Due to the high turnover at the senior management level and Eddie Lampert’s limited history of driving long-term sales improvement, investors should expect growth through acquisitions to be the likely strategy (that's where the massive cash flow comes handy).
SHLD has projected $500 million in annualized merger-related cost and revenue synergies by the end of 07, consisting of- $200 million in increased revenue through Kmart-to-Sears store conversions and cross-selling opportunities between Kmart and Sears proprietary brands; $200 million in purchasing cost reductions as a result of increased purchasing scale in both merchandise and non-merchandise procurement; and $100 million from other cost reductions, particularly with respect to the consolidation of shared headquarter functions and corporate services.
Projected cost reductions seem attainable, as SG&A expenses decreased by $399 million in FY 06 on a pro forma basis, which assumes the merger had occurred at the beginning of FY 05.
According to a Goldman Sachs research report:
• Valuation: somewhat appealing, but outlook still unclear
• "We are initiating with a $188, one-year price target based on four separate analyses—sum
of the parts, best-/worst-case scenarios, CROCI, and DCF. Our price target is equavalent to
16.2X our fiscal 2008E EPS, slightly below two-year averages of 16.8X.
• Sum-of-the-parts analysis leads to a $185, one-year valuation: Our analysis breaks out the three operating segments of Sears Holdings and uses comparable EV/EBITDA multiples from representative mass retailers, department stores, and hardline competitors;
• Best- and worst-case scenarios point to a $182, one-year valuation: Our analysis “shock tests” various EPS and multiple scenarios and probability weights the outcomes.
• Our CROCI analysis points to a $195, one-year valuation: Sears Holdings trades at a discount to other retail names when plotted on our retail regression line.
• Our detailed DCF model points to a $192, one-year valuation: Our model contains explicit forecasts through fiscal 2014.
• Given its somewhat appealing valuation, we see greater risks to the upside based on continued margin expansion, a successful sales recovery, and continued acquisitions."
Now some graphic magic thanks to the new TD Ameritrade:
SHLD vs. WMT, TGT & KSS (click to enlarge):
VICKERS Insider Trading Chronology of Sears