Sears: Retail Blues Equal Stock Greens

A consumer environment at the apex of what can only be described as the very definition of fragile doesn't lend itself to positive business results for retailers, specifically retailers which struggled even before the US recession went official. Sears Holdings (SHLD) was one of those retailers. And after Wednesday morning's quarterly results, it still is.

While not suffering the doomsday fate of electronics retail specialty chain Circuit City (CCTYQ.PK), the department store giant and its approximate army of 3800 stores reported a loss of $1.16/share ($146Million). Hedge Fund impresario Edward Lampert was known to make magic happen with the cash hoard at Sears in years prior, however, in today's economic and financial climate, it is getting harder to keep ahead of the curve. The company did make some gains in hedge transactions with Sears Canada, but it also took a charge with the closing of 14 'under performing' stores.

Excluding all special items, the loss ran to $0.90/share, which still almost doubled the analyst predictions of a $0.49/share loss. Revenue was down year-over-year by 8% ($10.7Billion), and the all important same-store sales metric was down over 10%. Sears did however do some trimming around its bulging edges, chopping almost $600Million in inventory and installing another $500Million share buyback. And yes, those that have followed SHLD's share price descent know all too well about these buyback announcements. The buybacks come almost quarterly as Lampert and co. try to resurrect a failing share price and a company that still sits on over $1Billion in cash.

Forecasting is proving to be an increasingly difficult endeavor for retailers, and Sears is no different. It is offering the public the unsparing sentiment that previous forecasts are 'no longer relevant'. The economic difficulties just add to the struggles of an already battered Sears retail operation. Going into Christmas and 2009, the analysts covering the company aren't ready to sell a turnaround story just yet. Forecasting earnings of $1.10 on average for next year, Sears sits at a forward P/E ratio in the low 30s. That is far too high in this climate, as general merchandise competitors Wal-Mart (WMT) and Target (TGT) have forward P/E ratios in the 15 range. On the lower and higher end of clothing and appliances, J.C. Penney (JCP) and Home Depot (HD) respectively, sport forward multiples of 13.

Why does Sears deserve such a premium? Perhaps the market knows, as it has been able to stay irrational for much longer than anyone anticipates, but on Wednesday, all these Retail Blues have turned into Stock Greens for Sears. SHLD has rebounded with the market to the tune of 13% to price around $36/share in Wednesday's trade. Sears can and surely will survive the economic turbulence of North America, but the question for investors is: where can it possibly go?

To put it in perspective, Sears as a retailer is executing far less successfully than either Wal-Mart or Target, and would have to beat estimates by 100% in the next year to be valued by the market the same way. But Sears is not just a retailer some will say, its also a holding company. Sears as a holding company doesn't appear to be doing much of anything of late, except of course buying shares of Sears.

This one will continue to under perform its peers in the year to come.

Disclosure: Author holds no position in the above mentioned companies

Comments

[nickie:]

Hit the nail on the head with Sears it has had it;s day....and is WAY OVER PRICED.......realistic... stock needs to be in the low $20,00..maybe some interestors will start reading and doing homework on Sears and get it as we do.It will fall and fall it will do....for you stock holders that love Eddie ( there is no other reason to hold the stock) start covering now it will fall

2008 Dec 04 06:42 AM

[fcharlie:]

the market gives sears a premium because the market understands how to read a cash flow statement and can see that reported earnings and free cash flow are significantly different.

2008 Dec 04 11:09 AM

[assetvalue:]

Unlike WMT and TGT, the current retail results have nothing to do with that value of SHLD from it current price.

At $35/shr, SHLD has an Enterprise Value of $6.58 billion. They own (not lease) 94 million square feet of retail space, of which about 75% is in malls (vs. K-Marts, etc.). That means the real estate they own is being valued at $70/sq ft.

In comparison, Simon Properties has an Ent Value of $28.5B and owns about 250MM sq ft (75% of which is in Malls), for a valuation of $115/sq ft. This is with its stock down 50% since September. About 6 months ago, before the big sell-off, Centro Properties sold 5.1 MM sq ft of retail space for $714 million or $140/sq ft.

So just based on the RE they own (not lease), SHLD seems to trading at a 40% discount to Simon. Oh and by the way, they also own Land’s End, the brands Kenmore, Craftsman and Diehard, as well as Sear’s Home Services (siding and cabinetry) business, another 15MM sq ft of distribution centers, and Billions in inventory. Lastly, they have leases on another 200 million sq ft of retail space. Ackman and others have said that much of this space is under 99 year leases with very favorable terms like $1/yr. I’m not sure what percentage is under those favorable terms, but it actually doesn't matter at this point as there’s a huge margin of safety here.

And to figure out how to maximize the value of these assets, we get Eddie Lampert at the helm, and he’s using all the cash flow to buy back the shares. So each retail disapointment is actually beneficial in that Lampert can buy back more shares at 25-50 cents on the dollar.

2008 Dec 04 11:26 AM

[k45:]

I doubt the real estate is worth all that much considering that it's in malls that are 25% empty.

Real estate is worthless if you can't sell it.

2008 Dec 04 12:01 PM