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Sears' Q2 Losses Raise Long-Term Questions

8/25/2013 08:00:00 PM Eastern

HOFFMAN ESTATES, ILL. – Widening losses at Sears Holdings, and declines in its core major appliances business, have raised renewed questions about the company’s long-term direction.

The parent of Sears and Kmart said store closings, sales declines and promotional costs contributed to a deeper than expected $194 million loss in the second quarter, ended Aug. 3, compared with a year-ago loss of $132 million, while revenues decreased 6.3 percent to $8.9 billion.

The announcement last week sent Sears shares down over 8 percent within the first hours of trading.

Total online sales soared 20 percent during the quarter, but U.S. comps slipped 1.5 percent, reflecting a 2.1 percent decrease at Kmart due to declines in CE and toys, and, more troubling, a 0.8 percent dip at Sears due to weakness in its jewel-in-thecrown appliance business.

Sears’ majap declines stand in stark contrast with reports by manufacturers and other white-goods retailers of a rebounding white-goods industry, and support indications that its once top-selling privatelabel Kenmore brand has slipped to third place behind GE and Whirlpool.

“This quarter should have benefited from … a revived appliance market,” observed Credit Suisse retail analyst Gary Balter in a research note. More ominously, he warned that “Sears remains on a dangerous downward spiral” as it pares back inventory, spins off businesses and sells some of its best store locations to finance operations.

“This is leading to even weaker operating results, which in turn is leading to additional dispositions of good locations,” he noted. “At this stage, time does not appear to be on the side of this company.”

In a statement, chairman/CEO Eddie Lampert pointed only to the growth of the company’s Shop Your Way loyalty rewards program, whose members now comprise more than 65 percent of sales.

Lampert acknowledged that the “deepening” customer engagement came at the expense of increased promotional activity and member redemptions, which resulted in what he described as “a meaningful increase in costs.”

“We recognize how important it is to improve the profitability of our company,” he said, “and I am disappointed that we did not deliver a better result.”

Of the $596 million sales decline, Sears attributed $210 million to the closing of multiple Sears and Kmart stores and $450 million to the absent contribution of its former Sears Hometown and Outlet Stores division, which was spun off last year.

Earnings were impacted by a $345 million decrease in gross margin due to reduced sales; a lower gross margin rate due to merchandise and loyalty rewards promotions; and higher expenses related to store closings and severance and pension payouts, Sears said.