CHICAGO – Sears Holdings Corp. (SHLD), the No. 3 U.S. retailer formed from Kmart's acquisition of Sears, Roebuck and Co., Tuesday reported a net loss as poor demand for spring merchandise hurt sales.
The newly formed retailer, headed by hedge fund manager Edward Lampert (search), said it would keep a tight grip on costs, but would consider acquisitions and spending to revamp certain stores.
Its shares, which hit an all-time high on Friday, were off 7 percent on the Nasdaq in early Tuesday trading.
The results were skewed by the acquisition, which was completed in the middle of the reporting period, and also included a hefty charge for an accounting change. Stripping out those unusual items, Sears Holdings posted a quarterly profit.
Lampert made no mention of any plans to sell more stores, a hugely profitable strategy that he employed at Kmart (search). The combined company owns hundreds of stores in prime, urban areas with low-cost leases.
Many investors expected Lampert to sell off more stores for cash that he could then use for acquisitions, building Sears into a holding company similar to Warren Buffett's (search) Berkshire Hathaway Inc.
"A lot of people felt that he was a raider who was going to take the company and sell off pieces for personal gain. That apparently is not going to be the case," said Kurt Barnard, head of consultants Retail Forecasting Group.
Lampert, credited with bringing Kmart out of bankruptcy and generating billions of dollars in cash, said the newly formed company was prepared to sacrifice sales growth for profit.
"Too often our predecessor companies pursued higher sales and accepted lower profits to meet objectives that we believe did not increase the value of the companies," Lampert said in a letter to shareholders accompanying the quarterly results.
Kmart bought Sears in March for $12.3 billion.
Lampert said Sears Holdings wants employees to "do more with less and to treat the company's money as they would their own", and said the new company was built with "strong discipline around expenses and capital allocation."
Sears posted a net loss of $9 million, or 7 cents per share, for the first quarter ended April 30. The loss includes an accounting change of $90 million after taxes. Excluding that charge, Sears earned $81 million, or 65 cents per share.
Analysts, on average, expected a profit of 63 cents per share, according to Reuters Estimates.
Kmart's purchase of Sears was completed in the middle of the reporting period, so the retailer said its results were not representative. Had Sears results been included for the whole quarter, the combined company would have lost $78 million, which includes the $90 million accounting charge.
Quarterly revenue was $7.6 billion, or $12.8 billion including results from Sears for the full quarter.
The retailer said quarterly sales fell 2.3 percent at Kmart stores, which it blamed on poor weather that curbed demand for spring merchandise. Revenue from merchandise sales and services rose 0.5 percent at U.S. Sears stores, largely because of a jump in its home service business that made up for weak clothing, and lawn and garden equipment sales.
Barnard said the company was wise to protect profits but also needed sales to lure customers into the stores "so that they can get accustomed to the new Kmart or Sears."
The quarterly report shows a steep drop in cash and a rise in inventory because of Kmart's purchase of Sears. The company had $1.6 billion of cash and cash equivalents as of April 30, down from $7.4 billion before the deal closed.
Lampert said the company had reduced its short-term debt because it is currently rated below investment grade, or junk. He said the retailer will "seek to persuade" ratings agencies to upgrade the company's credit rating.
Still, Lampert said the company was spending money to convert some Sears stores into Sears Essentials, which carry Sears appliances and tools as well as some grocery items.
The retailer was also willing to spend money to remodel some Kmart stores, bringing in Sears's well-known Craftsman tools and Kenmore appliances, he said.
Sears Holdings shares fell $11.36, or 7.2 percent, to $143.71 on the Nasdaq.