Sears plans to build on 2017 'progress' as comps drop 15%

Dive Brief:

Sears Holdings reported a surprising fourth quarter profit on Wednesday, sending shares up as much as 17% in late trading even as sales plummeted. The company reported net income in the fourth quarter of $182 million, or $1.69 a share, compared to losses totaling $607 million, or $5.67 a share, in the year-ago period. Income in the quarter was boosted by a $470 million tax benefit, according to a press release.
While investors may be optimistic, sales are still plummeting at an alarming rate. As the company anticipated in a February regulatory filing, overall Q4 comparable store sales dropped 15.6%, while at Kmart they fell 12.2% and at Sears a whopping 18.1%. For the full year, comparable store sales declined 13.5%, while they fell 11.4% at Kmart and 15.2% at Sears, the company said.
In Q4, Sears generated $4.4 billion in revenue, compared to $6.1 billion from the year-ago period with store closures contributing to over half of the decline, the company said. For the full year, revenue fell to $16.7 billion in 2017, compared to $22.1 billion the year before. The company completed a loan for $980 million and expects to report year-over-year adjusted EBITDA improvement in the first quarter of 2018. Additionally, long-term debt was $3.2 billion, down from $4.2 billion in the year-ago period.

Dive Insight:

While it may look quite the opposite from an outsider's perspective, Sears executives Wednesday maintained that operational performance is improving and the company is fully committed to a transformation.

"We intend to build on this momentum as we seek to generate profit and raise additional liquidity in order to strengthen Sears Holdings' financial position over the long term," CFO Rob Riecker said on an earnings call, according to a transcript from Seeking Alpha. Riecker said the company is taking incremental steps to "streamline" operations and drive profitability, which will include cost reductions of $200 million over the year unrelated to store closures (which have totaled roughly 400 in the past year). The company has previously announced it will close an additional 100 stores by April.

CEO Eddie Lampert echoed sentiments of "progress" last year, touting "important partnerships" like with Amazon to sell Kenmore appliances and the enhancement of its Shop Your Way loyalty program.

"We also recognize that we need to do more if we are to deliver on our commitment to return to profitability in 2018. We will work to build on the progress we made in 2017, including ongoing actions to improve or close unprofitable stores and to unlock the value in our assets. Importantly, to ensure our long-term viability, we must substantially improve our sales and gross margin performance, including adjustments to our business model," he said.

In another attempt to revitalize the business, Sears announced Thursday it is expanding a collaboration with celebrity Jaclyn Smith more than 33 years since the rollout of her first Kmart clothing line. Sears said her brand is one of America's most recognized, with an awareness over 80% among women 35-60 years old. The Ready to Wear collection is made up of "classic, sophisticated clothing" and are priced starting at $10. Greg Ladley, president of apparel and footwear at Sears, said in a statement that more than 5 million Shop Your Way members have purchased Jaclyn Smith products over the last 12 months.

But as much as executives and investors want to inject optimism into the business, the department store retailer has to reckon with prolonged declines in comparable sales and other metrics despite continued infusions of cash from Lampert's hedge fund ESL Investments, which provided hundreds of millions of dollars in credit in 2017.

Sears stock has dropped 73% over the last year, according to Marketwatch. But dwindling sales might be the bigger problem in the long run. A retailer can only cut costs and close stores so much and remain viable. And there seems to be no end in sight to the customer bleeding.

"In essence, the whole group [of Sears store lines] remains in a tailspin, and it is clear that there is no chance of even a leveling-off in sales anytime soon," Neil Saunders, managing director of GlobalData Retail, wrote in November (and things at Sears have changed little since). "The dramatic loss of customers at existing stores continues apace, and we believe that there is a danger this trend could accelerate into the new year."