Sears Q2 Loss Widens on Weak Sales, Promotions

Hoffmann Estates, IL–Sears Holdings reported today that second quarter loss widened larger than expected as weak sales and promotions cut into its stores’ bottom line.

For the quarter ended July 30, Sears, which operates Sears and Kmart, reported a loss of $146 million, or $1.37 a share, compared with a loss of $39 million, or 35 cents a share, a year earlier. Excluding items such as mark-to-market losses, domestic pension expenses and store-closing costs, the loss widened to $1.13 a share from 19 cents.

Revenue fell 1.2% to $10.33 billion. Total comparable store sales fell 0.7% in the United States, which actually was an improvement from the 3.6% decline posted in the same quarter last year. Its Kmart division posted flat comparable store sales with best performing categories including footwear, grocery, household products and appliances.

D’Ambrosio: ‘Not Satisfied with Our Results’

While its Sears U.S. comparable store sales dropped 1.2% dragged down by lower demand for consumer electronics—otherwise sales would have been flat, the company said. Sears Canada had a 5.8% drop in its comparable store sales.

Gross margin narrowed to 25.8% from 27% as the company said it raised discounts to boost sales of appliances, apparel and home goods.

Analysts’ average estimate had expected the company to have a loss of 64 cents a share on revenue of $10.13 billion.

“We are not satisfied with our results and are taking actions to turn around our performance in a challenging economic environment,” said Sears Lou D’Ambrosio, president/ceo at Sears Holdings.

To cut costs amid lower demand during the second quarter, the company shut 29 stores, including both Kmart and Sears; converted 14 Sears Grand stores to Kmart; and shut seven product repair center locations. It also cut about 250 support jobs on top of positions reduced from the closings and store conversions. It took a charge of $48 million for the restructuring moves.

According to Dow Jones, D’Ambrosio send a memo to employees today saying, “There are many bright spots throughout the company aimed at cultivating growth.” Such as “many innovative” products in the appliance area, an exclusive line by the Kardashian sisters, Sofia by Sofia Vergara at Kmart, and “our sporting-goods team continues to innovate on models to bridge the physical and digital,” he wrote.

D’Ambrosio was hired in February to lead the company’s turnaround efforts after Wall Street and retail analysts blamed the company, and its majority owned by hedge-fund investor Eddie Lampert’s ESL Investments in particular, of “skimping on investing in stores,” which analysts said are key to attracting shoppers. In the meantime, the company lost share to Walmart, Target and Kohl’s, analysts said.

Credit Suisse retail analyst Gary Balter said in a research note after the earnings were posted: “Essentially, the message from consumers to Sears is: ‘We will shop there, but not at the prices you wish to charge as we won’t pay full price for substandard service and unwelcoming physical facilities.’”

Sears has taken recent steps to get its order, naming former Hewitt Associates Chief Financial Officer Robert Schriesheim as its CFO and former FreshDirect executive Monica Woo as its new chief marketing officer.

“We continue to like the direction that Mr. D’Ambrosio is moving the company, focusing on key brands, reducing inventory, and leveraging the Internet,” added Balter. “Whether that is enough to stop the bleeding, in the midst of a slowing consumer, is the near term investment question for this troubled retailer.”

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