So, Sears Holdings (SHLD) reported sub-par expectations on Tuesday and as I read the various reports and “analyst” comments, something jumped off the page. The first analyst compared Sears to retailers like Target (TGT), JC Penny (JCP), Kohls (KSS) and Macy’s(M). I read the comments and they all seemed legit. Same store sales are down at Sears in excess of the others. This must be bad. Then I read another report and that analyst commented that Sears was in trouble because it’s appliance and “big ticket” items were down like retailers Home Depot (HD) and Lowes (LOW).
All this got me to thinking, what is Sears and how should we set expectations for it? Is it a home improvement retailer like Home Depot, an electronics one like Best Buy (BBY) or a clothing retailer like JC Penny? The answer is neither and all of them.
Sears garners revenue and profits from both the big ticket washers and dryers, lawn and garden equipment, large screen tv’s and electronics and children’s shoes and family photos. Home Depot gets revenue from the former, Best Buy the middle and JC Penny the latter. None of them do all and because of that, we cannot judge and set our expectations for the retail performance of Sears according to our expectations for them, but look at all of them. We must expect the home appliance and electronics sections of Sears to continue to suffer as long as the sector’s major members do. This is not due to a failure of management or “Lampert’s store neglect” (today’s excuse being thrown around in the media) but simply due to “people not buying these items anywhere”.
Clothing. Even thought apparel is turning around at Sears (Land’s End will have a record smashing year and womens and children’s apparel are doing very well) one must sell a whole lot of clothing to make up for the lost sale of a $2000 washer & dryer or TV set. These are issues that JC Penny and Macy’s do not suffer from. It also means that when housing begins it’s turn around, that fact that Sears has turned the tide in clothing retailing will lead to spectacular results as folks begin buying those washers, dryers, refrigerators and TV’s again (they will).
What does this mean? Sears is not necessarily suffering from “bad management” , but “bad expectations”. The people setting the public expectations for Sears are comparing it to other retailers “in total” and not separating out the divisions. Just because Sears is a retailer does not means that because we expect “x” at JC Penny, we should expect the same at Sears. Sears is essentially in a retailing class by itself. It’s Kmart divisions competes with Walmart (WMT), it’s clothing with JC Penny and other clothing retailers, it’s home appliances and lawn equipment with Home Depot and it sells electronics against Best Buy. In order to set our expectations for Sears earnings, we must included expectations for all these areas as they all effect Sears. Currently, way to much comparison is being placed on the clothing retailers and not enough on the home improvement chains.
This is leading to over ambitious expectations for Sears and when they do not deliver, we have events like today. There are pithy headlines about Sears being a “broken retailer” but I have to wonder, did not Target, Home Depot and Best Buy just finish dialing back expectations for the near future? Are they “broken” or is it just a general slowdown for anyone who has significant exposure to those big ticket household items? I think it is the later. Just because Sears is not making excuses, do not be lulled into thinking they are immune from housing.
It is ok though, I will be in the market with Lampert today and we welcome the shares you want to sell.
5 replies on “Sears Holdings: The Hybrid Retailer”
Sears is simply not a great retailer. Their stores are old and unappealing and the service level is simply not on par with competitors. They’re a second (Sears) or third tier (Kmart) retailer. And the stores are getting worse as a result of under-investment in stores and high turnover in the low to middle management ranks. Sears has, in the past, had two things going for it – cash flow growth and Eddie Lampert. But those two perceived strengths are now being questioned.
First, it has done a solid job of cutting costs – store labor, merchandise expense and SG&A. Eddie Lampert hates unprofitable sales and he’s done a nice job of reducing these sales. By squeezing the business the cash flow generation has been impressive and true believers seem to be everywhere (just watch Jim Cramer on Mad Money). The problem with this is the cost cutting and lack of investment will ultimately start to impact sales in a negative fashion, which they are starting to do. Cost cutting is easy. No real skill set is required except a strong backbone. Eddie has shown this ability at Auto Zone, Kmart and now Sears. If your trick is cost cutting and nothing else then you need to exit the business before the top-line erodes enough to start mitigating the impact of expense cuts. ESL should view itself as an aquatic bird that jumps from lily pad to lily pad with the hope that it does not sink too deep into the swamp before jumping to the next pad.
