(SHLD) Sears Shares Reiterated at Underperform

We have maintained our long-term Underperform recommendation on Sears Holdings Corporation (SHLD). The company is the fourth largest broadline retailer in the U.S. offering home appliances, tools, lawn and garden equipment, electronics, automotive repair and maintenance products through a countrywide network of over 4,000 retail stores.

Sears Holdings disappoints with its overall second-quarter 2011 results. The company’s adjusted loss of $1.13 per share was well above the Zacks Consensus Estimate of a loss of 64 cents per share while widening drastically from the prior-year quarter loss of 19 cents per share, primarily due to the sluggish top-line performance.

Management is still continuing with its cost-cutting measures for boosting profits, which were largely criticized in the first quarter of fiscal 2011, as improving the merchandise mix and customer service would have been a better option.

Moreover, Sears Holdings ended its second-quarter 2011 with cash and cash equivalent of $658.0 million compared with $1,193.0 million in the prior period. The company’s debt-to-capitalization ratio also increased to 22.8% from 13.8% reported in the prior-year quarter. Rising debt and declining cash and equivalents may negatively impact the company’s future expansion and operational activities.

Further, the company’s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels, and high household debt levels, which may negatively affect their discretionary spending, and in turn, the company’s growth and profitability.

Additionally, Sears Holding’s financial performance may be substantially affected due to its significant presence in international market (11% of fiscal 2010 revenue), which exposes it to unfavorable foreign currency translations, economic or political instability and other governmental actions on trade and repatriation of foreign profits.

Above all, Sears Holdings operates in a fiercely competitive industry, which includes retailing giants such as Wal-Mart Stores Inc. (WMT), Target Corporation (TGT), Kohl’s Corporation (KSS), J.C. Penney Company (JCP), Home Depot Inc. (HD) and Lowe’s Companies Inc. (LOW). Moreover, the company also faces competition from regional departmental stores, home improvement stores, consumer electronics dealers and specialty retailers. Consequently, this may dent the company’s future performance.

HOME DEPOT (HD): Free Stock Analysis Report

PENNEY (JC) INC (JCP): Free Stock Analysis Report

KOHLS CORP (KSS): Free Stock Analysis Report

LOWES COS (LOW): Free Stock Analysis Report

SEARS HLDG CP (SHLD): Free Stock Analysis Report

TARGET CORP (TGT): Free Stock Analysis Report

WAL-MART STORES (WMT): Free Stock Analysis Report

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