What Does the Future Hold for Sears Holdings?

Mar. 2.08 | About: Sears Holdings (SHLD)

It is hard to get all worked up over these results at Sears Holdings (NASDAQ:SHLD) for a few reasons:

1. They were expected;

2. Cash is higher than predicted;

3. Debt is lower;

4. The share count is lower (20% lower in the last 4.5 years);

5. The plan you have been clamoring for is being implemented.


So, first the results:

Net income of $426 million, or $3.17 per diluted share, for the fourth quarter ended February 2, 2008, compared with net income of $811 million, or $5.27 per diluted share, for the fourth quarter ended February 3, 2007. For the fiscal year ended February 2, 2008, net income was $826 million, or $5.70 per diluted share compared with net income of $1.5 billion, or $9.58 per diluted share, for the fiscal year ended February 3, 2007.

For the quarter, domestic comparable store sales declined 4.5% in the aggregate, with Sears Domestic comparable store sales declining 4.0% and Kmart comparable store sales declining 5.2%. For the year, domestic comparable store sales declined 4.3% in the aggregate, with Sears Domestic comparable store sales declining 4.0% and Kmart comparable store sales declining 4.7%. Declines for both the quarter and fiscal year include a more pronounced decline in comparable store sales in the month of January
2008.


The reason? The same as every other retailer, save Wal-Mart (NYSE:WMT). The weather is lousy, people have no money, housing, etc... Sears is no different in most respects except they have more tied to housing that either Macy's (NYSE:M), JC Penny (NYSE:JCP) and Kohl's (NYSE:KSS) because of the huge number of appliance sales.

What really matters
Sears had cash and cash equivalents of $1.6 billion at February 2, 2008 (of which $743 million was domestic and $879 million was at Sears Canada) as compared to $3.8 billion at February 3, 2007, a decline of $2.2 billion. For the year, the significant uses of cash included $2.9 billion for share repurchases, approximately $580 million in capital expenditures, debt payments (net of new borrowings) of approximately $600 million, and approximately $220 million of contributions to pension plans.

On January 14, 2008, they forecasted domestic cash and cash equivalents would be $1 billion at year-end, without effect of share repurchase activity after January 11, 2008. Subsequent to January 11, 2008, they repurchased $40 million of common shares.

During the fourth quarter of 2007, they repurchased approximately 5.3 million common shares under the share repurchase program at a total cost of $553 million, or an average price of $104 per share. For the full year, they repurchased 21.7 million common shares under the share repurchase program at a cost of $2.9 billion, or an average price of $135 per share. As of February 2, 2008, they had remaining authorization to repurchase $183 million of common shares under the program.

We have the odd position that the sales results were poorer than expected but the financial condition of the company is much better. Given a choice between the two, and in an economy like this one currently, it is more often the case than not, I will take the latter.

We are at a point now where we close the door on Sears as it is and look to the future. A 900% plus gain since Lampert took over Kmart in 5/2003 to the present, is there a problem?

What does the future hold? Sears brands will begin to show up all over especially in the likes of Home Depot (NYSE:HD) and Lows (NYSE:LOW). I can very easily see a scenario in which both retailers, given their current situation try to outbid each other for an "exclusive" deal for the lines (Craftsmen, Kenmore, Diehard).

Kmart will eventually disappear. The real estate arm will look to maximize the value of each location and those locations will be either as a Sears, or another retailer. Either way, who cares. A large part of the eventual revenue will come from the REIT portion of the company. For evidence of how this can evolve, check out Vornado's (NYSE:VNO) history.

As the main brands become sold in various other retailers, the flexibility and the options in the real estate grow profoundly. The actual value of a Sears and Kmart location actually diminishes in terms of the company's revenue and the value of what can be done with the floors and walls increases.

Will it happen in 2008? No. Don't forget, retail as a whole still currently is lousy. That being said, progress is all we should really expect and want to see. The company will still produce $6 billion from operations that will buy back more shares and pay down more debt while we wait.


Disclosure: Long SHLD, WMT.