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A Pared-Down Sears Beats Estimates in Third Quarter

Beleaguered department and discount retailer Sears Holdings reported third quarter earnings Thursday that were slightly better than Wall Street expected, and said that its liquidity has improved. The stock price is down, however, as the company apparently failed to convince investors that closing stores, selling off assets and reducing inventory will result in the rejuvenation of the business.

Revenues decreased by 13 percent, or approximately $1.1 billion, to $7.2 billion for the quarter from $8.3 billion in the year-earlier period. Almost $385 million of the decline was due to the separation of the Lands’ End business, which was completed in the first quarter of 2014, while another $340 million of the drop was attributed to fewer Kmart and Sears full-line stores. Another $326 million was from the separation of Sears Canada from the rest of the business in October 2014. Domestic comparable store sales declined 0.1% in the quarter, comprised of a 0.5% increase at Kmart and a 0.7% decrease at Sears. Online sales increased 9 percent over last year.

Gross margin decreased from 23.3% to 22.2% of sales. Kmart’s gross margin rate for the third quarter increased 50 basis points, primarily driven by an increase in the apparel category due to lower promotional activity. Sears domestic’s gross margin rate declined 190 basis points for the quarter with decreases experienced in a majority of categories, most notably consumer electronics, home appliances (partially due to free delivery), tools and home.

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The net loss was $548 million, or $5.15 per diluted share, compared to $534 million, or $5.03 loss per diluted share, for the prior year third quarter.

One of the biggest challenges the retailer faces is what to do with its stores, many of which are badly in need of renovation. Sears said it plans to close 235 stores this year, double the number it cited in August. The company has shifted its focus from running brick-and-mortar stores to operating a multi-channel merchandising business through its Shop Your Way loyalty program. The company reported that Shop Your Way represented over 70 percent of sales in the third quarter, even with last year.

Sears Holdings Chairman and CEO Edward S. Lampert said in a statement that the company remains “focused on delivering an unparalleled integrated retail experience for our customers through Shop Your Way and above all, returning Sears Holdings to profitability.”

He said the company continues to enhance its capital structure and liquidity. Sears said it has raised $2.2 billion so far this year, part of which was a load from Lampert’s own hedge fund. The company reportedly intends to sell most of its 51 percent stake in Sears Canada to raise almost $380 million.

Sears Holdings is expected to report its eighth consecutive year of declining revenue and fourth loss in as many years when it posts fiscal year results in early 2015.