Sears may finally be in a fight that it can't win

Seth Perlman / AP

Maybe if Sears had sold more of these. Analysts are wondering if a combination of greater competition, down-at-the-heels stores and escalating pension costs will combine to deliver a knockout punch to the venerable retailer.

By Martha C. White

Those blue-light specials just didn't cut it this year. After dismal holiday sales in a year when other retailers managed to claw their way to a modest recovery, Sears Holdings Inc. announced Tuesday it would close between 100 and 120 Sears and Kmart stores due to poor performance.

Sears is retail's Rocky Balboa: It's had more than its share of comebacks and reinventions.?And while it wasn't always pretty, it usually managed to squeeze out one more win. Now, though, analysts are wondering if a combination of greater competition, down-at-the-heels stores and escalating pension costs will combine to deliver the?knockout punch to a company that began?as a mail-order company in the 19th century and grew into one of the nation's largest retailers.?

The National Retail Federation estimates that sales for the holiday season are up 3.8 percent over last year. But for the eight-week period leading up to Christmas, Sears Holdings said its same-store sales fell by 5.2 percent. Same-store sales are sales at stores open more than a year and are considered a more accurate barometer of how a retail company is faring.

The drop was sharper at its flagship stores, which fell 6 percent, while Kmart sales fell by 4.4 percent. In a release, the company blamed sagging electronics sales at both chains, along with lower appliance sales at Sears and fewer clothing and layaway purchases at Kmart.?

It's true that these are competitive categories, but they're also areas where experts anticipated higher sales this holiday season. So it's not that people weren't buying gadgets and sweaters; they just weren't buying them at Sears or Kmart. With outdated, disorganized stores, Sears has lost?ground to discounters like Wal-Mart and Target, and to?Lowe's and Home Depot in tools and appliances. Tweaks to the merchandise mix, like a clothing line by reality TV's Kardashian sisters, were greeted cooly by consumers.?

Analysts are concerned that Sears may not be able to make up the lost ground. "These guys just turned in a disastrous fourth quarter," said?Imperial Capital managing director Mary Ross Gilbert. "We're seeing an acceleration in the deterioration of the business."

"I'm not sure how they're going to turn it around," Credit Suisse retail analyst Gary Balter told CNBC. Especially worrisome, he said, was Sears' disclosure that it currently has $438 million in outstanding borrowing, even though this is the time of year when retailers usually have the most cash available. "If they're not cash positive right now, that's a negative signal," he said.?

Sears' stocktumbled Tuesday.?Balter pointed out that his price target for Sears of $20 is still 15 times EBITDA (earnings before interest, taxes, depreciation and amortization), which is a high valuation for the company. Others are more pessimistic, saying this metric doesn't paint a complete picture of Sears' financial health.

Gilbert pointed out in a recent report that Sears' EBITDA doesn't include some substantial pension funding costs and gave the company?a $6 price target based on that as well as further anticipated declines in performance.

"Over the last five years you've seen their EBITDA decline by 68 percent," Gilbert said. "Now we're talking about a potential liquidity crisis in 2012." While Sears might be able to get through the first quarter without a hitch, Gilbert said the company will struggle if vendors lose confidence next summer, when holiday ordering takes place, and demand to be paid sooner or even payment in advance of shipments.?

The biggest problem is that the company can't or won't invest in its stores, and consumers have been voting with their feet. "Sears? retail operations have continued to languish over the years? capital expenditures have been running at close to 1 percent (or less) of revenues compared to 2?3 percent of revenues" ?for competitors like Target and Home Depot, Ross Gilbert wrote. "[C]ustomers may be further distanced from the brand due to store-level staff not being adequately trained or motivated to provide a high level of service.

"We think that it is a retail concept that has gotten tired," said Ed Mally, director of research at Imperial. "The stores are in need of some updating and their competitive position is challenged."

Insight on what is next for Sears Holdings, as it plans to close down 120 Kmart stores, with Gary Balter, Credit Suisse retail analyst.

Source: http://bottomline.msnbc.msn.com/_news/2011/12/27/9740808-sears-holdings-struggles-to-hold-on

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