FINANCE

Analysis: As the bad numbers keep on coming, Sears remains in a tailspin

Dire, dismal, terrible, horrendous, grim, appalling – over the past few years we’ve used up our stock of adjectives to describe Sears results. As the descriptors run dry, so the bad numbers keep on coming. This quarter is no exception.

It is particularly worrying that the strength of declines across all parts of the business is intensifying. In this period, total sales were down by just over 27%. To be fair, more than half of this is attributable to ongoing store closures. However, that program does not explain the slump in comparable sales which were down by 17% and 13% at Sears and Kmart, respectively.

In essence, the whole group remains in a tailspin, and it is clear that there is no chance of even a leveling-off in sales anytime soon. The dramatic loss of customers at existing stores continues apace, and we believe that there is a danger this trend could accelerate into the new year.

Much has been made of the improvement to the bottom line. In our view, these warm words — a bromide which has been trotted out at every results announcement for years — do not stack up against reality. It is true that losses have narrowed, but Sears was still in the red by well over half a billion dollars during the quarter. By no means is this a cause for celebration.

One small bright spot comes from the agreement with the Pension Benefit Guaranty Corporation. Under this plan, Sears will make an upfront payment into the pension scheme, secured by real estate assets. This will eliminate contributions, which were required in both 2018 and 2019. This will certainly take some pressure off the bottom line in those years, although we caution that it does very little to fix the fundamental issues with the business.

The extent of Sears’ woes is best seen through the growing gap between its assets and its liabilities. Last year this deficit was around $3.4 billion; this year it has grown to just over $4 billion. Given that the group has been selling off assets to fund current operations, this is not particularly surprising. However, the continued growth of the deficit, at a time when the group is deeply unprofitable, simply isn’t sustainable.

For all the criticism we throw at Sears, it is only fair to give praise to the initiatives the group is taking to try and bring itself back. While we do not have much faith that these things will be sufficient to revive the company’s fortunes, it does not mean to say that they are entirely without merit.

The first of these is the relatively recent decision to sell some Kenmore branded appliances on Amazon. This is a sensible move which should strengthen sales volumes which, in turn, should support the inherent brand value of Kenmore. Arguably, without seeking out alternative distribution channels, Sears’ brands are ultimately in danger of fading into obscurity. However, this move is also a tacit admission that its stores are simply not working effectively as a distribution channel for its own brands.

The second interesting move was the whole store sale that the group initiated before Black Friday. While this was probably borne out of desperation, it did help to drive footfall and interest across many stores. Unfortunately, such a strategy is not sustainable on a permanent basis — but it can be used to give sales and cash-flow a short-term boost.

Ultimately, we still believe that Sears is a dying business. Whichever way you cut them, the fundamental economics of the business do not add up. Nothing in this latest set of results changes our view.

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FINANCE

Fast-growing home decor retailer delivers another strong quarter

BY Marianne Wilson

At Home reported its 15th consecutive quarter of same-store sales growth as its value-driven store-based home decor model shows no signs of losing momentum. The company also raised its full year outlook.

At Home on Wednesday reported that its net sales grew 24.8% to $213.0 million in its third quarter, ended October 29, driven by the net addition of 22 stores since the year-ago period. Same-store sales increased 7.1%. Excluding the net impact of Hurricanes Harvey and Irma, the company estimate that comparable store sales would have increased 8.3%.

Net income in the quarter was $2.4 million compared to a net loss of $1.9 million in the prior year period, which included a $2.7 million loss on extinguishment of debt in the third quarter of fiscal 2017.

“Our new store growth of 18%, combined with our merchandising and marketing initiatives, drove net sales growth of 25% and our 14th consecutive quarter of over 20% percent net sales growth,” said chairman and CEO Lee Bird. “Additionally, we delivered our 15th consecutive quarter of positive comparable store sales increases with 7.1% growth, marking our third straight quarter of acceleration on a two-year comparable store sales basis.”

At Home raised its fiscal 2018 pro forma adjusted EPS outlook to $0.77 to $0.79 from the $0.73 to $0.75 previously provided.
It expects sales of $939 million to $944 million, representing annual growth of 23%, based on 28 gross and 26 net new store openings and an assumed comparable store sales increase of 5.7% to 6.0%.

“Driven by our top line outperformance and industry-leading profitability, we more than doubled year-over-year pro forma adjusted EPS to $0.07, enabling us to raise our full year outlook while continuing to reinvest in the expansion of our business,” Bird said.

As of November 29, 2017, At Home operates 149 stores in 34 states and is headquartered in Plano, Texas.

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Tiffany shines in Q3

BY Marianne Wilson

Tiffany & Co. reported third-quarter profit and sales that beat Street estimates, as sales strength in its Americas and Asia-Pacific regions helped to offset weakness in Japan.

Net income rose to $100.2 million, or 80 cents a share, for the quarter ended Oct. 31, from $95.1 million, or 76 cents a share, in the year-ago period.

Total net sales grew 3% to $976.2 million, above estimates of $958.3 million. Total same-store sales fell 1%.

“These latest financial results marginally exceeded our expectations, but I believe that Tiffany has the medium to long-term potential to achieve meaningful comparable store sales growth and drive higher operating margins and earnings growth,” said Alessandro Bogliolo, CEO, who joined Tiffany in October. “Looking forward, we will increasingly capitalize on the strength of the Tiffany & Co. brand with stronger organizational focus on innovation in product, digital, communication and the customer experience.”

Tiffany’s sales in the Americas increased 1% to a better-than-expected $421 million, and Asia-Pacific sales rose 15% to $283 million, also better than expected. Japan sales fell 8% to $139 million, below expectations. Tiffany said the weaker yen against the dollar weighed on results in Japan.

Commenting on the results, Neil Saunders, managing director of GlobalData Retail, noted that Tiffany has come a long way in the past year, starting with improvements in its product. He said that a greater emphasis on fashion and designer collections has generated interest among younger consumer segments.

“As well as using its products to showcase the brand, Tiffany has also upped its game in general marketing and advertising,” Saunders said. “These have been more in vogue than past campaigns, and the use of celebrities like Janelle Monáe, Zoë Kravitz, & St. Vincent (Annie Clarke) is helping consumers to see the brand in a new, more modern light.”

Saunders said an interesting consequence of the company’s “gentle repositioning” is that many of the younger shoppers Tiffany is starting to attract are going online rather than into stores.

“This has resulted in some robust e-commerce numbers,” he said. “It is to Tiffany’s credit that it has responded by improving the website experience and by increasing the amount of content across its platforms.”

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