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Sears 1Q loss widens, sales remain soft

Published May 24, 2014 10:16 am

This is an archived article that was published on sltrib.com in 2014, and information in the article may be outdated. It is provided only for personal research purposes and may not be reprinted.

New York • Sears Holdings signaled that it may close more stores beyond the 80 locations it's shuttering this year as the beleaguered retailer looks for ways to restore profitability and raise cash.

The news came as the Hoffman Estates, Illinois-based company, which operates Kmart as well as Sears stores, reported that its first-quarter loss widened as sales declined 7 percent. One of the biggest drags was consumer electronics.

Shares slipped 4 percent in morning trading.

Sears Holdings Corp., controlled by billionaire hedge fund investor Edward Lampert, has been cutting costs, reducing inventory and selling assets to return to profitability. Sears announced last week that it was considering selling its Canadian operations. It recently spun off clothing business Lands' End as a separate public company after not having much success with it.

At the same time, it's shifting away from its focus on running a store network to operating a member-focused business.

But its biggest albatross remains its stores, which have been criticized for being outdated. By the end of the first quarter, the company operated 1,900 Sears and Kmart stores, representing 200 million square feet in the U.S.

Lampert, who is chairman and CEO, combined Sears and Kmart in 2005, about two years after he helped bring Kmart out of bankruptcy. But it has faced mounting pressure from nimbler rivals like Wal-Mart Stores and Home Depot.

Moreover, Sears is also facing broader issues that are tripping up many other retailers. Like other stores catering to the low- to middle-income customers, Sears is wrestling with a slowly recovering economy that's not benefiting all Americans equally. It also faces a shifting landscape where mobile shoppers want more flexibility in where and how they buy.

Lampert told investors in a pre-recorded call Thursday that Sears is seeing progress in its shift to a member-focused business called Shop Your Way, with first-quarter member sales comprising 74 percent of eligible sales — the highest level ever. That's up from 68 percent from the same period a year ago.

"In our transformation, we are moving towards a model that is focused on providing benefits to our members by forming individual relationships using our technology and platforms," Lampert said in the call. "Our new business model is less asset-intensive and variable in nature."

He said in the call that the company "may close additional stores in the course of this year" on top of the 80 now being closed.

But Lampert acknowledged that overall profitability remains a challenge.

Sears lost $402 million, or $3.79 per share, for the period ended May 3. That compares with a loss of $279 million, or $2.63 per share, a year ago.

Excluding certain items, it lost $2.24 per share.

Revenue fell 7 percent to $7.88 billion partly because there were fewer Kmart and Sears stores open. The results also accounted for weaker Sears Canada revenue and the spinoff of Lands' End in April.

Lampert noted that the biggest negative was the consumer electronics businesses at its Kmart and Sears stores. Sales at domestic Sears stores open at least a year edged up 0.2 percent in the quarter. Excluding the impact of consumer electronics, the figure rose 0.8 percent. At Kmart stores open at least a year, sales declined 2.2 percent. Stripping out the impact of the consumer electronics business and its grocery and household goods category, the metric slipped 0.4 percent at Kmart.

Sales at stores open at least a year is a key indicator of a retailer's health. It excludes results from stores recently opened or closed

To turn around its consumer electronics business, Sears said it's moving the business from a focus on selling TV's to a company empowering Connected Living that will bring together its capabilities in fitness equipment, electronics, appliances, home services and auto services.

Another business that struggled was its fitness equipment business. It plans to boost that business as part of its Connected Living strategy. For example, it will reward Shop Your Way members for activities monitored via Fitbit, Jawbone Up and other smartphone apps.

One bright spot was online sales, which increased 26 percent.

Sears' shares fell $1.47, or 4 percent, to $35.09 in morning trading Thursday. Its shares had already fallen more than 25 percent so far this year.

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