* "We know we still have a lot of work to do," CEO Lampert
* Kmart same-store sales drop 3.7 percent
* Total costs fall more sharply than sales; net loss narrows
* Shares down 5.6 percent
By Dhanya Skariachan
Feb 28 Retailer Sears Holdings Corp
reported a higher-than-expected quarterly profit that stemmed
mainly from cost cuts, doing little to boost Wall Street's faith
in its turnaround and sending its shares down as much as 7
percent on Thursday.
The stakes were high this holiday season for the operator of
Sears department stores and the Kmart discount chain. Many on
Wall Street were looking at the quarter as a key gauge of
progress of the turnaround at the company, which is controlled
by hedge fund manager Edward Lampert.
Sears Holdings' sales have fallen every year since 2005,
when Lampert merged the Kmart and Sears Roebuck and Co chains in
an $11 billion deal.
However, the company has boosted results in recent quarters
by closing stores and managing inventory. It has also sold real
estate and other assets to pay down debt.
"They live kind of hand-to-mouth," said analyst Evan Mann of
independent corporate bond research firm Gimme Credit. "But I
don't really see a long-term plan to make them a relevant
As of Feb. 2, the company had cash balances of $618 million,
down from $754 million on Jan. 28, 2012.
On Thursday, Sears reiterated its expectation to generate at
least $500 million of liquidity by selling assets over the next
12 months, without specifying what those might be.
The earnings release came just weeks after Chairman and
largest shareholder Lampert took over as chief executive after
Louis D'Ambrosio left because of a family member's health issue.
Some on Wall Street saw D'Ambrosio's departure adding to
Sears' risks, and worried about Lampert's lack of merchandising
experience at a time when the retailer was trying to turn around
its core Sears and Kmart chains.
"The fact is that they don't have strong leadership that
can execute," said Mary Ross Gilbert, managing director of
investment bank Imperial Capital LLC. "If you look at the
businesses and the execution of the businesses, it's poor, and
that hasn't changed."
LAMPERT PLAYS DEFENSE
Lampert, who has faced criticism in the past for not
investing enough in stores, defended his strategy on Thursday.
"Observers have mistakenly concluded that our issues were
primarily related to underinvesting in our stores," he said.
Instead, Lampert tied the company's problems to the changing
habits of shoppers, who are increasingly buying their goods
online or using their mobile phones to make purchases.
Still, he promised to invest in in-store technology, online
business and Sears' loyalty program, in sync with a blueprint he
laid out last May to boost results.
"We know we still have a lot of work to do," he told
investors in a letter made public in a regulatory filing. "It
will not be easy at times, but we will take bold actions to get
But Mann dismissed a lot of Lampert's comments as
"boilerplate stuff they have been saying for the longest time"
and wondered if the hedge fund manager was the right person to
head the retailer.
"He has proven himself to be a very clever financial
engineer," Mann said. "But at the end of the day, all the real
successful retailers tend to be run by savvy well-known
merchants with a fashion background. He doesn't have that."
U.S. sales at stores open at least a year fell 1.6 percent,
including a 3.7 percent decline at Kmart that was mostly due to
tepid demand for electronic goods.
Same-stores sales rose 0.8 percent at the Sears Domestic
unit, helped by demand for apparel.
Rival J.C. Penney Co Inc's woes have helped Sears as
the two chains are neighbors in most malls, analysts have said.
Penney's sales at stores open at least a year fell 31.7 percent
in the latest quarter.
Another competitor, Kohl's Corp, reported a lower
quarterly profit on Thursday, hurt by markdowns during the
holiday season. It forecast full-year earnings that fell short
of Wall Street expectations.
Sears Holdings, home to the iconic Craftsman tool and
Kenmore appliance brands, also faces cut-throat competition from
the likes of Home Depot Inc, Lowe's Cos Inc,
Wal-Mart Stores Inc, Target Corp, Best Buy Co
Inc and Macy's Inc.
The company's net loss narrowed to $489 million, or $4.61 a
share, in the fourth quarter ended on Feb. 2 from $2.4 billion,
or $22.47 a share, a year earlier.
Excluding pension settlements, severance costs, impairment
charges and other items, earnings were $1.12 a share. Analysts
on average were expecting 98 cents, according to Thomson Reuters
Costs fell 2.2 percent to $12.88 billion in the quarter.
Sales declined about 1.8 percent to $12.26 billion, but beat the
analysts' average estimate of $11.77 billion.
Sears spun off its Orchard Supply Hardware Stores unit in
December 2011. Last year, it announced plans to sell some prime
real estate and spin off its Sears Hometown and Outlet
businesses and certain hardware stores.
In November, the company trimmed its stake in its Sears
Canada Inc unit from about 95 percent to 51 percent,
distributing the stock to Sears Holdings shareholders.
Earlier this week, Sears Canada reported a revenue decline
for the 16th straight quarter. Analysts expect Target's push in
Canada to hurt that business.
Shares of Sears Holdings were down 5.6 percent at $44.82 in
afternoon trading after falling as low as $44.20 earlier in the