29 November, 2007

Sears still suffering Retail Blues in Latest Quarter

The magic that was supposed to be a turn-around at Sears Holdings (SHLD) has seemed to fizzle lately with a whimper. Sales are declining, there's nothing to buy on the horizon, and if the only consolation Investors have is stock buy-backs then something is definitely awry.

The run Sears had from 2006 to early this year where the stock almost doubled on the strength and possibilities of cash being used to purchase other retailers and Ed Lampert running the company like a giant hedge fund has now been completely wiped out with the latest quarterly retail set back. Sears at $105 sits at the same point as it was at the end of 2004. All that Investor promise and cheering for Sears to do big things with its cash lately have led to nothing. Earlier Sears was able to maneuver, take in K-Mart stores and tried to wholly take in Sears Canada, but the rumors of further purchases that pushed the stock are now working against the retailer.

The current quarter showed just how dire the retail situation is for Sears. Net Income of only $2Million or $0.01/share versus $1.27/share a year ago (with $196Million in income). Now granted, $101Million last year was due to Lampert's investment gains in highly complex Total Return Swaps, which for reference, is a type of investment strategy where one party gets paid periodically for taking on risk, while another gets an almost fantasy-based fixed payment. For those really interested in these types of investments I suggest looking up Credit Derivatives and Total Return Swaps on Google or Wikipedia as a primer.

The bottom line here is that Revenue and Income are both slowing in line with slowing retail sales. Revenue this quarter was $11.5Billion versus $11.9Billion last year and store sales declined 4.5% year over year. The biggest kick of all to the negative side is that margins are falling further and faster than expected, meaning that Sears is a) having trouble getting people into the stores and b) having trouble selling them even cheaper items.

So somethings gotta give here and if Investors are to continue to have faith in this retailer there has to be some signs of mobility and business sense. The only thing going on with Sears in the backrooms these days seems like more Stock Buy Back plans. In fact in the current quarter Sears bought back almost $1Billion in stock. Which in the short term is without a doubt a positive for the company, but if the retail business can't produce cash flows that have any meaning to the war chest, then there certainly wont be many more quarters left where Sears can afford to keep buying back stock.

Right now I'd avoid Sears Holdings until management says anything meaningful and positive on the retail or acquisition side.

Disclosure: Author holds no position in SHLD

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