Sears Widens Loss, Fails Estimates - Analyst Blog

Sears Holdings Corp.'s (SHLD) fiscal 2010 third-quarter net loss widened to $1.71 per share from a net loss of 81 cents in the year-ago period, missing the Zacks Consensus Estimate of a loss of $1.07 per share. Excluding special items, adjusted loss per share came in at $1.98 per share.  

Quarterly Details

During the quarter, Sears' total revenue declined 5.1% year over year to $9,678 million and came in behind the Zacks Consensus Estimate of $9,903 million. The company's revenues in the quarter were affected by lower domestic same-store sales and fewer stores, partially offset by favorable foreign currency translations.

As the prolonged economic downturn has deterred shoppers from loosening their purse strings, same-store sales declined 0.7% and 8.2% at Kmart and Sears Domestic, respectively. At Kmart, food and consumables led the decline in comparable store sales, while home appliances, apparel, and consumer electronics categoriesexperienced sluggish same-store sales at Sears Domestic. On the positive, footwear, jewelry, home categories and tires experienced comparable store sales growth during the quarter.

Gross profit recorded a decline of 1.3% year over year to $2,557 million, while gross margin contracted 80 basis points (bps) to 26.4%. The lower gross margin primarily resulted from reduced margins at both Sears Domestic and Sears Canada, partially offset by somewhat better margins at Kmart.

Hoffman Estates, IL-based Sears posted a wider operating loss of $292 million in the quarter, compared with a loss of $106 million in the year-ago period. The wider loss was mainly attributable to lower gross margins.

Financial Position

Sears exited the quarter with cash and cash equivalents of $790 million, compared with $1,468 million in the year-ago quarter. Long-term debt at the end of the quarter was $2,570 million, reflecting a capitalization ratio of 23.5%. Significant cash deployments, year to date, include $560 million for acquisition of an additional stake in Sears Canada, $317 million toward share buybacks, $468 million for debt repayment and a $253 million contribution to pension and post-retirement benefit plans. 

Zacks Consensus

The Zacks Consensus Estimates on Sears' earnings for the upcoming quarter and fiscal year ending January 2011 have remained unchanged at $2.12 and $3.38 per share, respectively, over the past couple of months.

We currently have a short-term Zacks #4 Rank (Sell) on Sears, indicating downward pressure on the stock over the next 1 - 3 months.