Sears: Well Positioned for Retail Rebound

| About: Sears Holdings (SHLD)

Sears reported a 43 cent loss (53 cents without items) Thursday, vs a $1.15 gain last year. Lousy, but not surprising...

Our first quarter results reflect the difficult economic environment and intense competition for consumer business. That said, since May 3, 2008, our sales declines have moderated somewhat,” said W. Bruce Johnson, Sears Holdings’ interim chief executive officer and president. “As a result of actions we have taken and will continue to take to manage our costs, our current forecast for 2008 reflects higher EBITDA than we achieved last year. At the same time we are managing costs, we will continue to invest in our future by hiring talented leaders and improving our online and multi-channel capabilities.


Cash Position
The company had cash and cash equivalents of $1.4 billion at May 3, 2008 (of which $656 million was domestic and $757 million was at Sears Canada) as compared to $3.5 billion at May 5, 2007 and $1.6 billion at February 2, 2008. The $0.2 billion net decline in cash and cash equivalents since the end of fiscal 2007 primarily reflects $517 million of cash used in operating activities, capital expenditures of $178 million and total long-term debt payments (net of new borrowings) of approximately $131 million. These amounts were partially offset by a $646 million increase in short-term borrowings, primarily through borrowing on our $4 billion credit facility. As of this date borrowings on the facility have been reduced to $400 million.

Inventories

Merchandise inventories at May 3, 2008 and May 5, 2007 were $10.3 billion. Domestic inventory levels declined from $9.5 billion at May 5, 2007 to $9.4 billion at May 3, 2008. Sears Canada’s inventory levels increased from $0.8 billion at May 5, 2007 to $0.9 billion at May 3, 2008. The increase in Sears Canada’s inventory is primarily due to the change in exchange rates.

Share repurchases

The Company also announced today that our Board of Directors has approved the repurchase of up to an additional $500 million of the Company’s common shares. This authorization, when added to the $143 million remaining as of May 3, 2008 under previous authorizations, provides us with a current aggregate authorization of $643 million. Share repurchases may be implemented using a variety of methods, which may include open market purchases, privately negotiated transactions, block trades, accelerated share repurchase transactions, the purchase of call options, the sale of put options or otherwise, or by any combination of such methods. Timing of repurchases is dependent on prevailing market conditions, alternative uses of capital and other factors.

Bruce Johnson added, “We continue to have a strong balance sheet which, when combined with our expected free cash flow generation in 2008, enables us to take steps to invest in our business, consider other alternative investment opportunities, pay down debt, and repurchase our shares.”


Sears repurchased 0.4 million common shares at a total cost of $40 million (or $94.19 per share) under the share repurchase program during the first quarter of fiscal 2008. Since the third quarter of fiscal 2005, when the repurchase plan was first approved, the company has repurchased approximately 33.1 million of the common shares at a total cost of $4.4 billion pursuant to the program. As of May 3, 2008, it had approximately 132 million common shares outstanding.

Now the hysterical folks out there will screaming about a loss that ought not be all that surprising. Those of us who invest in the business, look at the balance sheet and cash position and recognize those are as solid as ever. As a matter of fact, when compared to competitors JC Penny (NYSE:JCP), Kohl's (NYSE:KSS), Macy's (NYSE:M) and even Home Depot (NYSE:HD), Sears has by far the strongest balance sheet. It also is the largest appliance retailer by FAR. Since that category currently is being hit very hard by housing, it only stands to reason that it will suffer more than the others.

The balance sheet is what will position Sears to capitalize when retail finds footing and rebounds. Also, nothing has been said about the brand positioning the company is undertaking.

It will be a tough ride in the near term. The question is "would you be better off as an investor of any of the about companies"? No. Your investment would be impacted the same or worse and of more importance, the balance sheet of the company you are invested in has been more negatively impacted as well.

What to do? Hold on. Maybe we get lucky and be able to get more in the mid 70s. It all comes down to your time frame. If it is years then this is just a blip on the screen and a great buying opportunity. If it is months, then you are panicking and if you invested in a big box retailer for the short term in the current environment, you should be.

It should be noted that Sears is forecasting higher EBITDA than last year (an unusual move) and Johnson said the company is going to "consider alternative investments". Something will happen, just a matter of time...


Disclosure: Long SHLD

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