Sears posts second-quarter loss

CHICAGO -- Once a mainstay in American shopping culture, the parent of Sears and Kmart stores took another step backward yesterday, announcing a surprising second-quarter loss that dimmed hopes about the ailing merchant's future.

Although Sears Holdings Corp. is paying down debt and has a $1.3 billion cash war chest -- enough to give investors confidence in its financial footing for now -- experts say it desperately needs to end years of declining sales if it wants to stay viable.

Led by Chairman Edward Lampert and an interim CEO who's been at the helm for more than 18 months, Sears continues to struggle to attract shoppers who, even before the recession, were taking their wallets to competitors that offered more products at cheaper prices with more appealing store atmospheres.

Since acquiring control of Kmart out of bankruptcy in 2003 and adding Sears, Roebuck and Co. in 2005, Lampert has had the retailer spend billions buying back stock and trimming debt. A renowned and reclusive financier, he carefully guarded how much money the Hoffman Estates-based company spent updating its mostly aging store base.

And so, while investors eventually began viewing the retailer as a way to buy into Lampert's hedge-fund mystique, customers continued to abandon its brands.

"At some point, we need to see a rebound in the top line, and that's going to depend on consumers' willingness to shop at Kmart and Sears," Morningstar analyst Kim Picciola said. "I think they still haven't quite figured out what's going to draw consumers back into their stores."

It hasn't been for lack of trying.

Sears has tried wooing shoppers by emphasizing its Kenmore, Craftsman and DieHard brands, along with offers of trendier clothing and housewares backed by celebrities, layaway deals, a series of online ventures and the ill-fated Sears Essentials stores, which sold merchandise from both stores but never resonated with shoppers.

This week, the company started a program mimicking old-fashioned Christmas club accounts to help shoppers save to buy presents.

Since the merger, the company's revenue has declined virtually every quarter. Meanwhile, sales in stores open at least a year have decreased every period.

The trends got worse during this year's second quarter when the company lost $94 million, or 79 cents per share -- its third loss in six quarters. Sales careened 10 percent to $10.55 billion.

That compares with a profit of $65 million, or 50 cents per share, a year ago when revenue was $11.76 billion.

Executives said results were dragged down by lower sales of clothing and home appliances along with one-time costs.

Sales at stores open at least a year dropped 12.5 percent at Sears' U.S. stores and 3.9 percent at Kmart locations.

Yesterday's results were far below expectations and sent the company's shares plunging $8.76, or 11.9 percent, to close at $65. Despite the dismal performance, observers say Sears isn't in imminent danger of following now-defunct retailers Circuit City Stores Inc. and Linens N Things into bankruptcy.

Still, the company will most likely face difficult choices, especially about its real estate holdings, considered by many to be among Sears' most valuable assets. But even those have lost their luster as commercial real estate values plummet.

"All roads lead to hell," said Howard Davidowitz, chairman of retail consulting and investment banking firm Davidowitz & Associates, who's been skeptical of Lampert's efforts for years. "It doesn't look to me like he has any good options, but he has to pick the best of the worst."

Among them, Davidowitz said, is keeping the company as is, a move tantamount to holding onto a shrinking asset. Other choices are selling and closing more stores, or selling off some of the company's assets like its popular brands or online ventures.