Sears trims losses despite 'tough to terrible' holiday quarter

By Phil Wahba

Feb 27 (Reuters) - Sears Holdings Corp said on Thursday its sales fell in a "tough-to-terrible" holiday quarter but store closures helped narrow its losses and it made progress in generating more business via the loyalty program it is betting its future on.

The company expects to generate $1 billion in cash this year by selling off some assets including its Lands' End brand, giving it a cushion while it tries to stanch its sales declines and get more business from its Shop Your Way program.

While overall sales fell 13.6 percent to $10.59 billion during the quarter, it said U.S. comparable sales were positive so far in February at its Sears and Kmart discount stores.

Shares rose 6 percent to $42.89 in morning trade, although the volatile stock remains well below the 52-week high of $67.50 struck in November.

Sears said its comparable sales fell 7.8 percent at its namesake U.S. department stores, and 5.1 percent at Kmart for the quarter ended Feb. 1.

Gross profit margins at its two main chains shrank as it offered deep markdowns, particularly on electronics and clothing.

"We view the stock as significantly overvalued based on earnings and a declining asset value outlook," Credit Suisse analyst Gary Balter said in a research note.

CUSTOMER LOYALTY

Sears is trying to move away from its traditional model of relying on stores for revenue, to focus on one based on membership through its Shop Your Way program that also integrates online shopping.

Chief Executive Officer Edward Lampert, a hedge fund manager and Sears' largest shareholder, acknowledged it was a "tough-to-terrible" holiday season which underscored the importance of his transformation plan to reflect changing shopping behavior.

"We build relationships with our members, anticipate their needs and serve them in the manner most convenient for them," Lampert wrote in a letter on Thursday to investors, employees and customers.

It made progress on that front last year, when some 69 percent of sales were generated through the Shop You Way program, compared to 59 percent a year earlier. Online sales rose 10 percent for the year.

The retailer reported a net loss of $358 million, or $3.37 a share, in the quarter ended Feb. 1, compared to a loss of $489 million, or $4.61 share, a year earlier.

To preserve cash and fund further investment in Shop Your Way, Sears has been closing stores and selling off assets.

Last year, it announced plans to separate its Lands' End clothing brand and auto-service centers. Lampert expects those efforts and others to raise $1 billion this fiscal year.

RIVAL IMPROVES

But Credit Suisse's Balter questioned the wisdom of selling Lands' End and the impact it would have on Sears going forward.

"The company is losing over $12 a share in cash flow each year, and is spinning off one of its last remaining profitable pieces," he wrote.

Rival chain Kohl's Corp reported a fourth quarter profit of $1.56 per share on Thursday, two cents better than expected, as leaner inventory levels limited the damage of deeper discounting during a competitive holiday season.

Kohl's has been trying to boost sales by bringing in new merchandise and improving its loyalty program. It is also building up its e-commerce, where sales hit $1.7 billion last year, double what they were three years ago.

"We're seeing signs these things are starting to work," said Edward Jones analyst Brian Yarbrough.

Kohl's said it expects comparable sales, which include e-commerce and sales at stores open at least a year, to be unchanged or rise as much as 2 percent, an improvement over last fiscal year, when they fell 1.2 percent.

Kohl's shares were up 1 percent to $55 in morning trading.