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Dissecting A Sluggish Second Quarter From Sears

Posted: Sep 03, 2008 09:27 AM by Glenn Curtis

Tickers in this Article: TGT, WMT, SHLD

Sears Holdings (Nasdaq:SHLD) released its second quarter earnings last week, and they were, in a word, lousy. In fact, after seeing these numbers I once again find myself questioning how its chairman Eddie Lampert is going to turn things around. Let's dig a little deeper into the carnage.

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Missed Estimates & Slumping Sales
In the period ended August 2, Sears reported earnings of $65 million, or 50 cents per share, which was a country mile lower than the $173 million, or $1.15 per share, it booked in the comparable period last year. Excluding a large item it actually earned just 21 cents per share. That's an issue because the Street had apparently been looking for earnings of 33 cents per share.

What really irked me about the quarter was the comparable-store-sales (comps) number. Comps at the flagship Sears concept declined 6.7% while Kmart's comps declined 5.6%. This drop is made worse when you consider that the company was going up against a pretty easy comparison. According to its second quarter 2007 release, Sears Domestic's comps declined 4.3% for the quarter, while Kmart's comps declined 3.8%. I was hoping for much better.

These numbers don't stack up well against the competition, either. For example, Target (NYSE:TGT) reported a 0.4% comps decrease in its second quarter; meanwhile, Wal-Mart (NYSE:WMT) reported a comps increase of 5% (including fuel). (Learn more about investing in stocks from this sector in Analyzing Retail Stocks.)

Investors Need a Carrot on a Stick
Above I mentioned that the company missed expectations. To be clear I don’t think that's the end of the world, but let's face it, where is the Street supposed to go from here? With comps in the tank, and the retail environment sluggish as it is, I think we could see the full-year consensus number get ratcheted down in the weeks ahead. If I'm right, the stock could take a hit as a result. (Note: The Street is currently expecting $2.34 per share this year and at $1.99 per share for 2009.)

If I were a portfolio manager and saw this quarter, I'd make a quick exit to greener pastures, especially since tax loss selling season is right around the corner.

The Flip Side
In the earnings release, interim CEO Bruce Johnson said, "While it was a difficult quarter, we were successful in reducing our domestic inventory levels by $500 million which should lead to lower markdowns and favorably impact our gross margin rates in the second half of the year."

This is a positive. In addition, Wall Street expectations for Sears are so low, virtually any positive news story could have a big positive impact on the shares.

Bottom Line
Sears' second quarter results were lousy, and I acknowledge that there's always a chance that Lampert could turn things around, but I'm not willing to bottom fish the stock just yet.

For more on analyzing what people buy and where they shop, read Using Consumer Spending As A Market Indicator.

By Glenn Curtis

Glenn Curtis started his career in the 1990s as an equity analyst for a regional firm in New Jersey. There, he covered companies in the technology, entertainment, and gaming industries. Curtis has since worked as a financial writer at a series of both web and print publications, including TheStreet.com and Registered Rep Magazine. He has held his series 6,7,24, and 63 securities licenses.

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