Market Overview

Sears Announces Massive Loss, Restructuring Initiatives; Stock Soars


Sears Holdings Corp. (NASDAQ: SHLD) released its fourth-quarter earnings results on Thursday prior to the closing bell. In a quarter which the CEO described as "unacceptable," the company reported a net loss attributable to shareholders of $2.40 billion, or $22.63 per share, versus a profit of $374 million, or $3.43 per share, in the year ago period. The loss included an accounting charge of $2.5 billion, of which only $95 million was cash. The charge was related to deferred tax assets, impairment of goodwill, and store closings and severance.

On an adjusted basis, EPS was $0.54 compared to $3.67 per share in last year's fourth quarter. This compared to Wall Street analysts consensus EPS estimates of $0.78.

Revenues for the quarter were down to $12.48 billion compared to $13 billion in last year's corresponding period. This compared to Wall Street consensus revenue estimates of $12.44 billion.

"Our poor financial results in 2011, culminating in a very poor fourth quarter, underscore the need to accelerate the transformation of Sears Holdings," Chairman Edward Lampert said in a letter to shareholders. "While some may claim that these results are a continuation of a trend, I believe that they are an anomaly."

To this end, Sears announced a number of significant restructuring initiatives designed to boost the company's liquidity and flexibility. The company said that it intends to spin off businesses that comprise around 1,250 stores, sell 11 stores, and reduce headcount. "This is to unlock value in our portfolio...It's important to distinguish between our short-term earnings issue and the strength of our assets and liquidity," said CEO Lou D'Ambrosio.

Sears will spin off its HOmetown and hardware-store businesses, around 1,250 stores, in a rights offering that is expected to raise between $400 million and $500 million. In addition, the company announced that it is selling 11 stores to General Growth Properties (NYSE: GGP) for $270 million. The company also is planning to reduce inventory by $580 million, which may net the company around $350 million in cash. Cost cuts will also be implemented through headcount reductions and lower marketing expenses. These savings may add up to $200 million or more.

"We're taking immediate actions to restore the strength of our company," D'Ambrosio said. "These actions are targeted to improve operations, unlock the value of our assets and portfolio, and accelerate our strategy around integrated retail."

The market is showing its approval for Sears' restructuring plans, as investors have pushed up the stock better than 18% to $61.58. The fact remains, however, that there is a sense of doubt and general mistrust that continues to surround the company. The stock also remains extremely volatile because of uncertainty surrounding SHLD's longer term prospects. For example, SHLD shares are up more than 94% in 2012, but have still fallen 30% in the last year. Over the last 5 years, SHLD is down roughly 67%.

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