoffman Estates, IL-based Sears posted a narrower operating loss (excluding gains on asset sales) of $4 million in the quarter, compared to loss of $63 million in the year-ago period. The narrower loss was mainly attributable to improved gross margin and a 0.9% year-over-year decline in selling and administrative expenses to $2,606 million.

Financial Position

Sears exited the quarter with cash and cash equivalents of $1,193 million, compared to $1,189 million in the year-ago quarter. Long-term debt (including current portion) at the end of the quarter was $1,968 million, reflecting a capitalization ratio of 18.6%. Significant cash deployments during the first-half of fiscal 2010 include $560 million towards acquisition of additional stake in Sears Canada, $273 million towards share buybacks, $228 million towards debt repayment and $168 million towards capital expenditure.

Zacks Consensus

The Zacks Consensus Estimate on Sears’ earnings for the fiscal year ending January 2011 has remained unchanged at $2.58 per share over the past 2 months. However, the Zacks Consensus Estimate for the next fiscal declined 8 cents over the past month to $2.79 per share as 1 of 6 covering analysts lowered his or her expectation.

We currently have a short-term Zacks #4 Rank (Sell) on Sears, indicating downward pressure on the stock over the next 1 – 3 months.

SEARS HLDG CP (SHLD): Free Stock Analysis Report

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