Sears Holdings Loss Stuns the Market

“Why don’t we take a look real quick at Sears stock today? The retailer, this is the biggest department store company in the country of course, KMart falling under Sears Holdings as well. Reporting an unexpected loss for the quarter. Same-store sales at Sears stores down 13% and sales at KMart stores falling by nearly 4%.

So, those two stores still really struggling and directly connected to the housing market as one of the weakest segment is the washers, dryers, refrigerators, big appliances is weighing down sales figures at Sears and KMart stores. Of course, back to school shopping season, ever important for the retailers is second only to the big holiday shopping season. Take a look at the forecast here because this is going to be key and crucial for retailers going forward. This is the latest estimates by shopper track at the Chicago-based research firm. Right now, saying that traffic at malls will fall 10% for this back to school shopping season while total sales for the season should be falling by about 5.9%, not a good sign…”– Fox Business Network 8/20/2009

Retailers have been in the spotlight over the last few weeks with so many reporting earnings recently. However, no retailer has been more starkly disappointing than Sears Holdings (NASDAQ:SHLD) which reported revenue declined 10.3% and swung to a loss of 17 cents per share, 52 cents worse than consensus analysts estimates. The performance was hampered of course by horrendous sales figures but also by severance and pension plan costs, and store closings. Company-wide same store sales were 8.6% lower in the U.S., with a drop of 12.5% in Sears stores falling the fastest. The dismal results have pushed the stock downwards, as shares are trading off about 12% in midday trading.

The horrendous quarter reported by Sears puts an end to the streak of two straight quarterly profits. What is especially troubling about these results is that Sears has been aggressively cutting costs for quite some time (expenses fell 8% in the quarter), but sales are deteriorating more rapidly than first thought. It appears that Sears will need to further cut costs over the next few quarters in order to become a more sustainable and efficient business.

Sears management maintains that their performance is closely tied to the housing market, as the appliances and home goods sales tallies were especially weak. Perhaps a turn around in the housing market would help turn the tide for Sears, but how long can they wait while sales falter? We did not anticipate Sears would have a loss again anytime soon, and to blame the difficulties on the housing market is a flimsy excuse. Especially as Home Depot (NYSE:HD) seems to be surviving the housing decline reasonably well and much more profitably.

Sears Holdings has been universally panned by analysts today, with Gregory Melich an analyst from Morgan Stanley saying, “Ouch…This morning’s 2Q miss was pretty much across the board, with weak comps and lack of gross margin expansion standing out.” The retail analyst from Credit Suisse called SHLD the most overvalued stock in his coverage following the results. Clearly, the experts were looking for much more out of the fourth largest retailer, whose stock had nearly doubled year to date.

As for Ockham, while this quarter was much worse than we had anticipated, we are content to reaffirm our Fairly Valued rating at this time. Executives at Sears has much more work ahead in order to become a more efficient operation, but we do not believe that the price tag is particularly egregious at this time. That being said, we would need to see it fall another 10-15% or more before we could consider this stock appropriately priced given the weakness in fundamentals. The substantial debt burden is certainly a concern as well. Seems to us that management will have to go back to the drawing board and perhaps think outside the box in order to reinvigorate sales and put Sears on better footing.

Sears Holdings: Loss Stuns the Market and Analysts

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