Second, Sears has the cult of Eddie Lampert working for it. He is a world class long equity investor (yes, he does have a hedge fund structure but he rarely does anything other than long equity). The skill set for a hedge fund manager is very different from that required for a manager of a retail business. Hedge funds create value from information. The best hedge funds have better information than others and thus have greater insight into the market. The process for a hedge fund manager is to spend a lot of time researching something and gathering information and then they will make the decision to buy, sell, whatever. Once the decision has been made the order can be executed by traders in seconds. Managers of businesses do something altogether different. These managers also see a ton of data but rarely have the luxury to sit back and think about decisions for any extended period of time. Decision making requires clarity of vision and, above all else, speed. The majority of time is spent in execution. Real work begins when the decision is made to do something. Execution takes a long time when managing a retailer in contrast to the immediate execution that is performed in the hedge fund world. The only reason I reference this above is because Eddie, who is a hedge fund manager, is currently moonlighting as a retail executive. Aylwin Lewis might have the title of CEO but do not assume he is calling the shots. He isn’t. Eddie is calling the shots and that has me concerned. He’s great at one job but I’m not sure I believe he’s great at the other. Hope I’m wrong.
The current economy is clearly a factor in the performance of Sears or any major retailer with exposure to appliances and home products. What is unique with Sears and Kmart is that their base-line comp sales numbers have been falling for years. Kmart has literally had negative comp sales for 4 years. The base-line number in 2007 is pathetically low. To eclipse the comp number, at this point, is not that significant an achievement. Kmart has limited exposure to the home improvement market, which means it should be compared to Target, Wal-Mart and Kohls who continue to take market share from Kmart. Kmart is not poised for improvement. The store and merchant talent that might have existed is long gone. Moral is poor and the business is structured to eventually fail. Sales have been a problem for Sears for the past four years but margin improvement allowed Sears to help get the Street to look past this troubling fact. Eddie, in a sense, has talked some people into believing that sales growth did not matter. Growth does matter and the multiple that people are willing to pay for a stock is a direct result of bottom line growth (cash and profit growth). The cost cutting engine that has spurred all of Sears’s growth has only a finite life. Top line growth must eventually kick-in and all indications are that the top line will never grow like it needs to support an “Eddie” valuation.
Why has Sears not made another acquisition while the stock was richly valued? Eddie is cheap. He likes to bottom feed. This market is anything but cheap and I think that’s kept Sears on the sidelines during the period of time when an acquisition probably would have been optimal (think lily-pads). Eddie might make an acquisition or two if valuations turn south and you can bet that there will be another cycle of cutting costs and improving cash flow.
anon,
nice reply… i disagree with some of it though. and i agree they are not a great retailer, i have never claimed they are..good will make shareholders a ton
who are you?
How can you say that Lampert is calling all the shots. It is the same as saying that Lewis is a puppet. That is an irrational saying. I have no idea what is going on but considering the reputation of this “piece of paper” there should be a shake up in management at all levels.
MG,
thank you for reading. the it is not a simple equation like you put it. when it comes to the cash, lampert calls the shots. he is chairman of the board and they have given him the power to invest it “as he sees fit”.
on the retail end, i am sure lewis has a broad array of authority but if he is going to invest cash, lampert will know about it.
disclosure – i am not an insider and do not own shares. i do have knowledge of internal processes.
lampert has all the revenue business functions reporting to him including merchandising, marketing, ecommerce, database / CRM, real etate, and operations. he also controls capital spending, down to the penny. the cfo is his former right hand man at esl and he’s responsible for the great indoors and sears essentials.
lewis has support functions including HR, IT, and logistics. lewis is also responsible for “the power of one”, a massive change management effort designed to rearchitect the culture.
it takes a treasure map to figure out this org chart. when there’s a shortfall, who should you blame? the ceo? he doesn’t pull the strings. the chairman? he’s not an employee. the only reason eddie isn’t ceo is sec regulations stating he would have to leave his position at esl.
at the end of the day, if the company is going to be a retailer, someone has to be accountable for declining market share, declining customer share, stagnant organic profit growth (vs. swaps), and a stagnant stock price – the price is flat since 6/30/06.