Sears closing up to 120 stores as sales slide

Wed Dec 28, 2011 8:10am EST

Customers walk into a Sears store at Fair Oaks Mall in Fairfax, Virginia, January 7, 2010. REUTERS/Larry Downing

Customers walk into a Sears store at Fair Oaks Mall in Fairfax, Virginia, January 7, 2010.

Credit: Reuters/Larry Downing

(Reuters) - Sears Holdings Corp (SHLD.O) will close as many as 120 of its Kmart and Sears discount and department stores after its holiday sales slumped, sending its shares sliding more than 27 percent to their lowest level in three years.

The retailer, which is controlled by its chairman, the hedge fund manager Edward Lampert, has seen sales decline every year since the $11 billion merger of the two chains in 2005, and likely faces further closings to cut expenses, preserve cash and push back against rivals such as Wal-Mart Stores Inc (WMT.N) and Amazon.com Inc (AMZN.O), analysts said.

Sears also disclosed on Tuesday that it tapped its credit line to borrow cash and forecast that fourth-quarter earnings would fall by more than half.

Under Lampert, the company, once one of the most successful U.S. retailers with a history going back to 1886, has let stores deteriorate, said analysts, who also faulted poor locations and ho-hum merchandise for its ongoing problems.

"They've neglected this business for so long," independent retail analyst Brian Sozzi said, adding that he expects more closings. "They are letting Kmart and Sears die on the vine."

In a memo to staff obtained by Reuters, Chief Executive Lou D'Ambrosio, who took the job in February, blamed the economy for some of Sears' problems but acknowledged "we also did not execute with the consistency or speed necessary" in areas under Sears' control. "We will do better," he continued.

But Credit Suisse analyst Gary Balter is not so sure. "We do not see how they dig out of these problems," he wrote in a client note.

The company also said it expects to record a noncash charge of $1.6 billion to $2.4 billion in the fourth quarter for a downward adjustment in the valuation of deferred tax assets, an indication it may not be generating enough income to use them, and for the impairment of goodwill.

Same-store sales at Kmart were down 4.4 percent in the eight weeks that ended Christmas Day, and down 6 percent at Sears' U.S. stores. Overall, they were down 5.2 percent compared with the same period a year ago.

The closings follow Sears' announcement last quarter it would shut 10 stores. Kmart and Sears have a combined 2,177 big-box locations.

A list of stores affected will be available at www.searsmedia.com once the retailer decides on the locations.

The declines at Kmart were led by drops in electronics and clothing sales as the low-price chain, founded in 1962, faced stiff competition from a resurgent Wal-Mart which resumed its layaway program this year to make it easier for low income shoppers to make purchases by paying in installments.

Kmart has found itself squeezed between Wal-Mart's low prices and Target's trendier offerings, while Sears has faced more intense competition for electronics and lower prices, and less demand for household appliances.

Sears blamed electronics sales for more than half of the decline in its namesake chain's domestic same-store holiday sales.

Sears' shares finished the day down 27.2 percent at $33.38, their lowest level since December 2008, and have fallen 65 percent since a 52-week high in February.

At the current stock price, Sears Holdings -- home to brands including Craftsman tools and Kenmore appliances -- has a value of $3.57 billion.

The value of Lampert and his hedge fund's stake in the company has plunged nearly 75 percent to $2.25 billion since 2005, when his holdings were worth around $8.5 billion. The stake was worth as much as $12.7 billion in April 2007.

The drop in shares is also a big blow for fund manager Bruce Berkowitz's Fairholme Capital, Sears' second-biggest shareholder with 15.2 percent. Fairholme's stake was worth about $570 million on Tuesday, a potential loss of almost $180 million since the end of the third quarter.

Sears' problems also hit shares of appliance maker Whirlpool Corp (WHR.N), which last year derived 8 percent of sales through the retailer. Whirlpool shares fell 8.9 percent to close at $46.62.

