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Ugly Sears loss makes it a salvage operation, not a turnaround play

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Sears Holdings Corp. (SHLD), parent of the struggling Sears and Kmart chains, is not a retail turnaround story. It’s not even really a retail story.

Sears reported another wretched quarter, losing $574 million, or $5.39 a share, on a steep 9.7% decline in sales. Though almost 40% of that sales decline is from the loss of transactions recorded by Lands’ End Inc. (LE), which Sears spun off in April, the retail business continues to lose market share due to its aging store base.

While Sears extolls the 73% of eligible sales occurring through its Shop Your Way customer-loyalty program, the company is discounting heavily to draw that business and margins have dropped precipitously. Sure, online sales keep growing as a percentage of the whole, and same-store sales at core Sears domestic stores stabilized the past two quarters. But Kmart remains a mess, with few apparent options for fixing itself.

Sears has long been controlled by hedge-fund billionaire Edward Lampert, who owns about 48% of the company and has been shrinking it strategically for years. The company has been caught between merchandising misery and financial wizardry for most of the past decade, its shares trading more on the hypothetical sum-of-parts value of its real estate and side businesses than on efforts to draw customer traffic.

This helps explain why Sears shares – which are among the most heavily shorted in the market  – haven’t been hit harder after today’s ugly results. The stock has dropped more than 8% to below $33 – bad enough, but hardly the washout that might otherwise follow news of nearly $1 billion in losses racked up in half a year by a company with a $3.5 billion market value.

Some abiding faith

The reason is some investors’ abiding faith that Lampert can continue selling, spinning off, restructuring and refinancing his way to wring more cash value out of his wounded corporate dinosaur. (Note that Sears investors got Lands’ End stock, now worth more than $10 per Sears share.)

Lampert’s spinoff of 51% of Lands’ End to shareholders follows his earlier separations of Sears Canada Inc. (SCC.TO) and Sears Hometown and Outlet Stores Inc. (SHOS), and comes as he continues to actively close, sell and re-lease as many of his 2,000 store locations as he can. The company continues to consider selling or spinning off its auto-center unit, and in the past has discussed monetizing its product-warranty operations.

More than 20% of Sears Holdings’ current stock-market value is now represented by its 51% interest in Sears Canada, a stake it's actively looking to sell.

Some value investors, such as asset management firm Horizon Kinetics, continue to believe there's enough real estate and other asset value inside Sears to generate a stock price of perhaps twice what it currently trades for.

Realizing such value, of course, requires that Lampert maintain enough financial liquidity to continue shrinking the core business and absorb more possible sales declines, while finding buyers of its unwanted store boxes and hocking the better segments of the company.

Seeing Lampert attempt to pull this off in the teeth of a brutal environment for physical mainline retailers is a bit like watching a man try to keep a dozen plates spinning on poles – with fascination, and always bracing for a crash.

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