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Why Sears’ turnaround plan may not turn it around

Hobson on retail "bloodbath"
Mellody Hobson on retail "bloodbath," growing challenges 03:25

Sears is aiming to be nimbler and lure shoppers back through its doors. So far, the evidence doesn't suggest its plan is working. 

The company's sales continued to plummet in the second quarter, plunging 11.5 percent at stores open at least a year. To be sure, the retail environment is tough at the moment for malls and department stores, but the worrying sales drops at Sears Holdings Corp.'s  (SHLD) Sears and Kmart retail divisions point to another issue, according to GlobalData Retail analyst Neil Saunders. 

The sales decline "reveals the fundamental weakness with both Sears and Kmart: fewer and fewer people want to shop there," Saunders wrote in a research note on Thursday. "Many consumers seek to actively avoid them."

Sears, which also posted a $251 million loss in the second quarter, is trying to right the ship. The company is restructuring its operations and shedding underperforming stores, including an additional 28 Kmart stores that it announced on Thursday would be shuttered later this year. It's also opened a new store format in Texas and struck a deal with Amazon to sell smart Kenmore appliances. 

But are these steps enough to save a brand whose core stores aren't drawing new customers or even convincing one-time loyal shoppers to return?

The precipitous drop in comparable sales and the continued lack of progress on profit suggests the company isn't moving far or fast enough to ensure its long-term survival, Saunders said.

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"Right-sizing the store portfolio is laudable and is something to which every retailer should be attending," Saunders noted. "The difficulty for Sears, however, is that as weak stores are disposed of comparable sales from the remaining parts of the chain should, in theory, be improving. However, this is not the case."

Instead, same-store sales appear to be worsening, especially at its Sears locations. Sales at Sears locations open at least a year plunged 13.2 percent, while Kmart same-store sales declined 9.4 percent. 

To put that in perspective, the declines are far worse than what other department stores and mall-based chains are suffering. As a group, those stores reported a sales drop of 4 percent last year.

So what's the end game for Sears? Some analysts have cited the specter of bankruptcy, with S&P Global Market Intelligence warning Sears is likely to file for bankruptcy protection within a year.

To be sure, Sears Holdings CEO Edward Lampert is pulling the company's financial levers to keep it solvent. The company is using cash from selling real estate to pay down debt, and Sears' cash balance has grown. Yet interest rates are higher and gross margins for its merchandise are down from a year ago. 

Added Saunders, "This financial wizardry is not fixing the underlying problems; it is merely kicking the can further down the road."

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