Retailers Face a Volatile January - Barron's

With the holidays over, retailers are bracing for the results for what was expected to be a truly dismal shopping season. Investors claim to have lowered their expectations, explains Barron's, but the relaxation in options prices over the past month suggests the market may not be quite ready for the volatility likely to follow.

Volatility in retail stocks is often higher in January than on Black Friday, and there are plenty of catalysts in both directions. On the downside, consumer confidence is at its lowest in years, seasonally adjusted mall traffic decelerated through the last full week in December, unemployment is rising and stricter lending standards have left consumers with less cash to spend. On the upside, there is the possibility of a federal stimulus plan and efforts to stabilize house price.

Two groups of retailers face the potential of unusually high volatility this week:

1) Companies whose long-term health is a concern to the credit market. Looking at CDS spreads, credit risk is heightened for Sears Holdings (SHLD) and Nordstrom (JWN). Sears' five-year spreads are 14.8%/year, far above the 3.5% for the average retail firm being tracked by Barron's. Nordstrom's spreads are near 5.3%, and all three ratings agencies have a negative outlook on the company.

2) Companies that rely heavily on holiday sales relative to the rest of the year. This type of company generally experiences more volatility in January. Radio Shack (RSH), for example, and Best Buy (BBY) usually see Q4 sales 50% higher than their average quarterly sales. Best Buy will report on Friday. Radio Shack, which hasn't scheduled a holiday sale report, has experienced high volatility on others' releases in prior years.

Comments

[MrsLinarcos:]

SHLD has been in trouble for a while, it's a total shame no one in the markets have noticed how Eddie Lampert manipulates his stock to keep it up. Or how he continues to buy shares in Auto Nation, instead of finding more ways to keep SHLD afloat. He will have a golden parachute when this company goes down and that's totally wrong.

Jan 04 08:56 AM

[fcharlie:]

MrsLinarcos,

Your comment doesn't make sense. Lampert has nearly his entire net worth in his hedge fund, and his hedge fund owns over 50% of SHLD. There isn't a golden parachute big enough to make up for the personal losses he would face should SHLD go down, therefore, I would assume he's more in control than you think. Why can't his hedge fund use some of the billions it raised last year with a 5 year lockup, to extend a line of credit to SHLD if needed? How do you go out of business if you have $7 billion in net inventory? Billions available in sale/leaseback's if needed? How do you go out of business if you are free cash flow positive? SHLD will generate over $4.00 in FCF for this year thats about to end. Next year? who knows.. could it get worse, sure.. cash flow negative? i doubt it... Regardless, with $78 a share in inventory and still one of the smartest and best out there running the company, i don't see SHLD going down, as you say.

Jan 04 09:26 AM

[MrsLinarcos:]

Have you been in a Sears store lately?? Are you totally aware of what's happening with the company? I worked for them and I know.

Jan 04 10:09 AM

[notsosmart:]

this is really a good one to watch.does working for a firm(other than top management)really give one employee an idea of whats going on?

Jan 04 12:07 PM

[MrsLinarcos:]

It's obvious, nobody is really looking but us employees. We know how they're cutting back, do you think all employees are in the dark? I don't think so.

Jan 04 04:52 PM

[fcharlie:]

MrsLinarcos.

I do not shop Sears, I do shop Kmart. Could you kindly inform me of whats happening with the company in your opinion, and how it ties in with Lampert manipulating the stock and his golden parachute you speak of?

Before Lampert came along, when Sears would spend money more freely on renovations, did it help sales? Did it make your store more profitable? Please tell.

Jan 04 05:17 PM

[MrsLinarcos:]

If you had gone into Sears lately and what it was like in the past you would know what I mean. Did you realize that just recently Lampert added a person from Lehman Brothers after it collapsed, one of the same people that led to it's downfall. And yes, when Sears spent money on renovations it did help, yes my store was more profitable. However, if you go into to buy a big ticket item, the MAs and PPPs are high, too high for people at this time.
As for his way of manipulation, he's a hedgefunder and he knows the angles.

Jan 04 08:29 PM

[User 330988:]

Kmart is currently doing better than the Sears component. The company has plenty of cash, a 4 billion dollar credit line, and tons of real estate (albeit worth less), to say nothing of the inventory. They will be around for a while. Lampert is not an idiot. And he has his OWN money on the line, unlike our dear friends at the banks and financial companies who are standing in line holding their hands out for more of yours. The company is going to make more cuts to their full time employee's at store level. This is a confirmed fact. My partner is a district manager for Sears.

Jan 04 10:13 PM

[fcharlie:]

The funny thing about SHLD, it really has come down to two sides. On one side, you have the people who dislike the company, the stock, or both. They typically mention the appearance of the stores as the #1 problem, and typically claim the company will go bankrupt. These people, however, cannot give a logical, thought out explanation, from a financial viewpoint, as to how SHLD goes bust. When asked, they constantly change the subject, and mention some other gripe they have, such as, Lampert is manipulating the stock, or Lampert hired someone from Lehman Bros. (i assume to imply his intentions are to wreck his own company), or Lampert is starving the stores of capital, or Kmart cannot compete with Wal-Mart, therefore it is not relevant.

On the other side, you have people who look at SHLD and see the assets, see the free cash flow, see the debt decreasing, see the shares being bought back, and see the big picture. These people understand that there is more to SHLD than just a busted retailer. Lampert has admitted that Kmart cannot compete against Wal-Mart on price, he is quoted as saying that the only way for Kmart to remain relevant is to run the business for maximum cash flow.

And on the subject of his "manipulating" the stock... Let's remind ourselves of all the companies that spent billions buying back stock at prices significantly higher than today, not just SHLD. Many companies borrowed billions to repurchase shares. Home Depot borrowed billions to do a Dutch Tender at $37 share. Target borrowed $10 billion to buy back stock in the $50's... Cheesecake Factory borrowed hundreds of millions to buy back stock in the high teens and twenty's. Lowe's bought back billions in the $30's. New York Times? We won't even talk about their buybacks. Every one of these companies have since suspended their buybacks at prices a fraction of where they were once leveraging to repurchase. SHLD still is buying, and has reduced debt every year... and LAMPERT is the idiot????? I think not.

People often cite same store sales with SHLD, and claim that because they are down 9%, Lampert is wrecking the company.... Let's not forget to look at Target's same store sales, Gap, American Eagle Outfitters, Limited Brands, Barnes & Noble, Home Depot, Lowe's... etc... Where has all the money they've spent on store remodels gotten them?

The more crap i hear about SHLD and Lampert, the more the contrarian in me loves it. He's taking full advantage of the negativity buying back stock at 1/2 of book value. He's still among the best capital allocators out there, and he's got significantly more skin in the game than all of us combined.

Jan 04 10:49 PM