Steer Clear of Sears - Barron's 17 comments
an article to
-
Font Size:
-
Print
- TweetThis
Steer clear of Sears Holdings (SHLD), warns Barron's Jonathan R. Laing. The company has failed to provide the profitability it promised and its outlook is increasingly gloomy.
Edward Lampert began running Sears in 2005, touting cost cuts and increased efficiency as the route to profitability. His promises helped push the stock from around $100/share to over $190 by April 2007. Now trading around $66, Sears announced last week that it lost $94M in Q2. Heavy cost-cutting couldn't keep up with a dramatic drop in sales and the planned closure of 28 stores cost the company $61M (while another 400 poorly-performing stores remain open for the time being).
In light of the Q2 miss, analysts have downgraded the stock. Gary Balter, of Credit Suisse, estimates EPS for the current fiscal year will be just $0.64, down from his estimate of $1.45. He sees next year's earnings at $1.03 per share.
According to Sears' specific calculations, it generated $2.5B in cash in FY' 07 and $1.6B in its most recent fiscal year. Using GAAP measurements, cash generation is falling quickly. Sears is facing a pension shortfall of $1.7B and future costs of store-closings are likely to rise. Sears produced $495M in free cash flow in 2008, down from $977M in 2007.
The heavy cost-cutting means Sears can't generate the cash or borrow at the level necessary to stage a turnaround. The company, which trails its rivals in both good times and bad, will likely continue to lose marketshare to companies like Target (TGT), Home Depot (HD), Wal-Mart (WMT) Lowe's (LOW) and Kohl's (KSS). The company has held back on capital spending and advertising, and some analysts believe the company is spending too little to even maintain its current business levels. Sears also seems to be chasing away customers with what Barron's calls "frequently uncompetitive pricing, inattentive service and increasingly shabby facilities."
Next March, the company's credit line will drop from $4.1B to $2.4B. Sears says this is more than enough to meet its needs, but that seems to be the case only if sales continue to fall; during last year's holiday shopping season, Sears used $2.9B in credit lines.
All this could lead to as much as a 50% drop in the stock's value, and at least one analyst thinks $35/share is a reasonable 'base case' number for the stock.
::::::::::::
- Sears: Q2 EPS of -$0.17 misses by $0.52. Revenue of $10.5B (-10%) vs. $10.7B. (PR)
- No retailer has been more starkly disappointing than Sears Holdings," writes Ockham Research. "Sears management maintains that their performance is closely tied to the housing market, as the appliances and home goods sales tallies were especially weak. Perhaps a turn around in the housing market would help turn the tide for Sears, but how long can they wait while sales falter?
- According to the Gerson Lehrman Group, "Sears Holding Corp may be accelerating toward an untimely end. Reading the Second Quarter Results press release one finds no mention of customers, the effort to find new customers or any hint at growth plans... For a business whose survival depends on customers repeatedly entering the store looking for something to buy, such highlights send an alarming signal."
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Mike Havrilla
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
And right now I don't put a lot of weight on their real estate holdings since CRE values are beginning to crumble as well. I just don't see any positives in this stock for a while.
Basically it's a contest to see if Lampert can keep a poor retailer he hasn't invested money in (preferring to buy back stock) alive long enough to realize any value on the assets, at some point over the horizon. Thsi quarter's numbers are a blow to the idea that he can.
Sure, all retailers have been affected by the GR, but SHLD has clearly been the laggard. They've also been trapped by their Real Estate to an extent. They own and have long term leases on plenty of poor performing store, so even though they're closing about 80 boxes this year they've still got plenty of dogs left.
One thing I didn't see mentioned was the inventory which only dropped from 9.8B to 9.4B YoY. Considering a 3-4% decline in store count (of big boxes) and a 10% drop in sales, that's an awful lot of inventory which will put pressure on margins. And if you've visited stores lately, you could rightly wonder where is the inventory anyway?
I would also carry on about the absolute lack of enthusiasm of the scarce employees, too busy with lunch....paperwork..., if I thought it would make a difference. Instead I concluded to write this merchant off as a failure, having reached it's zenith in the 1960s and not seeing how the world changes with time. Another GM syndrome?
b
I believe the truth is somewhere in the middle. I would not be buying the stock up here. However, in full disclosure, I have written puts (LEAPS - Jan 2011) at $15. The puts yielded premium close to $1.50 per contract.
When (hopefully not if) the economy recovers, there is at least some possibility that SHLD will generate free cash flow. Even in a tough 2008, SHLD generated FCF of $400 million. I also believe that the real estate and other assets leave SHLD with net assets that exceed $15 per share.
My biggest criticism of this company is the near $5 billion in share buybacks. WTF? Newsweek did a story a number of years back comparing Lampert to Buffett - well, as far as I know, Berkshire Hathaway has never done a share buyback. For SHLD, that was a lot of wasted capital. As I wrote in my book - if someone (i.e. Lampert) is so great at allocating capital, then why get rid of the capital? Doesn't (nor will it ever) make sense.
