Earnings Preview: Sears expected to report 2Q loss on Thursday

Earnings Preview: Sears Holdings

NEW YORK — Sears Holdings Corp., the retailer led by billionaire Edward Lampert that owns Sears and Kmart stores, reports its second-quarter results before the stock market opens on Thursday.

WHAT TO WATCH FOR: How the stalling economic recovery is affecting consumer spending behavior at both Kmart and Sears, Roebuck and Co. Analysts will also want to get early reads on the back-to-school season, the second-biggest period behind the Christmas season. Kmart is offering several exclusives for fall including Dream Out Loud with Selena Gomez, Bongo and Rebecca Bonbon.

Wall Street will also want to know how the unraveling of the housing market’s nascent recovery and increased competition from Target Corp., which is expanding its fresh food area, is having an impact on the company’s business. Retail consultant Burt P. Flickinger III says Sears has made some key initiatives to help drive business like resurrecting layaway services and its expansion of its “Christmas in July” promotions. Sears’ TV ads are also more enticing, Flickinger said. But he noted, “(Sears) has waited too long to invest in its stores.”

In particular, “The biggest food fight will between Wal-Mart and Target, and Kmart has failed on that front,” he said. That’s a big loss, because food brings in customers an average of 70 times a year, compared with discretionary items like clothing, which brings shoppers into stores only about seven times.

Investors will also want to know the company’s assessment of the economy and whether it feels comfortable with the inventory levels heading into the final months of the year

In the three-month period that ended May 1, Kmart had seen a key measure of revenue rose for the third straight quarter. Sears, Roebuck stores registered its first quarterly revenue increase for the first time in several years. The measure is based on revenue at stores opened at least a year and is considered a key indicator of a retailer’s health.

Still, heavy discounts on appliances squeezed the company’s profits in the first quarter even as sales were bolstered by federal rebates for those same appliances. But many customers came to Sears stores only for the deeply discounted appliances and bypassed tools, clothing, electronics and other departments, where revenue fell.

WHY IT MATTERS: Led by Lampert, Sears is closely followed by observers waiting for the reclusive billionaire investor’s next move. Outside of his appearance at the retailer’s annual meetings each spring, the hedge fund guru rarely communicates with shareholders or the media.

Lampert acquired Kmart out of bankruptcy in 2003 and added Sears, Roebuck and Co. in 2005.

WHAT’S EXPECTED: Analysts polled by Thomson Reuters expect Sears to record a loss of 18 cents per share on revenue of $10.62 billion.

LAST YEAR’S QUARTER: Last year, Sears reported earnings of 42 cents per share on revenue of $10.55 billion.