FALLING FURTHER BEHIND

Sears' empire was once so sprawling that it owned everything from a radio station (WLS in Chicago) to Allstate Insurance Co and Coldwell Banker Real Estate Group.

But now the chain, founded in Chicago 125 years ago, acknowledges it has to downsize. Its standard practice in the past would have been to give weak stores time to improve, but the economy is too tough to do that this time, Sears said.

Sozzi, the analyst, went to a Sears in Bayshore, New York, on Monday, one of the busiest days of the retail season, and said it was "deserted." At the northern end of the state, in Plattsburgh, a Sears was similarly quiet.

Wall Street analysts have long faulted Sears for letting its stores become stale, even as rivals ranging from Macy's Inc (M.N) and J.C. Penney Co Inc (JCP.N) to Target Corp (TGT.N) and Wal-Mart remodeled and spruced up their stores.

Last fiscal year, Macy's spent $505 million to improve its namesake and Bloomingdale's stores, while Sears spent $441 million despite having more than three times as many stores.

Sears is "effectively asking customers to pay for a poorer shopping environment", Credit Suisse's Balter said.

Balter was also surprised that Sears would borrow money during the holidays, which are typically a peak cash flow period. Sears had $483 million of borrowings outstanding as of December 23, compared with zero a year earlier.

As of October 29, Sears had cash and cash equivalents of $624 million, down from $790 million a year earlier.

Sears Holdings said the lower sales and margin pressure would lead to adjusted fourth-quarter earnings before interest, debt and amortization of less than half of the year-ago quarter's $933 million figure.

The retailer expects to earn $140 million to $170 million by selling off inventory in affected stores and selling or subleasing store space.

(Reporting by Phil Wahba in New York, additional reporting by Michael Erman, Dhanya Skariachan and Katya Wachtel in New York and Supantha Mukherjee in Bangalore; Editing by Maureen Bavdek, Tim Dobbyn, Matthew Lewis, Martin Howell)

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (8)
ChangeWhat wrote:
Come on Reuters, when you get that almighty email to push how the economy is recovering and how the unemployment is “dropping” at least once a week. Don’t you think you should address the issue of how many NEW unemployed people are going to put out of work for 127 stores being shutdown? And what is the expected increase back on unemployment or expired unemployment “Holiday workers” are there going be? Since the experts like to talk in “points/percentages” what is the new percentage increase? I’ll sit here twiddling my thumbs! Merry xmas Lampert!! Will ALL your employees be receiving a severance pay? Or perhaps a BONUS!!!

Dec 27, 2011 9:13pm EST  --  Report as abuse
atoz wrote:
I used to work at Sears. I enjoyed working there as a lot of customers were senior citizens. They went there not only to shop but also to feel some “human touch” as Sears used to be able to make customers feel. However, when Sears’ business started going down, the management went crazy. They pushed us to push for credit card applications. A lot of customers come to Sears almost every day, and they didn’t like to be pushed for opening another cards they didn’t need. But we had to push anyway. So the check-out process became a nightmare as we would have to try to get them to apply for one.

To make the matter worse, our performance was partly judged by how many credit applications you could get. I saw people cheating or telling customers lies to trick them into applying for ones. The management pretended that they didn’t see it. As a matter of fact, they even pushed harder on everybody by asking you how come you didn’t ask your friends to come to apply for a card… Well, when your target was to get people hooked with another credit card, not to provide service so that the customers would come again, who could blame the customers for not coming again? Sears never had merchandise that could compete with Walmart pricewise or with Target fashionwise and its losing its original charm. Who is the one to be blamed?

Dec 27, 2011 10:26pm EST  --  Report as abuse
richinnc wrote:
Before their last bankruptcy the local K mart (now closed) had a buy one get one free offer on cookies. I had to question the store manager as to why they had all the sale tags, shelf dangers etc on the “other” band of cookies – he did not have an answer. Same store had signage for Christmas photo cards up in February. Just seemed to have no attention to the details.

Dec 28, 2011 12:02am EST  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.