WILMINGTON, Delaware (Reuters) - Sears Holdings Corp (SHLD.O) posted a surprise second quarter loss on Thursday as sales declines outpaced cost cuts, sending its shares tumbling and dimming investor hopes that billionaire investor Eddie Lampert can turn the retailer around.
The U.S. housing crash weighed on the Sears department stores, with their Craftsman tools and big-ticket Kenmore appliances, while tough competition hurt its Kmart stores.
"Both Sears and Kmart continue to underperform their rivals," said Kimberly Picciola, an equity analyst with Morningstar. "In merchandise, service, location, price. They really haven't gotten the equation right yet."
Lampert, who formed the company by merging Kmart and Sears in 2005, has cut costs, trimmed inventories and shaken up management.
But retail specialists blame him for focusing too much on borrowing costs and inventory levels -- or the financial problems that are his strength -- rather than merchandising. A string of executive departures and a lack of permanent chief executive also have been concerns.
"We haven't heard from them on the CEO front," Picciola said, "and they have not clearly articulated a strategy in how they will hope to turn this business around."
Sears' total expenses fell 8 percent in the second quarter, but failed to keep pace with revenue's 10.3 percent drop to $10.55 billion.
Analysts expected revenue of $10.73 billion and said underinvestment in stores may be sending customers elsewhere.
"They could be losing shoppers to dollar stores," said Richard Hastings, a consumer strategist with Global Hunter Securities LLC of Newport Beach, California.
Sales at stores open at least a year fell 8.6 percent, driven by a 12.5 percent decline at Sears and a 3.9 percent decline at Kmart.
By comparison, Wal-Mart Stores Inc's (WMT.N) U.S. same-store sales fell 1.2 percent in the quarter, while Home Depot Inc (HD.N), which competes with Sears in tools and appliances, saw a 6.9 percent drop.
ROOM AT THE TOP
The company has been searching for a replacement for temporary CEO Bruce Johnson since early last year. Overshadowed by Lampert, Johnson did not hide his dislike for his current job at the annual meeting in May, where he said his wife refers to him as "interim."
"Nobody wants to work for (Lampert). His management style is extremely autocratic," Don Delzell, a managing partner at Retail Advantage in Los Angeles said on Thursday.
Sears has been tinkering with various growth strategies, such as layaway plans, online shopping formats and a new toy department, but analysts questioned the company's willingness to invest in the projects.
When Lampert unveiled the $11 billion merger, he was lauded for what was expected to give Target Corp (TGT.N) a run for its money.
BusinessWeek even asked in a cover story if Lampert was the next Warren Buffett, using the stores' cash flow, shares and real estate as fuel to build his own Berkshire Hathaway (BRKa.N).
But Delzell said the comparison falls short.
"Buffett understood you had to turn a company around and then you get your money out," Delzell said. "Lampert's approach was typical of a corporate raider -- In a boom it works, in a bust it does not."
Sears posted a net loss of $94 million, or 79 cents per share, in the second quarter, compared with a year-earlier profit of $65 million, or 50 cents per share.
Excluding items such as the expense of topping up a pension plan that suffered due to weak financial markets, Sears' loss was 17 cents per share. That compared with analysts' average forecast of a 35-cent profit, according to Reuters Estimates.
Sears announced 28 store closures during the quarter, but analysts have urged it to cut much deeper, as they estimate 400 or more of its roughly 3,900 stores are bleeding cash.
"Kmart is less than one-third as productive as Wal-Mart," said Credit Suisse analyst Gary Balter. "They can close all the stores they want."
One bright spot: the company ended the quarter with $1.3 billion in cash. While down from $1.5 billion a year ago, Picciola said liquidity concerns that had dogged Sears in the past have faded.
Sears shares fell 11.8 percent to $65.07 on Nasdaq. Through Wednesday, the stock had gained 80 percent this year, but was still less than half what it was just over two years ago.
(Editing by Carol Bishopric)