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Sears 1Q loss widens, sales remain soft

By Michelle Chapman

Associated Press

Published: Thursday, May 22 2014 2:51 p.m. MDT

In this Feb. 22, 2010 file photo, people shop at the Sears retail store in Burbank, Calif.

Damian Dovarganes, Associated Press

Enlarge photo»

NEW YORK — Sears Holdings signaled that it may close more stores than the 80 locations it is shuttering this year as the beleaguered retailer looks for ways to restore profitability and raise cash.

The news came as the Hoffman Estates, Illinois-based company, which operates Kmart as well as Sears stores, reported a wider first-quarter loss as sales declined 7 percent. The biggest drag was consumer electronics, a category that has been suffering because of price competition online.

Sears Holdings Corp., controlled by billionaire hedge fund investor Edward Lampert, has been cutting costs, reducing inventory and selling assets to return to profitability. Sears announced last week that it was considering selling its Canadian operations. It recently spun off clothing business Lands' End as a separate public company after not having much success with it.

At the same time, it's shifting away from its focus on running a store network to operating a member-focused business.

But its biggest albatross remains its stores, which have been criticized for being outdated. By the end of the first quarter, the company operated 1,900 Sears and Kmart stores.

Lampert, who is chairman and CEO, combined Sears and Kmart in 2005, about two years after he helped bring Kmart out of bankruptcy. But it has faced mounting pressure from nimbler rivals like Wal-Mart Stores and Home Depot.

Moreover, Sears is also facing broader issues that are tripping up many other retailers. Like other stores catering to low- to middle-income customers, Sears is wrestling with a slowly recovering economy that's not benefiting all Americans equally. It also faces a shifting landscape where mobile shoppers want more flexibility on where and how they buy.

Lampert told investors in a pre-recorded call Thursday that Sears is seeing progress in its shift to a member-focused business called Shop Your Way, with first-quarter member sales comprising 74 percent of eligible sales — the highest level ever. That's up from 68 percent from the same period a year ago.

But David Tawil, co-founder and portfolio manager of Maglan Capital, which follows distressed companies, says the free loyalty program hasn't "gained enough traction or isn't unique enough to set it apart from others."

Lampert said in the call that the company "may close additional stores in the course of this year" on top of the 80 now being closed.

Lampert acknowledged that overall profitability remains a challenge.

"Our performance in the first quarter highlights the challenges we are facing as well as the progress we are making in this transformation," Lampert added.

Sears lost $402 million, or $3.79 per share, for the period ended May 3. That compares with a loss of $279 million, or $2.63 per share, a year ago.

Excluding certain items, it lost $2.24 per share.

Revenue fell 7 percent to $7.88 billion, partly because there were fewer Kmart and Sears stores open. The results also accounted for weaker Sears Canada revenue and the spinoff of Lands' End in April.

Lampert noted that the biggest negative was the consumer electronics businesses at its Kmart and Sears stores. Sales at domestic Sears stores open at least a year edged up 0.2 percent in the quarter. Excluding the impact of consumer electronics, the figure rose 0.8 percent. At Kmart stores open at least a year, sales declined 2.2 percent. Stripping out the impact of the consumer electronics business and its grocery and household goods category, the metric slipped 0.4 percent at Kmart.

Sales at stores open at least a year is a key indicator of a retailer's health. It excludes results from stores recently opened or closed

To turn around its consumer electronics business, Sears said it's moving the business from a focus on selling TV's to a company empowering Connected Living that will bring together its capabilities in fitness equipment, electronics, appliances, home services and auto services.

Another business that struggled was its fitness equipment business. It plans to boost that business as part of its Connected Living strategy. For example, it will reward Shop Your Way members for activities monitored via Fitbit, Jawbone Up and other smartphone apps.

One bright spot was online sales, which increased 26 percent.

Sears' shares rose 4.2 percent, or $1.54, to close at $38.10.

Follow Anne D'Innocenzio at http://www.Twitter.com/adinnocenzio

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