Sears Holding Corporation shares surged over 25% to $6.96 in Friday trade after the retailer outlined a tremendous amount of cost reductions and divestments. The company also reported preliminary fourth quarter same store sales down 12.3% and Kmart same store sales fell 8.0%. The company also guided a net loss of between $635 million to $535 million.
The restructuring press release noted that these actions include steps to enhance liquidity and financial flexibility, as well as a strategic restructuring program intended to streamline operations, further improve operating performance and target cost reductions of at least $1.0 billion on an annualized basis. It highlighted plans to cut debt and pension obligations by $1.5 billion.
CEO Lampert noted, “We significantly improved our operating performance and made progress toward profitability in the fourth quarter of 2016. In the first several weeks of 2017, we undertook a series of transactions to optimize our capital structure and unlock value across our wide range of assets. We also reached an agreement to amend our asset-based credit facility which further enhances our liquidity and financial flexibility. Furthermore, we intend to use net proceeds from our announced Craftsman and real estate transactions, as well as from improvements in the operating performance of the Company, to meaningfully reduce our outstanding obligations and their associated expenses.”
Price action on the Sears daily chart shows that Friday’s rally stalled after reaching the $8.40 level. Additional resistance also came from the bearish channel that formed in the beginning in December. Despite the initial surge from cost saving measures, the market is still likely to focus on the continued poor sales performance. Further upside may be limited until the company can post solid same-store sales figures. If we see price continue to stabilize here, key resistance may come from the $8.00-8.50 zone. If that level is taken out, we could see price target the $10.00 level. Key support remains the $5.50 level. If we see further pressure, the $3.71 level is major support.
The Trade: Sell SHLD at $7.50, with a stop loss at $8.00 and a take profit at $6.00. The Risk/Reward Ratio is 1:3