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Sears Holdings Corporation reported third-quarter 2012 adjusted loss of $1.99 per share, narrower than the loss per share of $2.55 reported in the prior-year quarter. Including special items, the company reported loss of $4.70 per share compared with a loss of $3.85 per share posted in the prior-year period.

The robust bottom-line comparisons from last year resulted from the company’s ongoing cost reduction initiatives, which helped to lower selling and administrative expenses during the quarter, offset by a decline in sales that pulled down gross profits. Additionally, the company has managed to effectively reduce merchandise inventory levels to $9.6 billion at the end of the quarter compared with $10.9 billion at the end of third-quarter 2011.

Quarterly Detail

Revenue for the quarter decreased 5.8% to $8,857 million compared with $9,405 million in the prior-year quarter, driven by the reduction in the number of Kmart and Sears full-line stores in operation during the quarter as well as lower domestic comparable store sales.

The company witnessed a 3.1% decline in Domestic comparable store sales, including a fall of 1.6% and 4.8% at Sears Domestic and Kmart, respectively. The decline at Sears Domestic and Kmart was driven by weak performance in the consumer electronics, Grocery and household, Lawn and garden and pharmacy categories. However, comps benefited from increases in the apparel and home appliance categories.

Moreover, comparable store sales at Sears Canada registered a slump of 5.7% in the quarter as sales declined in the snow throwers, women's apparel, electronics, men's apparel and home décor categories, offset by improvements in home appliances and mattresses.

Segment wise, sales at Sears Domestic dropped 4.6% to $4,724 million, while Kmart sales declined 7.8% to $3,081 million. Moreover, sales at Sears Canada registered a decline of 5.1% to $1,052 million.

Adjusted EBITDA for the third quarter of 2012 was a loss of $156 million, improving $34 million from the prior-year quarter. Accelerated strategic actions including introduction of new offers, honed pricing, effectively managed costs and implementation of better inventory management in the Appliances, Apparel, and Home Services led to the EBITDA growth.

Balance Sheet and Cash Flow

Sears Holdings ended the quarter with cash and cash equivalents of $622 million and long-term debt and capitalized lease obligations of $1,960 million compared with a cash balance of $591 million and long-term debt and capitalized lease obligations of $2,073 million at the end of the prior-year period. The company’s shareholder equity stands at $3,901 million at the end of the third-quarter of fiscal 2012.

Measures to Revive Operational Activities

Sears has long been grappling with weak top-line performances and even weaker bottom-line results. However, the measures undertaken to revive the operating performance are showing some signs of improvement as is evident from the company’s EBITDA growth and narrower loss per share from the prior-year quarter.

The company continues to take the actions necessary to create value and retain the flexibility to invest in its strategic priorities. Further, in an effort to enhance its liquidity position, the company completed the partial spin-off of 45% of Sears Canada’s common shares to the company’s shareholders on November 13, 2012.

The company also successfully completed the separation of Sears Hometown and Outlet Stores Inc. on October 11, 2012, raising $446.5 million in gross proceeds.

Sears Holdings, which competes head-to-head with Wal-Mart Stores Inc. (WMT - Analyst Report) and Target Corporation (TGT - Analyst Report), currently has a Zacks #3 Rank, implying a short-term Hold rating. The company retains a long-term Neutral recommendation.

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