In this article I will try to estimate how Sears (SHLD) will do in Q1 2012. One important thing to remember is that Q4 2011, which Sears reported 2 weeks ago, was a seasonally favorable period, a period which could mask a lot of the underlying weakness in a retail business. Q1 is not so unforgiving.
For this exercise, we will base ourselves in Q1 2011's cost structure, which was actually the quarter presenting the lowest selling and administrative costs of the entire year, so this exercise will be on the optimistic side regarding costs. With this in mind, we'll consider $2560 million in selling and administrative costs, $220 million in depreciation and $80 million in interest costs. For the sake of simplicity we'll ignore any small taxes, interest income, minorities, etc, which should be residual anyway.
Now, to estimate the Q1 2012 EPS, we will consider several possible outcomes regarding how much Sears' revenues will fall (anywhere from 1% to 4%), and several gross margin levels (24.5%, 25.5% and 26.5%). None of these are random choices, the revenue drops during 2011 all fell within the range I considered (-1% to -4%), and the gross margin levels were 24.5% during Q4 2011, 25.5% during Q3 2011 as well as the whole of 2011, and 26.8% (here 26.5%) during Q1 2011.
Taking into account the assumptions we made regarding costs, revenues and gross margins, this is what we get (the drop in revenues is relative to Q1 2011):
Basically, we can expect a loss from ongoing operations anywhere from $2.96 per share under the most optimistic assumptions (-1% revenue; 26.5% gross margins) to $5.44 under the most pessimistic - but still realistic - assumptions (-4% revenue; 24.5% gross margins). The central case is for an EPS loss of $4.09-$4.33 (-2%, -3% revenues; 25.5% gross margins).
What this exercise tells us is that the present market consensus, at a $1.70 loss per share, is wildly optimistic. The only way such consensus can be reached, is by the inclusion of one-off gains from the sale of properties. One-off items are usually ignored, but it would seem that's not what is happening with the consensus estimates for Sears.
Still, that brings us another interesting tidbit. There are a lot of happy shareholders out there, celebrating the sale of several profitable stores in some of the best malls across North America. These stores, namely the Ala Moana store and the 3 Canadian stores, are to bring around $422 million in proceeds. And how does that compare with the loss being expected on just this single quarter? I calculated that as well …
So the lowest loss expected is $313.9 million, and the highest, $577.4 million, with a central case of $434.7 million to $459.5 million. The central case wipes out all the benefit from selling the 4 nice profitable Sears stores.
Sears losses will accelerate substantially during Q1 2012, and will become so large that even selling several profitable stores will just plug the hole for a single quarter. Everything still points towards Sears eventually wiping out its common shareholders, in spite of the tremendous short squeeze that is presently affecting the stock.
Disclosure: I am short SHLD.