We recently upgraded our long-term recommendation on broadline retailer Sears Holdings Corporation (SHLD) to ‘Outperform’, given its efforts to revamp its organizational structure and operating model in order to overcome its sluggish top-line performance and even weaker bottom-line results.
Following continually disappointing top- and bottom-line results, the first quarter of 2012 reflected solace for Sears with losses narrowing in the quarter. Despite a 2.8% decline in the top line, Sears’ first-quarter 2012 loss per share narrowed to 31 cents from $1.34 in the prior-year period and fared better than the Zacks Consensus estimate of a loss of 59 cents. The improved results were primarily driven by its ongoing cost reduction, inventory management, strengthening liquidity strategies and merchandise initiatives. Moreover, adjusted EBITDA margin expanded 150 basis points to 2.1% from 0.6% in the prior-year quarter.
Struggling with losses, Sears has now revamped its organizational structure and operating model in an effort to simplify its business lines. The new structure is based on five business units, namely operating businesses, support, brands, online and real estate. Each unit operates separately to facilitate greater focus on profitability and rapid decision-making to capitalize on opportunities and mitigate risks.
In order to boost top-line growth, Sears has strategically entered into a license agreement with Dorcy International. As per the agreement, Dorcy will be allowed to sell Sears Holdings DieHard-branded rechargeable batteries and flashlights to retailers in the U.S., Puerto Rico and the Caribbean. This will help the company to generate incremental retail sales.
In its attempt to optimize its financial performance, the company recently announced a string of measures to enhance its growth prospects by trimming investment in sections that no longer contribute significantly to growth.
In keeping with this strategy, Sears announced its intention to partially spin-off its interest in Sears Canada Inc. Sears currently has 95% ownership interest in Sears Canada, which it intends to reduce to 51%. The move is expected to enhance Sears Holdings’ liquidity position.
Moreover, Sears Holdings intends to shutter 100 to 120 Kmart and Sears full-line stores to trim costs and generate cash. Further, the company expects to generate $140 to $170 million of cash from store closures through inventory clearance.
Apart from this, the company has been focusing on cost containment, inventory management, and merchandise initiatives to improve margins through leverage on buying and occupancy expenses. Looking ahead, we believe these ongoing strategic and cost containment initiatives will provide cushion to Sears’ bottom line.
However, intense competition and exposure to adverse foreign currency translations may undermine Sears’ future operating performance.
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.
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