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Sears' Loss Narrows Y/Y

Zacks Equity Research

Sears Holdings Corporation (SHLD) reported second-quarter 2012 adjusted loss of 86 cents per share, wider than the Zacks Consensus Estimate of a loss of 84 cents per share. The quarterly loss was better than the prior-year quarter’s loss of $1.18 per share. Including special items, the company reported loss of $1.25 per share compared with a loss of $1.42 per share posted in the prior-year period.

The robust bottom-line comparisons from last year resulted from the company’s ongoing cost reduction initiatives, better margin rates, lower debt levels and strengthening liquidity strategies. Additionally, the company has managed to effectively reduce merchandise inventory levels to $8.7 billion at the end of the quarter compared with $9.3 billion at the end of second-quarter 2011.

Quarterly Detail

For the second quarter of 2012, revenue decreased 6.6% to $9,467 million compared with $10,138 million in the prior-year quarter, missing the Zacks Consensus Estimate of $10,028 million.

The decline in quarterly revenue not only reflects lower domestic comparable store sales, but also reduced Kmart and Sears full-line stores in operation during the quarter. The company witnessed a 3.7% decline in domestic comparable store sales, including a fall of 2.9% and 4.7% at Sears Domestic and Kmart, respectively. Moreover, comparable store sales at Sears Canada registered a slump of 7.1% in the quarter.

Segment wise, during the reported quarter, sales at Sears Domestic and Kmart dropped 6.9% and 5.2%, to $3,374 million and $5,062 million, respectively. Moreover, sales at Sears Canada registered a decline of 12.3% to $1,031 million.

Revenue decline at Sears Domestic segment reflects weak sales of appliances and consumer electronics, lawn and garden, lower clearance sales activity as well as reduced pharmacy sales. Moreover, revenue decline at Sears Canada reflects weak sales in women's apparel, tools and lawn and garden, home decor and men's apparel, partially offset by improved performance in home appliances and mattresses.

Adjusted EBITDA for the second quarter of 2012 was $153 million, compared with $58 million in the prior-year quarter. However, EBITDA margin expanded 100 basis points to 1.6% from 0.6% in the prior-year quarter.

Balance Sheet and Cash Flow

Sears Holdings ended the quarter with cash and cash equivalents of $730 million and long-term debt of $2.0 billion compared with a cash balance of $647 million and long-term debt of $2.1 billion at the end of the prior-year period. The company’s shareholder equity stands at $4,496 million at the end of the second-quarter 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 margin expansion and narrower loss per share from the prior-year quarter.

In an effort to optimize its financial performance, the company recently announced a string of measures to enhance its growth prospects by lowering investment in sections of the company that no longer contribute significantly to its growth.

In doing so, Sears Holding has announced its intention to partially spin-off its interest in Sears Canada Inc. Sears Holdings currently has a 95% ownership interest in Sears Canada, which it intends to reduce to 51%. The move is expected to enhance Sears Holdings’ liquidity position. The company expects to successfully close this transaction in the second half of 2012.

Further, Sears Holdings filed a registration statement with the Securities and Exchange Commission (:SEC) for spinning off its Sears Hometown and Outlet stores businesses. The separation is expected to provide $446.5 million in gross proceeds. The company hopes to complete the partial spin-off in the third quarter of 2012.

Apart from this, the company is focusing on cost containment, inventory management, and merchandise initiatives to improve margins through leverage on buying and occupancy expenses.

Sears Holdings, which competes with Wal-Mart Stores Inc. (WMT) and Target Corporation (TGT), currently has a Zacks #2 Rank, implying a short-term Buy rating. The company retains a long-term Outperform recommendation.

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