Sears Holdings reported a second-quarter earnings loss Thursday as it continues to pursue its strategy of “transformation” under leadership of well-known hedge fund manager Eddie Lampert.
Sears had a net loss of $395 million and $3.70 per diluted share, compared to net earnings of $208 million and $1.84 for the second quarter last year. The losses came as the struggling retailer witnessed comparable store sales decline by 3.3% at Kmart and 7% at Sears Domestic.
"We continue to face a challenging competitive environment and while we continue to focus on our overall profitability, including managing expenses, we reported a net loss for the second quarter,” Lampert, Sears Holdings' chairman and CEO, said.
The July quarter was the company’s fourth straight of net losses; it has suffered five consecutive years of losses since 2012.
With only $276 million on its balance sheet at quarter-end, Sears also accepted a $300 million loan from Lampert’s hedge fund, ESL Investments Inc., against its inventory, receivables and other working capital. Its low cash also means it has blown through most of the $2.7 billion it gained when it sold 235 of its stores to lease back from a real estate investment trust it created, Seritage Growth Properties (SRG, Financial), in July last year.
At quarter-end, $3.4 billion in long-term debt burdened Sears’ balance sheet, increased from $2.2 billion at Jan. 30.
To make ends meet, Sears has sold off assets and businesses, and is now considering selling some of the brands to which its investors have been assigning much value: Kenmore, Craftsman and DieHard. It is also exploring selling its Sears Home Services Businesses.
One of the investors who has lost money buying into Sears’ turnaround story is Bruce Berkowitz (Trades, Portfolio), chief investment officer of the Fairholme Fund (Trades, Portfolio), who owns 26% of its shares, as well as short-term bonds with yields above 10%. He bought much of the stake at shares prices around $32 to $42 from 2012 through 2014. Sears shares traded around $13.99 Thursday afternoon, after falling 73% over the past five years. Sears’ competitor, JC Penny (JCP, Financial), fell about 59% over the same period, while peers such as Target gained 42% and Kohl’s (KSS, Financial) rose almost 1%.
Berkowitz sold approximately 1.6 million shares of the company in the first quarter when the price averaged $17 per share, but bought around 1.3 million in the second quarter when it dropped to $14.
In February, Berkowitz joined the board of Sears and in an August letter, approved the potential brand and service business sales, saying market observers were only recently recognizing valuable parts of Sears.
“[The transformation] is taking much longer than we thought,” he said, “but we’re still optimistic.”
Francis Chou (Trades, Portfolio)’s conviction on Sears also grew in the second quarter – the deep value investor boosted his holding, which he started more than five years ago when prices hovered around $52, by 38.8%, assigning 7.58% of his portfolio to the company.
“At the current price of $15 for Sears, the company is being priced in the market for about $1.5 billion,” Chou said in a letter dated in May. “Even if you include the debt of roughly $3 billion, we believe that the price of Sears is severely underpriced.”
By far its top investor is Lampert, its board chairman and CEO of hedge fund ESL Investments, who controls 50% of the its common stock. Lampert became CEO of Sears in February 2013 and initiated its turnaround strategy. He aims to make the ponderous, discount-heavy traditional retailer company into a “more asset light, integrated membership-focused company,” with a plan to cut staff and marketing costs, and improvement inventory management to increase gross margins.
The strategy will likely impede revenues in the near term, he said, as the company focuses on a return to profitability.
“We are encouraged by the year-over-year improvement in our Adjusted EBITDA and feel we are making progress in our transformation as we remain focused on our best stores, our best members and our best categories to drive our business and enhance the member experience," Lampert said.
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