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Sears' 4Q Earnings Improve

Zacks Equity Research

Sears Holdings Corporation (SHLD) reported its fourth-quarter fiscal 2012 adjusted earnings of $1.12 per share, higher than the year-ago comparable quarter’s earnings of 54 cents. Including special items, the company’s reported loss reached $4.61 per share compared with a loss per share of $22.47 posted in the prior-year period.

The robust bottom-line comparisons from last year resulted from the company’s ongoing cost reduction initiatives, which helped it bring down selling and administrative expenses during the quarter. Additionally, the company has managed to effectively reduce merchandise inventory levels to $7.6 billion at the end of the fiscal compared with $8.4 billion at the end of fiscal 2011.

During fiscal 2012, the company’s adjusted loss per share narrowed to $2.03 from $4.52 from fiscal 2011.

Quarterly Detail

Revenues inched down 1.8% to $12,260 million compared with $12,484 million in the year-ago quarter, primarily due to separation of Sears Hometown and Outlet business, reduction in the number of Kmart and Sears’s full-line stores in operation during the quarter as well as lower domestic comparable store sales. Revenue for full fiscal 2012 decreased 4.1% year over year to $39,854 million.

The company witnessed a 1.6% decline in Domestic comparable store sales, primarily attributable to a fall of 3.7% at Kmart stores, which was partially offset by an improvement of 0.8% at Sears Domestic stores. The decline at Kmart was driven by weak performance in the consumer electronics, grocery & household and pharmacy categories.

However, comps at Sears Domestic benefited from increases in the apparel, home appliance and home categories, partially offset by soft sales in the consumer electronics, sporting goods, Sears Auto Centers and lawn & garden categories.

Segment wise, sales at Sears Domestic inched down 0.9% to $4,697 million, while Kmart sales declined 2.3% to $4,697 million. Moreover, sales at Sears Canada registered a decline of 1.9% to $1,310 million.

On a reported basis, gross profit improved $101 million to $3,163 million compared with $3,062 million reported in the fourth quarter of fiscal 2011. Consequently, gross profit margin expanded 130 basis points to 25.8%.

The company’s selling and administrative expenses climbed 12.4% to $3,282 million, primarily due to increased expenses related to pension plans, store closures and store impairments and severance.

Adjusted EBITDA stood at $429 million, improving $78 million from the year-ago comparable quarter. We believe that accelerated strategic actions, including introduction of new offers, honed pricing, effectively managed costs and implementation of better inventory management in the Appliances, Apparel, and Home Services, led to the growth in EBITDA.

Balance Sheet and Cash Flow

Sears Holdings ended the fiscal with cash and cash equivalents (including restricted cash) of $618 million and long-term debt and capitalized lease obligations of $1,943 million compared with a cash balance of $754 million and long-term debt and capitalized lease obligations of $2,088 million at the end of fiscal 2011. The company’s shareholder equity stands at $3,172 million at the end of fiscal 2012.

Measures to Revive Operational Activities

Sears has long been grappling with weak top-line performances and even weaker bottom-line results. However, the measures undertaken to revive the operating performance are showing some signs of improvement as is evident from the company’s EBITDA growth and narrower GAAP loss per share from the prior-year quarter.

The company continues to take the actions necessary to create value and retain the flexibility to invest in its strategic priorities. Further, in an effort to enhance its liquidity position, the company completed the partial spin-off of 45% of Sears Canada’s common shares to its shareholders on Nov 13, 2012.

The company also successfully completed the separation of Sears Hometown and Outlet Stores Inc. on Oct 11, 2012, raising $446.5 million in gross proceeds.

Other Stocks to Consider

Sears Holdings currently holds a Zacks Rank #3 (Hold). Other stocks worth considering in the departmental store industry are Conns Inc. (CONN), Cabela’s Inc. (CAB) and Safeway Inc. (SWY). All these stocks hold a Zacks Rank #2 (Buy).

Read the Full Research Report on SWY

Read the Full Research Report on CAB

Read the Full Research Report on SHLD

Read the Full Research Report on CONN

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