A New Trend Or An Outlier: Sears Has Strung Together Several Earnings Beats In A Row

Last week, Sears Holdings Corp SHLD reported its fifth consecutive quarterly earnings beat. If taken out of context, Sears sounds like a company doing everything right. However, Wall Street knows better. Sears shares are down 59.3 percent since the beginning of 2016, as investors are looking for something more from Sears than smaller-than-expected operating losses.

Quarter, In Review

In the most recent quarter, revenue plummeted another 20 percent. EBITDA dropped from -$181 million to -$222 million. Same-store sales dropped 11.9 percent. All of these metrics point to a company that is bleeding to death, and the market sees the blood in the water.

Management's Take

Sears shares initially spiked 13 percent after this week’s earnings reports. However, after a 7.8 percent sell-off on Friday and a reality check for Sears bulls, the stock is now flat from a week ago.

Sears management is focusing on improving its liquidity, cutting costs, closing unprofitable stores and selling assets. While these initiatives are steps in the right direction, Sears management must do something more than make things slightly less bad.

“During the first quarter we took decisive actions to reduce our cost base and drive operational efficiencies which allowed us to make significant progress on our restructuring program,” said Rob Rieker, chief financial officer, of the most recent quarter. But if Sears is making “significant progress,” investors are wondering why revenue, EBITDA, same-store sales and gross margins are all still trending in the wrong direction.

The Fickle Market

As this week demonstrated, even positive earnings reactions in the market are short-lived. Sears jumped 5.2 percent on the day following its Q3 report in December. A week later, the stock was down 13.1 percent. The stock jumped again by 6.9 percent on the day following its Q4 earnings report in March. It is now down 2.5 percent since that earnings report.

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In fact, much of the positive post-earnings market reactions may be a result of short squeezes rather than bullish buying. Sears has been one of the most popular and profitable shorts in the market in recent years, and each earnings report provides yet another profit-taking opportunity for short sellers.

Shortsqueeze's Perspective

According to shortsqueeze.com, Sears currently has an incredibly high short percent of float of 68.2 percent with 16.5 days to cover. There are plenty of Sears shorts betting on $0 at this point, as short interest is up 37 percent in the past five years.

Sears management is pulling a lot of levers to make things better, particularly by cutting costs and restructuring debt. However, unless Sears’ cost cuts can outpace its declining revenue, the stock will likely continue to drift lower in the long-term, even if it reacts positively in the short-term to the company’s lackluster earnings beats. With the stock down 13.1 percent so far in 2017, Sears’ Q4 and Q1 earnings “beats” and positive initial market reactions are looking more like outliers than a change in direction for Sears.