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Sears Q1 Sales Plunge $2 Billion as Retailer Sheds Assets

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Struggling department and discount store operator Sears Holdings Corp. (SHLD) reported first-quarter earnings that beat Wall Street estimates. Sales, however, fell short of expectations as the company continues to downsize its business.

Revenues fell by a dramatic $2 billion to $5.9 billion, due to actions taken by the company last year to streamline operations and focus on its transformation into what it refers to as being more “member-centric.” The decrease in revenue included $697 million associated with Sears Canada, which was spun off in October, $222 million from the separation of the Lands’ End business, which occurred in the first quarter of 2014, and $501 million as a result of store closures. Domestic comps declined 10.9%, comprised of a 7 percent drop at Kmart and a 14.5% plunge at Sears.

During the quarter, the company’s store count decreased by a total of 713, including the 449 divested Sears Canada stores as well as closures of 179 Kmart and 85 domestic Sears stores. In addition, the company has begun to downsize some of the stores it’s keeping open.

Gross margin decreased by $310 million, but improved by 260 basis points as a percent of revenue, to 25.8%. Kmart’s gross margin rate for the first quarter improved 150 basis points. Sears’ gross margin rate improved 350 basis points for the quarter.

SG&A expenses decreased $408 million in quarter compared to the prior-year period. Excluding non-recurring items, the biggest declines were in payroll and advertising expenses.

The company’s net loss narrowed to $303 million, or $2.85 per share, from $402 million, or $3.79 per share, in the prior year period. The quarterly net losses for both years were impacted by significant items. Adjusting for those, the company would have reported a net loss of $213 million and $216 million in the first quarter of 2015 and 2014, respectively, beating analyst estimates.

“During the first quarter, we made significant progress in our transformation from a traditional, store-network based retail business model to a more asset-light, member-centric integrated retailer leveraging our Shop Your Way platform,” chairman and CEO Edward S. Lampert said in a statement.

The Shop Your Way program allows consumers to pre-shop the latest deals, coupons and sales on a broad range of merchandise categories before visiting a store, and earn points and other benefits while doing so. The company reported that sales to Shop Your Way members in Sears Full-line and Kmart stores were 74 percent of eligible sales for the first quarter, and that the company is successfully enhancing margin rates and earnings performance as it replaces traditional forms of marketing with Shop Your Way targeted and personalized digital transactions.

Sears said it continues to make progress toward the formation of Seritage Growth Properties, a public real estate investment trust (REIT) that will purchase properties from the company in a sale and leaseback arrangement involving approximately 235 Sears and Kmart stores, as well as the purchase of the company’s interest in the joint ventures, with expected proceeds to Sears Holdings of $2.6 billion. This, when combined with the proceeds from the previously announced joint venture transactions, is expected to yield proceeds in excess of $3 billion.

“With the completion of the joint venture transactions with three leading shopping mall owners and operators, and the advanced formation of the Seritage REIT, we will become more productive with our physical store space.” Lampert said. “This will position Sears Holdings for long-term success consistent with our focus on our best stores, rewarding our best members and pursuing our best categories to transform Sears Holdings into a leading integrated retail membership-focused company leveraging our Shop Your Way platform.”

The stock was down a little over 1 percent in Monday morning trading.

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