08/16/2012 07:27 EDT | Updated 10/16/2012 05:12 EDT

Sears Holdings' sales keep falling on weakness at stores; loss narrows on cost cuts

Sears Holding Corp.'s push to turn around its ailing business is showing early signs of paying off, even as the retailer failed to stem declining sales.

The Hoffman Estates, Ill.-based company said Thursday that aggressive cost-cutting and reduced inventory levels helped narrow its loss in the second quarter from a year ago, with results coming in line with Wall Street expectations.

"We did what we said we were going to do," CEO and President Lou D'Ambrosio said in a letter to employees, noting that the company still has plenty of work ahead.

Despite the company's efforts to improve the customer experience in recent months, a key sales figure declined in the quarter at both its Sears and Kmart stores.

In the U.S., the company said revenue from Sears stores open at least a year fell 2.9 per cent. The figure declined 4.7 per cent for Kmart locations. The metric is an indicator of health because it strips out the impact of newly opened and closed locations.

Sears blamed competitive pricing for weaker sales of electronics. Lawn and garden sales also fell, with drought across the country hindering purchases.

Fewer clearance items also dragged down revenue, with tighter inventory levels limiting the amount of seasonal merchandise markdowns. Pharmacy sales fell as popular drugs such as cholesterol fighter Lipitor have come out in cheaper generic versions in the past year.

Back in May, Sears said it was investing heavily in improving the customer experience, with changes such as improved displays and iPads for sales staff to research products and help customers check out wherever they are in the store.

In an emailed statement Thursday, Sears spokesman Chris Brathwaite noted that the company continues to work on improving the shopping experience. He cited examples such as tying more promotions to its store credit cards and offering free flu shots at Kmart when customers spend $100 or more.

To boost shareholder confidence and restore profitability, the company has also looked to spinoffs and real estate sales. Three days ago, Sears said that it is moving forward with plans to spin off its Hometown and Outlet stores along with some hardware stores into a separate company.

Sears is also spinning off a stake in its Canada division to focus on turning around its U.S. business.

In a note to investors Thursday, ISI analyst Greg Melich said Sears still has a long way to go to fix its business but that the improved liquidity should buy it some time.

For the period ended July 28, Sears lost $132 million, or $1.25 per share. That compares with a loss of $146 million, or $1.37 per share, a year ago.

Excluding costs tied to store closings, a pension expense and other items, the company lost 86 cents per share.

Revenue dropped 7 per cent to $9.47 billion, missing Wall Street's $9.68 billion estimate.

Sears Canada reported a 7.1 per cent drop in revenue at stores open at least a year, hurt by lower sales of women's and men's clothing, tools, home decor and lawn and garden items. Unfavourable foreign currency exchange rates also impacted results.

Sears managed to trim its selling and administrative expenses in the quarter by reducing payroll and advertising costs. Merchandise inventories fell to $8.7 billion from $9.3 billion. Domestic inventory was reduced thanks to store closings and improved productivity.

Sears, which has more than 3,900 stores in the U.S. and Canada, also reduced its total debt to $3.3 billion from $3.5 billion.

Shares of Sears rose $3.46, or 6 per cent, to $60.06 in morning trading. They're still significantly lower than their 52-week high of $85.90.