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Stock Analyst Update

Sears Carries Too Much Baggage

The company's long-term issues outweigh cost-cutting benefits.

What Happened?
Retail giant Sears (S) reported that revenue and operating earnings (excluding one-time items) grew 4.7% and 17%, respectively, for the third quarter ending September 30. Earnings per share of $0.81 beat First Call estimates by a penny. The company had about 10% fewer shares outstanding in the quarter compared with the same period last year as a result of repurchases; this boosted earnings per share.

What It Means for Investors
Sears still has some serious long-term issues to deal with before we would recommend purchasing the stock. Its top line continues to show very slow growth, even as it cuts expenses to improve its bottom line. And although Sears has a done a great job of cleaning up its poor-performing credit card division, credit sales have stagnated over the past few years as the company has used tighter credit standards for new cardholders. Moreover, department stores such as Sears continue to lose market share to discount and niche retailers such as Target  (TGT), Gap  (GPS), Home Depot (HD), Best Buy  (BBY), and Kohl's  (KSS). Thus, we think Sears shares are a dud until the company figures out how to stem the loss of market share in apparel, electronics, hardware, and other products.