Sears? Bankruptcy? I Think Not 29 comments
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When a friend emailed me this article about Sears (SHLD) I spit coffee out my nose. The jist of the article is as follows:
It's the economy, stupid. We are in a recession, sales and profit margin are falling year over year at Sears. Commercial real estate values are falling. Eddie will unlikely sell any property at an attractive price anytime soon. In recent years, under the leadership of Eddie Lampert, Sears cut marketing expenses to the bone. There's nothing left to cut. In its latest quarter ended May 3, 2008, the company posted a pretax loss of $64 million vs. pretax income of $381 million in the same period last year. As the economy gets tough for some extended period and the housing bust continues to get worse, department stores like Sears will lose more business to the discount retailers. It will be increasingly more difficult to turn a profit at Sears and K-Mart.
Sears Holding has bought back $2.96 billion dollars worth of stock in 2007, and that leaves Sears with very little or no money on hand to endure an economic downturn. That stress has clearly shown up in its latest quarter, as it had to borrow $646 million dollars in short term commercial paper to cover some cash flow issues.
I have a hard time believing that Sears will turn a profit this year, with almost $10 billion dollars in total current liability, and only $13 billion dollars in current assets, mainly comprised of $10.3 billion in inventory. A bankruptcy filing for Sears Holdings is a real possibility in the next two years if it continues to struggle.
Where to start. Yes, Sears did lose $64 million last quarter its first quarterly loss in over three years. That also left it with $1.4 billion (yes billion) in cash on the books. It should be noted that is almost three times Macy's (M) and Kohl's (KSS) combined! That number is twice what sits on the books over at Home Depot (HD). It is also essentially equal to that of JC Penney (JCP) and Lowes (LOW). The main difference between JC Penney, Lowes and Sears is that Sears carries 40% LESS long term debt than Penney's and Lowes do.
Sears carries the same amount of debt as Kohl's does despite having in excess of three times Kohl's sales and has 1/4 the debt of Macy's despite almost doubling its sales. If we look at Home Depot, Sears tallies 65% of the sales the Depot does yet carries less than 20% of the debt of its appliance rival. In short, Sears has the strength of balance sheet second only to Wal-Mart (WMT) and Target (TGT).
The exercise here is that if we are looking for a retailer that may face bankruptcy, I think a cursory look could find more likely candidates.
But hey, why listen to me? Let's hear what none other than Bruce Berkowitz has to say.
Read more of Berkowitz's thoughts on Sears here:
One also can easily look at the stunning success of the Land's End brand.
From the article:
But one part of the $50.7 billion company is sparkling: Lands' End (SHLD). The apparel subsidiary is thriving with its reputation for impeccable customer service and sturdy-but-stylish designs. While Sears doesn't break out numbers, retail analyst Anne Brouwer of Chicago's McMillan/Doolittle estimates the unit made $200 million on $2.2 billion in sales last year. The Lands' End Web site, where the brand rings up 80% of sales, is among the retailing industry's top 10 by several measures. And offline sales are rising as Sears has put Lands' End boutiques in more than 200 of its 935 mall stores. Retail consultant Howard Davidowitz calls the business "Sears' shining star.
Lands' End was not such a gem when Sears acquired the company in 2002 for $1.9 billion. At the time, its apparel was available only online or through catalogs, and was generally seen as well-made but staid preppy gear. Seeking a chance to broaden its apparel offerings, Sears quickly began stocking Lands' End shirts and slacks in stores, though it kept the two brands' Web sites separate. But Lands' End got lost in the aisles until Lampert took over Sears and pushed to build the brand. In mid-2005, a month after McCreight became president, Sears opened the first Lands' End boutique in a White Plains (N.Y.) store.
