Sears Holding Corp. managed to shrink its adjusted loss amid belt-tightening and inventory management during the fourth quarter of 2016, on Thursday reporting net losses of $137 million ($1.28 loss per diluted share) compared to $181 million ($1.70 loss per diluted share) in the prior year.
Sears cut its Q4 adjusted earnings before interest, tax, depreciation and amortization to a negative $61 million compared to a negative $137 million in the year-ago quarter. Merchandise inventories as of Jan. 28 fell to $4 billion, compared to $5.2 billion as of Jan. 30, 2016, while merchandise payables dropped to $1 billion this year from $1.6 billion last year.
Still, Q4 2016 revenue fell to $6.05 billion from $7.3 billion in the year-ago period, and same-store sales plunged 10.3%. Sears same-store sales dropped 12.3% due to depressed sales of appliances, clothing, consumer electronics and tools, and Kmart same-store sales fell 8%, due to depressed sales of consumer electronics, toys, clothing and grocery and household goods. Full-year 2016 revenues were $22.1 billion compared to $25.1 billion in the prior year, due mostly to a decline of $1.3 billion from having fewer Kmart and Sears stores; full-year same-store sales declined 7.4%, with Sears down 9.3% and Kmart falling 5.3%.
Investors were cheered by the slivers of good news in Sears Holdings' earnings report Thursday morning, sending shares up more than 5%. "While the challenging holiday selling season pressured margins and comparable store sales, we were able to successfully improve profitability through disciplined inventory and costs management,” CFO Jason M. Hollar said in a statement. “We will continue to take actions to drive profitability, generate liquidity and adjust our overall capital structure while continuing to meet all of our financial obligations."
Some of that cost management has included closing stores and laying of employees in brick-and-mortar operations as well as staffers at its Chicagoland headquarters. Sears Holdings also detailed moves to improve its customer experience that it says will continue to pay off, including a new Sears MasterCard with enhanced Shop Your Way loyalty rewards, an expanded partnership with Uber to boost rider rewards, mobile capabilities to enhance its Home Services operations and new services in its Auto Center business.
But those moves are the equivalent of “taking an Advil to cure a heart attack,” says GlobalData Retail managing director Neil Saunders, who adds that the results in Thursday's report can only be described as dire.
“Not only are sales down, but the pace of decline has accelerated sharply,” Saunders noted in an email to Retail Dive. “At total level, some of this is the result of store closures across the year — something we believe is sensible and prudent in light of changing patterns of demand. However, much of the dip is also attributable to a slump in the number of shoppers visiting Sears and Kmart, and a continued deterioration in conversion rates among those that do.”
Both Sears (once a fixture of the American retail landscape and in its golden era a disrupter akin to Amazon) and sibling Kmart (once an iconic retailer in its own right) simply aren’t selling what consumers are buying. “On the contrary: [Sears'] product mix, its store environments, its customer service, and its general approach to retailing are actively deterring consumers from visiting,” Saunders said. “Kmart is in much the same position. In ordinary times this would be more than sufficient to cause major problems; in today’s pressured and competitive retail environment we believe that these things will ultimately prove fatal.”
And despite the smiles coming from Wall Street Thursday morning, it’s not just about merchandising or the relationship with customers, but also about the basic financial nuts and bolts, which are allowing the wheels to come off. “Every quarter, the company emphasizes that it is working its way to profitability; and this latest reporting period is no exception, with the promise being made that the firm has a ‘clear path toward profitability,’” Saunders said. “However, where Sears sees a path, we see a tangle.”
Sears Holdings' fourth quarter operating loss of $717 million, worse than last year’s $539 million loss — plus the full 2016 operating loss of nearly $2 billion and net losses of $2.2 billion — make improvements unlikely, Saunders said. Worse, the sales of some of its best performing assets, like its Craftsman brand, boosted EBITDA in the short term but have no role in generating long term growth — a problem made worse because the company’s asset base is being diminished at a time when its total long-term debt has risen from $2.2 billion to $4.2 billion, Saunders added.
“Not only do these staggering figures fail to show even the faintest glimmer of improvement, but they are also a clear symptom of a business that is broken and now well beyond repair,” Saunders said.