Sears Holdings Corp (SHLD.O) reported a much bigger-than-expected quarterly loss on Thursday as weak sales and bigger discounts squeezed margins at its eponymous department stores and the Kmart discount chain.
The results pushed Sears shares down 9 percent and gave further proof that turning the retailer around will not be easy for Chief Executive Edward Lampert.
Demand was weak for everything from groceries to electronics at Kmart. Sales of appliances were sluggish at Sears department stores, in a quarter when they were strong at rivals Home Depot (HD.N), Lowe's (LOW.N) and Best Buy (BBY.N).
Lampert, who is also Sears' chairman and controlling shareholder, took over as CEO earlier this year after Louis D'Ambrosio stepped down due to a family member's health problem.
Some on Wall Street have said the hedge fund manager and Goldman Sachs Group Inc (GS.N) alumnus' lack of retail sales experience might hurt the company's attempt to reverse years of sales weakness.
"Sears remains on a dangerous downward spiral," Credit Suisse analyst Gary Balter said. "To finance operations and create liquidity, Sears continues to pare back on inventory, spin off select businesses, and sell some of its best locations. This is leading to even weaker operating results."
Balter said the trend could continue for a while, given Sears' multiple assets, including clothing retailer Lands' End and some "excellent" real estate locations.
Revenue declines have plagued Sears since 2005, when Lampert merged Kmart and Sears in an $11 billion deal.
The company has been closing stores, tightly managing inventory, selling real estate and shedding assets. Sears, which has been considering selling its service contracts business, said on Thursday it had not decided what actions, if any, to take with that unit.
While Sears has been investing in e-commerce and its "Shop Your Way" rewards program, critics contend its stores need more investment and attention as the company still makes a larger chunk of its revenue in stores rather than online. Also, rivals like Target Corp (TGT.N) spend a lot more on their stores.
In a Reuters interview on Thursday, Lampert said the company's high pension costs, which he said were the result of artificially depressed U.S. interest rates, were taking resources away from stores. He said many Sears rivals did not even have pension plans.
"It is not just in isolation what we want to do. We have got to manage a business with obligations to pensioners, obligations to our employees, obligations to vendors," Lampert said.
"We have got a lot of people who depend on a pension from Sears, which has hampered our ability to be more aggressive," he said.
ANOTHER WEAK QUARTER
The U.S. economy has recovered modestly since the financial crisis, but median household income is still below where it was before the 2007-2009 recession began, a recent report from Sentier Research showed.
Sears has also been facing cut-throat competition from discounters Wal-Mart Stores Inc (WMT.N) and Target, department stores and online retailers.
As of August 3, Sears had total debt of $3.7 billion, cash balances of $681 million, and available credit of $1.6 billion.
The company's net loss widened to $194 million, or $1.83 a share, in the second quarter ended August 3, from $132 million, or $1.25 a share, a year earlier.
Excluding gains on the sale of certain assets and other items, but including certain expenses, the loss was $1.70 a share. On that basis, analysts on average were expecting a loss of $1.10, according to Thomson Reuters I/B/E/S.
"While the increase in Shop Your Way promotional activity and member redemptions resulted in a meaningful increase in our costs, it demonstrates that our members are deepening their engagement with our program," Lampert said.
Sales fell 6.3 percent to $8.9 billion, falling short of analysts' average estimate of $9.5 billion.
Sales at U.S. stores open at least a year fell 1.5 percent, with declines of 2.1 percent at Kmart and 0.8 percent at Sears Domestic. Same-store sales at its Canadian unit fell 2.5 percent. Online sales rose 20 percent.
Shares of Sears were down 9 percent at $39.41 in late-morning trade on Thursday.
(Reporting by Dhanya Skariachan; Editing by Lisa Von Ahn and John Wallace)