02 December, 2008

Sears Holdings: Retail Blues equal Stock Greens?

A consumer environment at the apex of, what can only be described as the very definition of fragile doesn't lend itself to positive business results at retailers. Specifically retailers which struggled even before the US went recession-official. Sears Holdings (SHLD) was one of those retailers. And after this morning's quarterly results it still is.

While not suffering the doomsday fate of electronics retail specialty chain Circuit City, the department store giant and its approximate army of 3800 stores reported a loss of $1.16/share ($146Million). Hedge Fund impresario Edward Lampert was known to make magic happen with the cash horde at Sears in years prior, however in today's economic and financial climate it is getting harder to keep ahead of the curve. The company did make some gains in hedge transactions with Sears Canada but it also took a charge with the closing of 14 'under performing' stores.

Excluding all special items the loss ran to $0.90/share, which still almost doubled the analyst predictions of a loss $0.49/share. Revenue was down year over year by 8% ($10.7Billion) and the all important same-store sales metric was down over 10%. Sears did however do some trimming around its bulging edges, chopping almost $600Million in inventory and installing another $500Million share buyback. And yes, those that have followed SHLD's share price descent know all too well about these buyback announcements. They, the buybacks, come practically quarterly as Lampert and co. try to resurrect a failing share price and a company that still sits on over $1Billion in cash.

Forecasting is proving to be an increasingly difficult endeavor for retailers and Sears is no different. Offering the public the unsparing sentiment that previous forecasts are 'no longer relevant'. The economic difficulties just add to the struggles of an already battered Sears retail operation. Going into Christmas and 2009, the analysts covering the company aren't ready to sell a turnaround story just yet. Forecasting earnings of $1.10 on average for next year, Sears sits at a forward P/E ratio in the low 30s. Far too high in this climate, as general merchandise competitors Wal-Mart (WMT) and Target (TGT) have forward P/E ratios in the 15 range. On the lower and higher end of clothing and appliances, J.C. Penny (JCP) and Home Depot (HD) respectively, sport forward multiples of 13.

Why does Sears deserve such a premium? Perhaps the market knows, as it has been able to stay irrational for much longer than anyone anticipates, but today all these Retail Blues have turned into Stock Greens for Sears. SHLD has rebounded with the market to the tune of 13% to price around $36/share in today's trade. Sears can and surely will survive the economic turbulence of North America, but the question for Investors is where can it possibly go?

To put it in perspective, Sears as a retailer, is executing far less successfully that either Wal-Mart or Target, and would have to beat estimates by 100% in the next year to be valued by the market the same way. But Sears is not just a retailer some will say, its also a holding company! Sears as a holding company, doesn't appear to be doing much of anything of late, except of course buying shares of Sears.

This one will continue to under perform its peers in the year to come.

Disclosure: Author holds no position in the above mentioned companies


Charlie said...

Do you not believe in a stock's market price catching up with intrinsic value in the long run? Just as you said, Sears isn't just a retailer. It's not a very strong argument to say that it doesn't matter that Sears is a holding company just because Eddie Lampert hasn't done anything yet. That's like saying it doesn't matter that Usain Bolt is the world's fastest sprinter just because the race hasn't started yet. What your position tells me is that you don't understand Eddie Lampert. You're completely underestimating him. Granted, it takes a lot of creativity to picture the future of SHLD. Yet it still surprises me that you choose to state that it will underperform for years to come without even giving mention to the possible upside.

Seems like you're just thinking too short-term, just like the market...

Chris Krasowski said...

I do believe the market may catch up to Sears however I think it'll under-perform over next year.

The article only was meant to portray Sears on a valuation basis over the "year to come". It is true that Sears is more of a retail real estate story than a retail story these days, however with the housing market still expected to perform poorly over 2009 I don't see investors really lining up to own this stock for its arsenal of stores.

Lampert did things in the past with Sears cash, including incredible credit swaps a couple years ago, however with the financials in dire straits and risk & leverage being toned down tremendously those opportunities do not exist like they did in 2006-2007. So now Lampert is stuck buying back stock.


Charlie said...

Got it. I think I get confused when I'm reading something that seems to be speaking very long-term yet is focused on the upcoming twelve months. I consider twelve-months to be very short-term (although a year feels like an eternity when the market's like this).

Apologies for the misperception...

Chris Krasowski said...

Not a problem at all Charlie, comments and opinions are always welcomed.