--
That is a very tasty FCF yield in what looks like will be a trough year. Those numbers can't be tortured. This is the SHLD story, nothing more.
"My biggest criticism of this company is the near $5 billion in share buybacks. As I wrote in my book - if someone (i.e. Lampert) is so great at allocating capital, then why get rid of the capital? Doesn't (nor will it ever) make sense."
----------------------...
Blame the tax code for that one. Share repurchases are greatly favored over dividends as a way of using profits to reward shareholders (because paying a dividend results in double taxation).
Much of the "leverage up then repurchase shares" game is a function of our tax code, not business logic. Its one one the many reasons to rationalize our tax code.
quote*Wal-Mart firmly believes in local procurement. We recognize that by purchasing quality products, we can generate more job opportunities, support local manufacturing and boost economic development. Over 95% of the merchandise in our stores in China is sourced locally. We have established partnerships with nearly 20,000 suppliers in China. *end quote!
Now! if there be 182 country’s making items for the world to buy and they have only 5% of the pie in China…duh! This company makes the nice people of China support their currency(yuan) by keeping it in their country working for the people there…. but with the “yuan” going up in value and the US dollar going down…all the foreign items that the American consumer buys thinking it is cheap has went up in price.
People…its all about the currency and to keep a currency strong you got to keep it floating around the country you live in so it can work for you. For the past 12 years all them US dollars are being shipped overseas to a foreign bank and with the American worker not making anything for the foreigner to buy the “we the people” have to turn to the “second” largest employer in America(Uncle Sam) to sell “we the people” debt in order to get all them dollars back!
50 years ago a foreigner would had given their left nut for a US dollar or a Hershey’s chocolate bar and today the same foreigner has got Uncle Sam and the American consumer by both all the while Hershey is moving the chocolate factory to Mexico. Wake up! America and think “MADE IN AMERICA.”
quote*"Considering that there are over 30,000 ships at sea this morning," writes James Carlton, director of the Williams College-Mystic Seaport Maritime Studies Program, in an e-mail, "the total number of organisms and species in this global 'bioflow' on the morning your readers read your piece could be staggering - billions of individuals, and thousands of species."
Indeed, scientists have long considered ballast water the primary way invasive aquatic organisms are introduced. From the zebra mussel's arrival in the Great Lakes, to an American jellyfish severely disrupting Black Sea fisheries, the potential costs of accidental introduction of a species to new homes can be tremendous. Aquatic invasives cost the US $9 billion yearly, according to estimates by David Pimentel, professor emeritus of ecology and evolutionary biology at Cornell University in Ithaca, N.Y. Zebra and quagga mussels (a cousin to the zebra) alone cost the $1 billion annually.*end quote!
tat is $9 billion a year in hidden taxes to all Americans...
cheap ain't chic and it cost America............jobs!
Obviously you are a very bright individual. I also include a section in the book on reforming the tax code. Specifically, a 0% dividend tax. Also, reform on 162(m), which gives incentives to executives to use options. Accordintly, executives now have incentive to do buybacks over other uses of capital. I can't believe the media doesn't cover this. It is a huge part of common business practice, and a highly destructive one.
Still, that is no excuse for Lampert to waste $5 billion. Leaving the cash sit idle would have been much better. I will not excuse executives that destroy shareholder capital simply because it is tax efficient destruction.
On Aug 24 03:54 PM Crocodilian wrote:
> @Dan Braem
> "My biggest criticism of this company is the near $5 billion in share
> buybacks. As I wrote in my book - if someone (i.e. Lampert) is so
> great at allocating capital, then why get rid of the capital? Doesn't
> (nor will it ever) make sense."
> ----------------------...
>
> Blame the tax code for that one. Share repurchases are greatly favored
> over dividends as a way of using profits to reward shareholders (because
> paying a dividend results in double taxation).
>
> Much of the "leverage up then repurchase shares" game is a function
> of our tax code, not business logic. Its one one the many reasons
> to rationalize our tax code.
On Aug 25 09:41 AM Dan Braem wrote:
> Crocodilian,
>
> Obviously you are a very bright individual.
Flattery will get you everywhere. Your %0 dividend tax is the right idea, and in fact we have it, in somewhat obscure instruments (Master Limited Partnerships, and Preferred stock--sometimes-- escape double taxation, and thus pay a cash return to holders that makes much more sense).
> Still, that is no excuse for Lampert to waste $5 billion. Leaving
> the cash sit idle would have been much better. I will not excuse
> executives that destroy shareholder capital simply because it is
> tax efficient destruction.
>
You won't get any argument from me than Lampert has been a disaster-- but I'd argue that with the tax code structured as it is, there's a kind of welcome mat out for anyone to borrow money against future cash flows on stagnating properties. If it hadn't been Lampert, its have been some private equity guy: the incentives that moved Lampert would have moved someone else.
The Reader's Digest story is, at a finance level, a good parallel. No real estate angle as in Sears, but the same dynamic of taking a stagnant property still throwing off a lot of cash and levering it to the hilt.