Steer Clear of Sears

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If Wal-Mart (NYS: WMT) can't fix its biggest problem in this climate, Sears Holdings (NAS: SHLD) sure can't.

In May, I described Sears as a shambling, soulless wreck of a stock, and things haven't improved in the ensuing months. Sears most recently reported a second-quarter net loss of $146 million, or $1.37 per share, versus a net loss of $39 million, or $0.35 per share, in the year-ago period.

Total revenue for Sears and Kmart declined by 1.2% to $10.3 billion, and same-store sales fell 1.2% at Sears U.S. and were flat at Kmart. Sears also had to mark down prices to move inventory out the door.

Sears shares have shed a quarter of their value since Aug. 1, but that doesn't make them a better bargain than they were in the spring. Its competitive position stinks, with Wal-Mart's hungry to turn around its fortunes in the U.S. market, and discounters like Target (NYS: TGT) and Costco (NAS: COST) also providing formidable competition.

In this retail environment, Sears -- which also recently announced that it's closing 29 stores -- is less relevant than ever, and it resonates with consumers far less than the aforementioned discounters.

Furthermore, Sears is saddled with a problem that can be toxic for companies in low-growth economies. It has only $658 million in cash, compared to a vast $3.74 billion in debt. Note Borders' sad fate for a good idea of worst-case scenarios for competitively weak, overly indebted companies in recessionary times.

The strongest stocks can become golden bargains in volatile markets, but beware the stocks of weak companies. Stay away from Sears.  

At the time this article was published

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