Shares of Sears Holdings (SHLD) fell 27% on Tuesday, as a whopping 9.6 million shares exchanged hands on news that the struggling retailer would close as many as 120 Sears and Kmart stores.
The market doesn't usually react this strongly to a corporate retreat. If anything, shuttering unprofitable stores is occasionally applauded by investors. If taking one step back is the key to eventually taking two steps forward, kiss the leases goodbye.
However, the challenge here is that this doesn't appear to be an isolated issue. The operator of the Sears and Kmart department store chains is suffering on all fronts. Sales have fallen every year since hedge-fund icon Eddie Lampert orchestrated the combination of the two retailing laggards seven years ago.
A Blue Christmas
No one should be surprised. Shoppers have been sidestepping Sears and Kmart for years. I argued that Sears will never be great just three weeks ago. The decline at both chains has been evident for years, so why should this holiday shopping season have played out any differently?
Comparable-store sales at Kmart fell 4.4% during the eight weeks ending on Christmas Day. Things were even worse at Sears' stateside stores, which suffered a 6% decline in that time. In short, Santa seems to have skipped both hungry chains in handling his shopping list this season.
Sears Holdings will record up to $2.4 billion in quarterly charges as a result of the soft holidays and store closures, but this isn't just a lamentable accounting move. Lampert is now tapping the company's credit line and predicting that profits during the seasonally potent holiday quarter would be shaved in half.
The Harder Side of Sears
We can't mistake a smaller fiscal-fourth-quarter profit for the lost art of making money. Sears is losing more money through its first three quarters than it makes back during the holiday-spiked fourth.
Analysts now see Sears Holdings posting a chunky deficit of $3.83 a share this fiscal year, followed by a loss of $2.35 a share in fiscal 2012 that will likely widen as more of Wall Street's bean counters come to grips with the grim reality.
Sears Holdings is in trouble, and there are no guarantees that this operator that was originally pieced together by a financial guru as a turnaround play rich in real estate assets will ever pan out.
A walk through one of the company's stores -- particularly Kmart, but lately also Sears itself -- is sobering. There's not the flurry of bargain-hungry shopper activity that one routinely finds at global leader Walmart (WMT). The "cheap chic" allure of Target (TGT) isn't there.
Sears Holdings is in a bind. It needs to lower its prices to compete with Walmart, but it can't afford to work on even leaner margins given its current lack of profitability. It needs to make significant capital improvements to update its stores to make them more like Target, but it can't afford the makeover now when it's tapping its credit line just to stay alive.
All hope isn't lost here. Sears still has the golden brands of Kenmore appliances and Craftsman tools, even if their reputations are slipping. Kmart had initial success with its Kardashian Kollection, though that appears to have lasted as long as a Kim Kardashian marriage.
Will a buyout save Sears Holdings before the bankruptcy vultures come to pick at its remains? The clock is ticking on Lampert -- and at more than the 120 stores that will likely close now.
Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. The Motley Fool owns shares of Walmart Stores. Motley Fool newsletter services have recommended buying shares of Walmart Stores. Motley Fool newsletter services have recommended creating a diagonal call position in Walmart Stores.