Sears reports narrower loss, but sales mark sixth year of declines

Key Points
  • Sears posted a net loss of $558 million, or $5.19 a share, during the fiscal third quarter, compared with a loss of $748 million, or $6.99, during the same period last year.
  • Excluding one-time items, Sears lost $2.64 a share.
  • The department store chain's total same-store sales tumbled 15.3 percent during the latest period.
Sears shares are soaring as net loss narrows

Sears Holdings, the parent company of Sears and Kmart stores, reported a narrower net loss for the fiscal third quarter than it did a year ago, as the company pushes to return to profitability against a backdrop of store closures and vendor disputes.

Efforts to shrink the retailer's real estate footprint look to be taking hold, as Sears aims to strike a balance with its existing assets. The department store chain is testing smaller store formats across the U.S., and in some cases moving to occupy a pint-sized portion of a bigger box, as mall operators redevelop their properties.

While Sears' stock initially soared on the news, shares turned by mid-afternoon to fall around 4 percent. There's still the sobering fact that sales have declined for six years, and losses are deep.

The department store chain's total same-store sales tumbled a whopping 15.3 percent during the latest period. That consisted of a 13 percent decline at Kmart locations, and a 17 percent drop in comparable sales at Sears stores.

"Whichever way you cut them, the fundamental economics of the business do not add up," GlobalData Retail Managing Director Neil Saunders wrote in a note to clients. "Nothing in this latest set of results changes our view."

Moving forward, Sears said it will continue to explore ways to monetize its real estate portfolio and consider other asset sales. The company will look to diversify its revenue stream through third-party partnerships including those within it Sears Home Services, Innovel, Kenmore and DieHard businesses.

"With the challenging retail landscape continuing to pressure sales, the improvement in Adjusted EBITDA is reflective of the success of the strategic priorities we outlined earlier this year to streamline our operations, reduce inventory and minimize operating expenses," CEO Eddie Lampert said in a statement.

Sears posted a net loss of $558 million, or $5.19 a share, during the fiscal third quarter, compared with a loss of $748 million, or $6.99, during the same period last year. Excluding one-time items, Sears lost $2.64 a share.

The company reported total revenues of roughly $3.7 billion for the fiscal third quarter, compared with $5 billion a year ago. Recent store closures contributed to most of these declines, the company explained. Sales have been further hampered by a reduction in the number of pharmacies open in Kmart stores, and fewer consumer electronics sold.

All of these results were in line with Sears' prior forecast, when it pre-announced its quarterly earnings in October. At the time, Sears also said it struck a deal with the Pension Benefit Guaranty Corp. over its pension obligations, clearing the way for the company to try to sell about 140 additional properties. In exchange, Sears said it will pay $407 million to the plan.

"Additionally we will be taking action in the near term with respect to certain upcoming debt maturities to provide the Company with further financial flexibility and enhanced liquidity," CFO Rob Riecker said Thursday about future initiatives.

"We will build on the success of our recently opened dedicated concept stores to continue delivering specialized integrated retail experiences to our members in the upcoming quarters," Riecker added on a pre-recorded conference call.

Sears said Thursday that the company has achieved its annualized cost savings target of $1.25 billion, and ahead of schedule. But that won't satisfy all the retailer's woes.

"Sears has meaningful upcoming maturities in fiscal 2018 which must be met as its unencumbered asset base continues to decline and its business turnaround remains elusive despite its achievement of $1.25 billion in cost savings," Moody's analyst Christina Boni wrote in a note to clients.

As of Oct. 28, Sears has used roughly $805 million of its $1.5 billion revolving credit facility due in 2020, with $39 million readily available to borrow. A year ago, Sears had $174 million available to borrow through the loan.

The retailer's total cash balance was $200 million at Oct. 28, compared with $258 million at the end of the same period last year.

During the latest period, Sears generated net cash proceeds of more than $270 million from real estate transactions and sales of assets, which the company used to pay down its revolving credit facility and other loans. Sears has closed roughly 330 stores this year, with 100 closures set to take place over the fourth quarter.

The company said restructuring actions taken in the first three quarters of 2017, along with the closure of unprofitable stores, have resulted in improvements in its financial performance.

Sears added it expects to reach positive adjusted earnings before interest, taxes, depreciation and amortization in 2018.

CEO Lampert has said Sears is "fighting like hell" amid pressure from partners and negative headlines in the media. Sears continues to fire off announcements of store closures, though the company says it's doing so in a bid to return to profitability.

In October, Lampert's right-hand man and a long-time top Sears investor, Bruce Berkowitz, announced his plans to retire from the department store chain's board.

Berkowitz has since been cashing out of Seritage, a spin-off of Sears' real estate. His investment firm, Fairholme Capital Management, also sold all its shares in Lands End during the third quarter, a securities filing shows. Sears acquired the apparel retailer in 2002, then spun it off as an IPO a little more than a decade later.

This holiday season marks a crucial one for Sears, as the company has endured several battles with top vendors of late, some resulting in terminated contracts altogether. For the month of November, Sears put its entire fleet of Sears and Kmart stores on sale, marking merchandise down as much as 50 percent.

With Thursday's losses, Sears shares have fallen more than 55 percent in 2017.