Sears Q2 Earnings: Anyone Who Likes These Results Is High

 | Sep 14, 2018 | 7:40 AM EDT
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

shld

Sears Holdings (SHLD) made us wait as long as legally possible to report its second quarter earnings results. The stock was up 26% at one point in after hours trading, and it truly boggles my mind.

The shares rose 15.7% in pre-market trading on Friday.

The only marginally good news issued in the Q2 release was the CEO Eddie Lampert saying that comp sales were positive thus far in the third quarter. I'm not sure how that makes up for the awful results in the second quarter, especially when you consider the fact that they will have a lot less stores reporting in the third.

The troubled retailer reported a huge increase in losses year over year, lower sales, lower margins, increasing interest expenses, and a huge increase in the company's long-term liabilities.

I own some $1 put options for SHLD, and this afternoon it just plain old disappointed. I am not giving up, however. I knew the September puts were a high-risk play, and I plan on riding it out through at least through Monday before I consider cutting my losses. If I miss it here, I'll likely be purchasing puts for October and February 2019. The fundamentals behind Sears' earnings results are plain old not good, and I hope the market is smart enough to realize that.

The company placed much of the blame for declining revenues on store closures. That's a fair justification; but it doesn't make up for the declining sales at the locations that are still left. Comparable store sales declined a total of 3.9% in the second quarter. Those declines break down to a 4% decline at Sears locations, and a 3.7% decline at Kmart locations. The big bragging right getting thrown around here that seems to be the catalyst for the share price, is the fact that this comp decline is smaller than the 11.9% decline in the period prior. Folks, that's not a good reason to buy a stock like this. A sales loss is still a sales loss! Furthermore, the smaller decline in comp sales did not do help losses.

Sears' net loss of $508 million represents an increase in losses over the first quarter (despite slower comp sales declines), as well as from Q2'17. Year over year, the $508 million loss represents a 103% increase in losses. Remind me again why the stock is up after hours? I think the main culprit of the climb has to do with the company pushing the tale of positive comp sales in the third quarter. Sales are reportedly up 3% in July, and 2.5% in August. I remain unimpressed. Two months of reported positive same store sales growth do not make up for the 11.9% and 3.9% quarterly declines in the first half of the year. With the hurricane season likely affecting store sales along the east coast, I question whether they'll be able to create growth in September.

Frankly, I think the debt levels that the company has acquired in trying to right itself are too high for the company to come back from. If the overall store base has to keep being shuttered, their potential revenue is smaller, making it a lot harder to produce operating income on a level that can handle the debt load.

That debt load is still growing, as the company takes out more financing in order to cover its payments on past financing/operations. It's a vicious cycle.

The long-term debt grew by $1.25 billion, or 55.8% in the second quarter to $3.5 billion. Year over year, that's an increase of 45.7%. They also still face $1.16 billion in pension liabilities. Altogether, Sears' total liabilities of $11.3 billion outpace the company's actual assets by $4.4 billion. That's right.

This company's balance sheet runs a deficit of $4.4 billion. Think about that. People are actually still buying shares in a business that's worth negative $4.4 billion, and the company continues to hemorrhage money quarterly. The liabilities are increasing interest expenses ($188 million in the second quarter), and I see no way that the company can successfully allocate capital to revamp its business to drive sales, while also meeting its debt obligations.

If Lampert successfully gets his hands on Kenmore (An offer of $400 million offer from ESL investments), there will be even less in Sears arsenal that it can actually sell. All in all, it's clear that Lampert wants to get that last big asset out of Sears before the shell of a company collapses. Anyone who argues that a Kenmore sale would help the company turn things around need only look at the quarterly losses. That cash isn't enough to do anything.

This stock is getting bounced around by traders. There's no reason for the stock to be trading near $1.50. I think it's absurd that the stock isn't delisted at this point. I might have pulled the trigger too early on my September put options, but rest assured, I'll be looking to make a comeback with some 2019 options.

Columnist Conversations

In GS I see key price support at the 224.49-226.42 area.  I also have timing for a possible low.  I ...
Tesla (TSLA) has tested our long-term bounce zone @ 283.90-258.95 a few times. These have been BUYING opportun...
We have a big winner here, let's roll it up to a higher strike   SOLD SRPT NOV 140 CALL AT 26 (in ...
We still like this name and want to give it more time. SOLD AAPL OCT 220 CALL AT 6.9 (in at 10) BOUGHT A...

BEST IDEAS

REAL MONEY'S BEST IDEAS

News Breaks

Powered by

COLUMNIST TWEETS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.