Sears Holdings: Due for Underperformance?

Anybody who likes Eddie Lampert, the hedge fund guy who has control of Sears Holdings (SHLD), will be impressed with the latest corporate report. Then there are traders like me who are asking, what’s to like?

Today, the wire story reads:

Sears Holdings Corporation announced it expects that net income for its fourth quarter ending February 3, 2007 will be between $750 million and $830 million, or between $4.87 and $5.39 per fully diluted share. For the full year ending February 3, 2007, SHLD expects net income to be between $1.42 billion and $1.50 billion, or between $9.12 and $9.63 per fully diluted share.

But, but, but… isn’t this a real estate play? Location, location, location…

Sears Holdings has dubious retailer management and declining revenues and earnings in the business of department store retail operations. Isn’t that why you would buy a department store retailer: quality management, and rising operating sales, margins and earnings?

Against the two U.S. Department Store Cara 100 selections, JC Penney (JCP) and Kohl’s (KSS), SHLD has managed to keep pace for the past three months. But, with today’s report, I suspect that after the earnings quality is reviewed, SHLD may be in for a period of under-performance.

Disclosure: No position. Actually, I don’t much care for U.S. Department Store stocks right now. Consumer spending is uncertain in the face of a likely economic recession, and margins are being squeezed.

Comments

[Travis Johnson:]

Bill,

I agree with you -- it worries me the extent to which Sears is cannibalizing its future for near term cash flow. It might work out great if Eddie Lampert is indeed able to reinvest that cash effectively (as he has in the past), but I'd be worried that if he's trying to build the next Berkshire Hathaway he's doing it on a fairly weak foundation and will soon have to have some great performance from other investments if they're not able to grow the Sears business (not unlike the way Buffett had to shed the weak textile business that got him started). It's admirable that he's focusing more on profitability than on sales growth, but that can only work for so long. Great turnaround so far, shaky future in my opinion.

2007 Jan 11 11:09 AM

[Nova Law:]

I find this posting from Cara to be rather odd.

Revenue has gone from 17 billion in 2004 to 49 billion in 2006.

EPS in '04 was 2.50, in '05 was 11.00, in '06 was 6.17, and according to S&P in '07 is due to be about 9 dollars.

In sum, SHLD actually has earnings, revenue, and a business model.

In the past three years it has grown its share price from 30 to 166, providing a bonanza for the shareholders.

While any company isn't perfect, shareholders have been richly rewarded over the last three years by SHLD's management. And Cara wants to take it to the woodshed? Come to think of it, Cara's post isn't just odd, it is foolish.

Things could be worse, I guess, Cara could have annointed SHLD his can't-miss "Stock of the Year 2007" and odds are it would have tanked 15%.

2007 Jan 11 12:05 PM

[Greg Calder...:]

One had to stop thinking about this stock as a retail stock. It is a hedgefund ran by one of the best. On top of that, one does not have to be a millionaire to get into this hedgefund. This company has the assets, revenue growth, and CEO to outperform for years to come. I follow Cramer closely and he loves this stock, which is why I bough it. I know there are articles about Cramer's opinion on this stock. Besides here, other good sites for Cramer are thestreet.com, cramersez.com, and madmoneyrecap.com. I use these sites when stock hunting. SHLD will be the one that got away if one does go long here.

2007 Jan 11 05:43 PM