We have downgraded our prior long-term ‘Neutral’ recommendation on Sears Holdings Corporation (SHLD) to ‘Underperform’ with a target price of $62.00 per share. Moreover, the company holds a Zacks #5 Rank, implying a short-term ‘Strong Sell’ rating on the stock.

The fourth largest broadline retailer in the U.S., Sears Holdings disappoints with its overall first-quarter 2011 results. The company reported an adjusted loss of $1.39 per share compared with the Zacks Consensus Estimate loss of $1.22 and plunged drastically from the prior-year quarter earnings of 16 cents, primarily due to the sluggish top-line performance. Management’s cost-cutting measures for boosting profits were largely criticized as improving the merchandise mix and customer service would have been a better option.

Moreover, Sears Holdings ended its first-quarter 2011 with cash and cash equivalent of $952.0 million compared with $1,744.0 million in the prior period. The company’s debt-to-capitalization ratio also increased to 24.7% from 19.6% reported in the prior-year quarter. Rising debt and declining cash and equivalents may negatively impact the company’s future expansion and operational activities.

Furthermore, the company’s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels, and high household debt levels, which may negatively affect their discretionary spending, and in turn, the company’s growth and profitability.

In addition, Sears Holdings’ financial performance may be substantially affected due to its significant presence in international market (11% of fiscal 2010 revenue), which exposes it to unfavorable foreign currency translations, economic or political instability and other governmental actions on trade and repatriation of foreign profits.

Above all, Sears Holdings operates in a fiercely competitive industry, which includes retailing giants such as Wal-Mart Stores Inc. (WMT), Target Corporation (TGT), and Lowe’s Companies Inc. (LOW). Moreover, the company also faces competition from regional departmental stores, home improvement stores, consumer electronics dealers and specialty retailers. Consequently, this may dent the company’s future performance.

Sears Holdings, the fourth largest broadline retailer in the U.S., offers home appliances, tools, lawn and garden equipment, electronics, automotive repair and maintenance products through a countrywide network of over 4,000 retail stores.

 
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