With its own look and branding, McCreight's store-within-a-store worked. He says transforming the brand's catalog image into a physical space was "a once-in-a-lifetime career opportunity." Analyst Brouwer figures the Lands' End boutiques bring in at least $200 in sales per square foot annually. That's just a third what a top retailer such as Nordstrom (JWN) produces, she says, but it's far ahead of the $137 per square foot Sears averages from its goods and apparel.
Almost forgot. The "had to borrow $646 million for cash flow issues" statement. A quick read of the last earnings release told us that as of the time of the release $400 million of it has been repaid. In other words it was a non-issue.
No folks, a Sears BK is not in the cards. Think of it this way: Sears is heavily levered to housing (a top appliance seller) yet despite the worst housing environment in 6 decades it lost $64 million. If housing just returns to historically average levels (and it will), the profit will again begin to flow.
I am buying more after the next earnings release. Do I expect a loss? Probably a nominal one unless Lampert pulled a rabbit out of his hat with the excess inventory. Chumps will sell off shares and I will pick some more up. I bet Ackman and Berkowitz will be there with me.
Good company.....
Disclosure: Long SHLD, WMT
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This article has 29 comments:
BASHERS POST NOW!!!!!!!!!!!!!!
Weed that out and you have a gold mine.
As I said if you are looking at a real estate play at least reits pay a dividend.
Buy shares today and your grandchilderen's grandchilderen will love you for it and maybe they will put some flowers on your grave.
Here are the problems I see with SHLD:
Sales in 2004 of the entities to be combined as SHLD--55.6B
Twelve month sales of SHLD after 1Q of 2008--50.0B
Sales at Domestic Sears and Kmart in 2004--51.1B
Sales at DS and Kmart 12 month ending 1Q 2008--44.25B (a decline of 13.5%)
Sales at Sears Canada in 2004--4.5B
Sales at SC 12 months ending 1Q 2008--5.75B (a 28% increase)
So SHLD has been losing revenue since it's formation, in good retail years and bad. Sears Canada has hid part of the decline and we'll discuss how and why?
Let's start with Sears Canada because they look like a star. Why have they done so well? Easy, the Loonie has gone up 25-33% vs the US dollar since 2004. SHLD makes mention in ever report that gains in Sears Canada are primarily currency driven. Will it continue? Near term, it looks unlikely. In fact, for 3Q and 4Q its likely that the Loonie will be below YOY levels which means revenue declines are likely for SC in the second half of 2008. Pressure will also be put on gross margins and cash flow though that is more complicated than revenues and I certainly don't have the information to say how much they'll be impacted. Also, it looks like the housing bubble in Canada is popping and that will pressure sales too.
Bottomline--Sears Canada not really the star it looked like.
KMart
Worst margins. Worst cash flow. In fact, could go cash flow negative. SSS continue to dive, despite being a "discounter" and despite many stores adding Sears product like Craftsman, DieHard, and appliances. Will take the biggest impact of the increase in minimum wage. Will Eddie take this out and shoot it without taking out the rest of the company? Tough call.
Bottom Line--Ugh
Domestic Sears/Sears Brands
Lands End is Swell--An undisputed star
Die Hard seems solid
Kenmore/Craftsmen--Bee... losing marketshare for years. Lowe's and Home Depot expand, Sears doesn't (well maybe putting the product in KMart is expansion, but it doesn't seem to be working).
Bottom line--Sears doesn't grow, it shrinks. Their competitors grow and take marketshare. However, in at least the softlines there are competitors in trouble (Mervyns, Steve and Barry, Linens and Things) can that benefit Sears? maybe.
Sears RE
It certainly looks like a huge glut of CRE is going to build on the market over the next several years. Whatever RE value SHLD has will take time to unlock. It will have overhead and carry costs, unless Eddie sells at firesale prices.
In Sum--I don't own SHLD (except in a mutual fund) and I don't short SHLD. I think they are an interesting case study and I think they are a crappy retailer. I doubt they are worth $100+ a share, I doubt they are worth less than $60 a share. I do think the value is in the breakup, not the retailer.
