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Why the Sears Story Continues To Be a Sad One


Don't expect much holiday cheer from Eddie Lampert.

The US Commerce Department said retail sales rose 1.4% in October, surpassing the forecast 0.9% increase, but look for downbeat numbers when Sears Holdings (SHLD) reports third-quarter earnings Thursday.

Analysts expect Sears Holdings, the nation's fourth-largest broadline retailer, to report a net loss of $1.09 a share on sales of $9.92 billion compared with a net loss of $0.90 excluding one-time items on sales of $10.7 billion for the same period a year ago. The company lost $94 million, or $0.79 a share, in the second quarter.

Sears operates in three business segments -- Sears Domestic, Sears Canada, and Kmart -- and faces intense competition from Walmart (WMT), Target (TGT), and department stores such as Kohl's (KSS). On Tuesday, Target said third-quarter earnings rose 18.6% to $0.58 a share from $0.49 for the same period a year ago. (See also, Target Hits the Bull's-Eye)

"We expect Sears to lose market share in fiscal year 2010 as we see significant room for improvement in merchandizing and in-store shopping experience relative to peers such as Kohl's," Standard & Poor's says in a research report. "We perceive less downside risk for Kmart given its strong value proposition on basic goods, and a layaway program that enables cash-strapped customers to purchase higher-margin discretionary categories."

In the second quarter, Sears closed 24 stores, including 13 Kmarts, four full-line Sears outlets, and seven Sears Grand/Essentials stores. The company also announced plans to close an additional 28 stores.

Standard & Poor's expects Sears Holdings's same-stores sales to fall 7% in fiscal year 2010 and another 6% in 2011. Sears Holdings will continue to cut costs through better inventory control and the closure of underperforming stores.

Sales of apparel, home furnishings, tools, appliances, and gardening equipment are likely to decline, but demand for personal care products and household cleaners should remain strong.

S&P's 12-month target price is $59 a share and it recommends selling the stock. In mid-day trading Wednesday, the stock fell 1.01% to $75.55.

"Sears Holdings believes it has an opportunity to leverage Kmart's off-mall locations to expand distribution of Sears products and services at a more rapid pace and at a lower cost than Sears would have been able to accomplish on its own," Standard & Poor's says. "The company also sees the potential for Kmart to improve its value proposition and competitive positioning through the addition of Sears-owned brands and services (cross-selling)."

Sears Holdings was formed in 2005 by the merger of Sears Roebuck and Kmart Holdings. So far, the union of two struggling companies hasn't produced consistent results. Following the merger in 2005, revenue more than doubled to $49.1 billion in 2006, and rose to $53 billion in 2007, but declined to $50.7 billion in 2008.

Chairman Edward Lampert has given store managers more authority in an effort to increase sales, but it hasn't worked, despite the company's solid brand names, including Craftsman and Kenmore.

Lampert has repurchased stock using cash, which could leave the company with less room to maneuver in the future.

Keep an eye on the company's efforts to revitalize and extend the brand. Response to the company's mid-size format, Sears Essentials, hasn't been as strong as hoped. The new format sought to combine convenience items found in Kmart with larger ticket items found at Sears. The company now plans to push its off-mall format, Sears Grand.

There are likely more tough times ahead for Sears Holdings. If nothing else, the October sales aren't as rosy as they look because, excluding autos, sales rose 0.2%. The Commerce Department also revised August's sales downward to a -2.3% decline from a -1.5% decline.
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