Sears is a Sinking Ship

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Sears Holdings (NASDAQ: SHLD) is being targeted in a $100 million class action lawsuit on behalf of about 260 Hometown dealers throughout Canada.

In the lawsuit, Sears is accused of breaching its "legal obligations by depriving dealers of the realistic opportunity to earn a living wage and make a reasonable profit from their store businesses."

This casts a dark shadow on the company and can do a lot of damage to its bottom line that is already being crushed. The company has continued to battle against enormous operating expenses to realize repeated losses. Sears hasn't made a profit in three years, and posted more than a $1 billion loss last year after a $3.1 billion loss the year before. Furthermore, revenue is declining by about a billion dollars in each of the last four years. In 2010, the firm posted over $43 billion in revenue, and in fiscal 2013 realized less than $40 billion.

But the most stressing issue is a slew of operating expenses that will be further pressured if the $100 million lawsuit pans out. The company is expected to lose $5.15 per share this year and $2.15 per share the year after. The stock was trading over $175 prior to the recession, but doesn't seem able to recover. It is currently priced in the low $40-range. Morningstar considers the stock to be a buy if it reaches $15 per share, but I don't see the firm recovering within the next several years, even though it is attempting to do away with stores that aren't productive. In fact, the company has closed many of its operations. Since merging with Kmart in 2005, the firm hasn't been able to produce top-line growth. Still, a major change is needed before I'd consider purchasing this stock.

Where to put your money instead

If you want to keep your money in the fashion retail sector, I'd look at Nike (NYSE: NKE) or Foot Locker (NYSE: FL). As Sears continues to close stores, both Nike and Foot Locker are opening up shop internationally, and that is a move that will pay off for the long term investor.

Nike is an international player

As the most dominant player in athletic footwear and apparel, Nike has the funds needed to profit internationally. However, the firm still has to prove that it knows how to profit from China, due to many people there not being able to afford the expensive merchandise. First quarter sales were flat for Nike, but that is an improvement from the 8% decline the previous quarter experienced in year-over-year sales for that period. Sales in China were $2.4 billion in 2012, and that was during a time of economic slowdown in the nation. Analysts believe Nike will realize $3.02 EPS in fiscal 2014 and $3.42 the year after. However, with improved success in China, shares of Nike could improve substantially and drive profits much higher.

Foot Locker is following Nike's lead

New management at Foot Locker is making various improvements to the firm, including the number of international stores. However, this is just the beginning of efforts that we will see at Foot Locker. Management has also cited improvements in store productivity, better apparel and technological enhancements. Analysts see the share price reaching nearly $45, and it is currently priced at around $36 per share. However, Morningstar says there is a lot of uncertainty about the profitability of the company. I see the historically stable performance as an indication that Foot Locker will continue to dominate, and international expansion will fuel much of those gains.

Goodbye to Sears? 

Sears could very well turn operations around. After all, the firm is more than a century old, and this corporate titan won't die with age. However, the company is going through major restructuring, and improved efficiency at its stores. This will take several years to sort out, and the $100 million lawsuit only adds salt to shareholders' wounds. Investors should jump this sinking ship and hop onto the more attractive and luxurious safety offered by Nike and Foot Locker.

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Phillip Woolgar has no position in any stocks mentioned. The Motley Fool recommends Nike. The Motley Fool owns shares of Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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