So what there are billions coming in billions are going out and net cash is drying up.
That is what thew majority of investors are seeing.
Keep eating your cheeseburgers.
I arrived to find out my TV was there, not repaired or looked at, but simply lying there without the 2nd box containing the stand and remote (essential if you want to use the TV). After taking the TV home, I came to yet another horrifying conclusion that nearly rocked my world, no popcorn was added to the box even though I informed the employee he needed to add in extra packaging material and the box was shipped with 2 pieces of styrofoam on one side allowing the tv 3 inches of space to bounce around. I have not confirmed what I believe to be damage as I am scared to take the TV into repair anywhere else as I am 25% sure the TV may never operate again.
Day after day I have reported to sears in hope of the issue would be resolved, yet today I was just informed the manager did not have a price for the items after which I informed him the company does not refurbish stands for my tv. I can only post here in hopes of a board member reading this and maybe he will tell the store to stop treating me as though I am not a customer of theirs despite bringing in TVs, Appliances, Cameras, and other equipment (I guess I just can no longer trust this company & need to take my business and the business of my friends to another company). This issue began at the Ventura, California store on July 10th, the day I went to pickup the TV. I'm beginning to believe sears does not care for customers, as day after day as I continue to wait for a response 5 weeks after the initial incident...
5 weeks and a day later I'm still being told to wait for a response from the "people upstairs," I'm beginning to worry as I feel this company's morale has sunk to an all time low (employees within the store no longer have smiles on their faces as they once did 6 months ago). My family cannot watch the olympics, cannot use our entertainment systems, cannot watch DVDs recently bought in hope the situation would have been resolved. My morale at work is beginning to fall, all because I have nothing to look forward to when I come home everyday.
started selling appliances on the sales floor I might
be interested. A wealthy hedge fund manager
cannot relate to the clientele. Home Depot and Lowe's
caught the management of Sear's sound asleep years ago.
Add Sears to the cemetary of once formidable American
retailers. By the way Todd, have you shopped there lately?
It's the only way.
COVINGTON TOWNSHIP, PA-Sears Holdings Corp. has sold its one-million-sf distribution center at Covington Industrial Park to San Antonio-based USAA Real Estate Co.'s US Industrial REIT II. Published reports say the build-changed hands for $56.1 million.
I don't even take him serious. I think he's just a housewife, and has nothing better to do than go online and desparately look for companionship. What is up with his stupid "cheeseburger" posts?!?!
Yessssssssssssssssssss...
REMEMBER I LOVE LUCi , FOR MONTHS ALL HE WAS SAYING WAS I LOVE LUCI ,REFERRING TO LUCENT..
I just spent 1600.00 on a washer and I expect to be treated with respect by the SEARS customer service associates. Because I purchased it online - no-one can help. Perhaps the Board of Sears Holding Company should seriously consider instilling this core ethic of helping their customers, instead of ignoring and compartalizing their experience. Because I will not buy at sears anymore, even lands end can't help poor abysimal customer relations.
But I can't see where monetizing a one year-old major asset to lease it back is nothing more than a quick cash fix.
He points to Sears's low debt, valuable real estate, profitable Canadian operations and prodigious sales ($50 billion a year). "The biggest repairer of appliances in the U.S. is going to go away?" Berkowitz ask. "Canada is going to disappear? No one's going to buy a Lands End jersey?"
Davis 3.5 million shares
Ackman 6.75 million shares
Berkowitz 16.2 million shares
Having a CEO (Rsb 65.6,ESL13.9)controlli... 72.94 million shares priceless!!!
Do the math just these holdings equal 101,000,000.00 million shares!!!
With shares outstanding of 134,000,000.00 that leaves 23,000,000.00 million for all of the rest of the of institutions.Anyone want to put a wager on what the share count is when they report next week!!!Shorts heads are gonna roll bad or good report.The float could be 125-120 million!!!???!!!