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

Morning Market Musings 8/28

As the Democratic Convention rolled on with another star-studded political night, the morning Markets turned positive from the opening bell. While the majors opened nearly half a percent higher, several news points stood out.

Previous gloomy growth forecasts for the US economy were actually revised higher, as GDP for quarter 2 of the year came in at 3.3% growth versus the initially estimated 1.9%. However this result was propped up by the stimulus package provided in the quarter and economists still expect slowing growth for the rest of the year.

Freddie and Fannie continue their torrid rebound, as the 5 day tally for Fannie Mae (FNM) now stands at a 43% gain, and trying not to be outdone by it's mortgage partner in crime Freddie Mac's (FRE) 5 day tally stands at 65% in gains. As the yells of government bailouts turn into whispers and some optimism the street has rewarded these battered companies by showing Investment support. Quite the turnaround from even just a few days ago!

All is still not well with Sears Holdings (SHLD) as it continues to limp along from quarter to quarter with sales declines. Sears delivered an over 60% profit decline year over year, earning $65Million of $0.50/share all the while adding a gain that without would have pegged earnings at $0.21/share. The outlook? Not so bright either as the company predicted earnings to continue to fall compared to 2007 on a year to year basis.

iPhone comes to Russia via Vimpel Communications. The Russian mobile operator announced earnings earlier this morning and announced it had signed a deal to bring Apple's (AAPL) iconic mobile handset to Russia, being the first official carrier to do so. Russia has always been one of the largest grey-markets for iPhones, having an estimated 600,000 units floating around unofficially on local carriers. With no signs of exclusivity, Apple will likely continue negotiating an eventually offer the iPhone through other large Russian providers.

Disclosure: Author owns AAPL

Retail Pressure hurting Sears Holdings, Posts loss

Another quarter in the books for Sears Holdings (SHLD), and another lackluster effort on the retail front. These days it seems hopes for profit come only from the Holdings rather than the Sears as Hedge Fund manager turned executive Ed Lampert has been unable to turn around the retail division with any amount of success in recent quarters.

It was during the difficult retail sales quarters in the past years that Lampert was able to keep the company generating profits by using the Holdings cash reserves seemingly as a large hedge fund, but with the current quarter in the books, Sears has swung to a loss. Sears posted a net loss of $56Million ($0.43/share). On the top line, Revenue fell almost 6% to $11.07Billion. Compared to expectations it does not paint a bright picture, as analysts were hoping Sears would deliver $11.4Billion in Revenues and a profit of $0.15/share.

The ever important margin question has to be posed here. How fast are margins actually shrinking at Sears? In fact gross margins declined by 1% to 27%. As the economy weakened in the United States, it became clearer that bigger ticket items would have a hard time generating sufficient demand. Sears noted its highest sales rate drops in items such as Home Appliances and Lawn and Garden items. With Sears sales down in the US by almost 10% and K-Mart sales down by 7% it brings up another question, can Lampert turn this around, or will the weakening economy further deteriorate Sears margins and in turn earnings (losses)?

As they say, 1 things for sure, 2 things for certain, Sears is struggling amidst a declining economic picture domestically, and secondly any plan that involves simply buying back more stock will not lead to sustainable turnaround in "core-business". Sears was "Suffering Retail Blues" back in its November quarter and nearly 6 months later, the picture hasn't gotten any clearer, and may have in fact, with this latest posted loss, gotten more polluted.

Disclosure: Author does not own SHLD

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