Sears Holdings: A Business Plan

An easy way to determine the future of a company is to listen to the chairman, CEO and largest investor. So why is Sears (SHLD) surrounded with speculation of liquidations, real estate sales, brand sales or laundry lists of public takeover candidates?

Facts from Eddie Lampert:

• The company is not a real estate play.
• The company will be run as a retailer
• The company will not be selling its most valuable brands
• The company is pursuing lower costs of capital and improving debt levels
• The company is focused long-term and is not competing with WalMart (WMT)

Combine these facts and a business plan for a quality, higher-end retail outfit begins to emerge.

Step 1: Identify the best markets for Sears/KMart store locations. If Sears hopes to capitalize on its strong brands it needs to focus on higher-end customers. This means selling real estate in low end markets and keeping the proceeds on balance.

Step 2: Continue to acquire quality brand names. This winter, SHLD began its purchase of Restoration Hardware (RSTO) - a high quality furniture and home product retailer. Instead of building a portfolio of businesses like Berkshire (BRK.A), Sears can buy its own durable competitive advantages by owning strong brands. Add Restoration to Kenmore, Craftsmen, Land's End, Martha Stewart, and DieHard brands. These high-end brands support the plan of appealing to wealthier customers and command higher margins.

Step 3: Improve the cost of capital. SHLD caught a set back after the most recent quarter when S&P lowered its credit rating from B to BB. To turn this ship around management has three main tasks, continue to erase debt, hold more cash on balance, and improve cash flows (this is the most difficult task for a retailer). Lampert still believes Sears deserves an investment grade on debt. With more cash, lower cost of capital, and improved brands Sears can afford its final and most important step.

Step 4: Nationwide overhaul of stores. In an effort to create a high quality retailer, Sears needs to drop the KMart brand name and renovate its stores to reflect the quality shopping experience that Sears hopes to create. Coupled with some good publicity and well managed renovations, Sears can return to its nationwide presence and quality reputation.

Is this the definite plan for Sears? No. But I have more evidence to support this long-term turnaround than Barron's real estate play or Stockpickr's "Next Berkshire" theories. Just ask the boss.

Disclosure: Author has a long position in SHLD

Comments

[BigE:]

Is there a plan to restyle the stores? I haven't been able to find a plan for that in any of the reports.

The reason I wonder is because if you walk into a Sears, they're fairly junky, leaning more towards a KMart. If they would emmulate Macy's and Target it would be a lot better.

I like your idea of what sears could do and I really dig Lampert. I don't hold a position in SHLD but I'm gonna keep following this and see if goes below $90 and really follow the plan. I'd love to be long on this stock and see it be successful as a retailer as well as an investment portfolio like BErk.

Only time will tell.

2007 Dec 28 03:42 AM

[Jim Not C:]

I can agree in principle to dump the losing stores. All of them- it hurts, but needed to be done 15 years ago.
Leave the stores that are amongst "money" (better locations)
and dump the rest.
Drop the word "Mart"from everything - there already is one.Its a DISCOUNT STORE. When did Walmart get labled a retailer? Sorry, there's a huge difference.
RETAIL is equated with customer service. Sears used to have it. They need to get it back. Can't go "cheap" on this principle.
Then concentrate on fixing what you have left.
Worth of their real estate? Some stores are virtual gold mines. Some are parking lots at best.

Long on Sears- Yes , only with a business plan.

2008 Jan 03 12:07 PM

[Jim Not C:]

Over the years, much has been spent on revamping Sears stores with a different look.
Problem- Here's how a Sear store gets remodeled.

"Hoffman says it wants it this way"
"Region wants it that way"
"District wants it this other way"
"The Merchandiser wants it over this way"
"The Manager wants it two aisles over"
There's so much wasted time and material (and salary)
That they could have sold more (and made more profit) if they left the store alone. Nothing justifys Sears Culture.

2008 Jan 03 12:19 PM

[Bill Herbert:]

Will,

You seem to be oblivious to the huge array of problems at Sears.

After the release of earnings today - 8/28/08 - it should be quite clear to any thinking investor that SHLD is deeply troubled in its core business, and is only propping the stock by drawing down inventory (both in quantity and quality) to raise cash to buy back the stock...while it still can.

Almost 60% of Q2-08 earnings were from an accounting adjustment, not operations.

I look for a much lower price point for SHLD within a few months - maybe $40?

What say you?

2008 Aug 28 09:47 AM