Sears Holding (SHLD) reported earnings today that beat expectations. Helped by a stronger than expected retail sales environment at both Sears and K-mart, the company posted a profit of $3.69 in the fourth quarter.

 

Analysts were expecting a profit of $3.54. Shares are trading higher on the news.

 

Sears is benefiting from significant cost cutting and a search for discounts by consumers, but before you pop open the cork to celebrate consider that the results may be a last hurrah for a company running on fumes.

 

See: Five reasons Sears will die

 

I’m not impressed.

 

The performance at the company, though admirable, may not be sustainable for a number of reasons. Run by hedge fund magnet, Eddie Lampert, SHLD is a lesson in juicing. (For 10 stocks that do impress me, click here.)

 

By that I mean the company has squeezed every last drop of life blood from two brands that are dying. Lampert admits as much in his annual missive where he spends much time complaining about poor ratings versus competitors.

 

The company is at a disadvantage that will be difficult to overcome.

 

Cutting costs, jettisoning poor performing locations and tightly managing inventory has resulted in cheers from investors as the stock trades for a fairly high, but it may not be enough.

 

How can it be?

 

Sears has been dying a slow death for some time and management has done little to create a sustainable business, recent results at K-mart notwithstanding. Instead efforts have focused on maximizing profits for the short term.

 

To that end Lampert is to be commended. The market is certainly noticing with a solid valuation.

 

SHLD trades for a multiple of some 40 times forward earnings estimates. Analysts expect the company to make $2.38 per share in 2010. That is 24% higher than the $1.92 earned in 2009. Impressive sure, but analysts expect 2011 to come it at $2.41.

 

In other words growth will pop in 2010, but slow to a crawl in the following year. Where is the growth coming from? Good question and enough for savvy investors to want to avoid the stock.

 

Here are 3 reasons why Sears ultimately fails:

 

Sears is a boomer generation brand

 

Actually Sears is a brand of the parents of boomers. It’s been that long since the name Sears had any meaningful value to the market place. Now with boomers heading into the sunset the company is loosing touch with a key demographic.

 

How has the company done with Generation X or Y? I would bet that most of those two generations last shopped at Sears in their youth and with boomer parents. Until the company can show a connection with a new generation of customer sales will decline.

 

Retail space is crowded

 

Making the connection to new customers in a crowded market is challenging at best. The market is full of retail options after experiencing explosive growth during the last bull market. There is intense competition for customers and the recession has made matters more difficult.

 

There are too many operators fighting for too few customers. While that may be good for consumers looking for low prices the environment is not conducive to sustainable profits. Typically it is the strong that survive such conditions as they hunker down and weather the storm.

 

Sears results in the short term shows that it too can survive, but for how long? With a lower credit rating debt costs more and with almost $4 billion in debt the weight becomes a significant anchor on performance.

 

K-Mart is a temporary mirage

 

Congratulations to K-mart shoppers. One of the original discount retailers showed signs of life in the third quarter that has continued in the fourth quarter. After years of decline nominal same store sales growth sure beats the alternative.

 

Consumers were lured to stores with heavy promotions and discounts. That works during a recession, but not likely to change habits in the long term. Walmart (WMT) and Target (TGT) dominate this space. Other competitors like BJ Wholesale (BJS), Costco (COST) and Big Lots (BIG) have all performed well during the recession.

 

A reliance on price and promotion is not sustainable. At some point K-mart needs to change its fairly dingy image in order to better compete. It will take more than two quarters of tiny growth to convince me.

 

It very well may be that SHLD is being prepped for a sale to a competitor. That competitor can keep prime locations open while renaming might help other locations. Of course with the stock trading for a premium, it is not certain anyone will step up to the plate.

 

There does not appear to be enough value in SHLD to make it worth the speculation. Here are 10 stocks that are worthy of speculation.

 

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