Sears Holdings net plummets, sending down shares

ATLANTA (Reuters) - Sears Holdings Corp (SHLD.O) reported sharply lower third-quarter profit on Thursday, sending its shares down as much as 14 percent to new lows, as sales fell at its U.S. Kmart and Sears stores and it cut prices to clear excess inventory.

The retailer controlled by hedge fund manager Edward Lampert said sales and margins would probably remain under pressure for the current quarter as the softer U.S. housing market and credit concerns hurt consumer spending during the critical holiday shopping season.

"Kmart and Sears have been in a downward spiral for the last two years," said Britt Beemer, founder of America's Research Group, which surveys consumer behavior. "I think you're in a major free-fall."

Beemer said Thanksgiving weekend surveys by his group indicated that both chains have 20 percent fewer shoppers than they did three years ago.

There has been "no effort to make Kmart or Sears competitive," Beemer said.

The company was formed in the 2005 merger of Sears, Roebuck and Kmart.

Net income fell 99 percent to $2 million, or 1 cent a share, for the third quarter ended November 3 from $196 million, or $1.27 a share, a year earlier. Share count was lower in the latest period as Sears bought back 6.7 million common shares.

The 2006 quarter included $64 million in gains tied to swap investments. Excluding that item, the year-ago profit was 85 cents a share.

Sears Holdings, which earlier this week offered to buy specialty retailer Restoration Hardware Inc RSTO.O for about $269 million, attributed its current problems to everything from increased competition to unseasonably warm weather.

But in a statement, Chief Executive Aylwin Lewis said: "We cannot blame our results entirely on the retail and macro-economic environments." Sears, which has unveiled new marketing campaigns this year, has "much on which to improve," he added.

Revenue fell 3 percent to $11.5 billion as domestic same-store sales fell 4.2 percent at Sears, Roebuck and 5 percent at Kmart, pulling total domestic same-store sales down 4.6 percent.

The company cited notable declines in apparel and lawn and garden sales, partly offset by higher sales of electronics at U.S. Sears stores.

'DEATH SPIRAL?'

Credit Suisse analyst Gary Balter said in a research note titled "Death Spiral?" that there was "nothing good" to take from the latest earnings report.

"It should be clear to investors that if Sears continues to try to make it as a retailer, it will likely not happen," Balter wrote.

Gross margin contracted to 27.4 percent of sales from 28.3 percent a year earlier as the Hoffman Estates, Illinois-based company cut prices to sell seasonal goods.

Sears competes with many other chains, including Macy's Inc (M.N) in clothing sales and Wal-Mart Stores Inc (WMT.N) and other discounters in general merchandise.

In appliances, Home Depot Inc (HD.N) and Lowe's Cos Inc (LOW.N) have chipped away at Sears' dominant market share.

Before the merger, Lampert had gained favor at Kmart for making shareholders rich by selling prime real estate. In many quarters following the 2005 merger, Sears Holdings posted hefty profit growth even as sales declined, in part due to cost-cutting.

But Lampert's team has come under increased criticism this year as that earnings growth has stalled. Profit fell 40 percent in the second quarter, and same-store sales at Kmart and Sears, Roebuck have sagged for the past seven quarters.

"These (latest) quarterly results prove that a financial guy can't run a retail operation," Beemer said. "You can't cut expenses and grow market share."

Standard & Poor's Equity Research slapped a "sell" rating on Sears Holdings, replacing its prior "hold" rating.

"Given limited success of remerchandising efforts at Sears and Kmart segments, increased competition, and a projected slowdown in consumer spending, we think Sears' chances of executing a turnaround are slim," S&P analyst Jason Asaeda said in a statement.

Sears had cash of $1.5 billion at the end of the third quarter, down from $2.1 billion a year earlier. Investors watch the cash balance closely because the company gives Lampert authority to invest excess money as he sees fit.

Sears proposed buying Restoration Hardware for $6.75 per share, topping a management-led buyout of $6.70 to which Restoration had agreed earlier this month.

Sears shares were down $13.99, or 12 percent, to $102.35 in Nasdaq afternoon trading after earlier touching $98.25 -- their lowest level since the company began trading as Sears Holdings in March 2005.

As of Wednesday's close, the stock had fallen 30 percent year-to-date.

(Additional reporting by Christopher Kaufman and Justin Grant in New York; Editing by Gary Hill)