The more I sit an think about Sears Holdings and Herb Greenberg’s naming Eddie Lampert “worst CEO” for 2007 (he is not Sears’s CEO for those of you who do not know) I though I would take a look at it’s competitions situation. The reason is simple. If we are headed for a slowdown, which company is in the best financial shape to whether the storm?
Looking at three basic elements:
1- Cash
2- Cash per share
3- Debt to Equity
The results are all as of the latest quarters results and we will compare Sears to 4 rivals: JC Penny, Kohl’s, Macy’s and Home Depot.
The results will surprise non-Sears followers.
Cash:
Sears Holdings (SHLD)= $1.5 billion
Home Depot (HD)= $550 million
Kohl’s (KSS)= $295 million
Macy’s (M)= $275 million
JC Penny (JCP)= $150 million
Well, Sears has $400 million more dollars sitting in the bank that it’s rivals combined! Now we need to see how much of that cash is there on a per-share basis. After all, we are buying an interest in the company by the share so we need to know how much of that cash is ours per share we purchase.
Cash Per share Outstanding:
Sears Holdings= $10.71
JC Penny= $7.48
Kohl’s= $1.22
Macy’s= $ .63
Home Depot= $.32
Now, cash is great but if it is offset by huge debt, its benefit to the company is minimized.
Debt to Equity (lower is better):
Sears Holdings= 25%
Kohl’s= 35%
Home Depot= 71%
JC Penny= 78%
Macy’s= 96%
Now, let’s look at a chart for the past year for all three retailers. Almost identical, reflecting a negative retail environment.
What you typically see in environments like this is businesses in a stressed sector will begin to to struggle. They may look for cash investments like Citigroup (C) did recently in the financial sector or their existence will come into doubt as was the case with both Kmart and Sears when Lampert bought them.
When that happens, the winner is always the company is the strongest financial position that can pick up a business at a dirt cheap price, wait for the environment to turn around and then reap the benefits. In this case that retailer is Sears. Warren Bufffet’s Berkshire Hathaway (BRK.A) has been doing business this way for decades, making shareholders millionaires many times over. Simply put, Lampert has taken two essentially bankrupt retailers and turned them into the retailer with a pristine balance sheet.
When you consider that Sears has 25% of its share sold short, when retailers turn around and profits begin increasing again, shares will explode to the upside.
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14 replies on “Sears vs Competition: A Look At The Balance Sheet”
always a pleasure to read your insight Todd – i’m long on SHLD for Life
thank you
Excellent analysis.
My sense is that, “..the force is strong in this one“.
isn’t there an implicit assumption that SHLD will turn if/when the housing sector turns? last time i checked, both companies – sears and kmart – got pummeled during the previous run-up and Sears in particular lost major share in its core categories, appliances, tools, outdoor power equipment (mowers, etc.). also, didn’t the company have cash exceeding 3B previously and has since paid down debt and repurchased shares all the while the stock declined 30% YTD? now, with 1.5b in cash, declining sales, declining margin, and increasing inventories, the company could reach a point where it needs to invest that cash to keep the business afloat.
target, jcp, and kohls are still generating positive store comp and maintained margins, equating to sustained customer, transaction counts, and profits. low is suffering just the same on a comp basis, but is stealing share in critical categories and could position itself as a retailer of choice if/when the market turns. SHLD, and ESL in particular, MUST do something about its negative trends in customer counts, sales, and margin. otherwise, there won’t be much left if/when things do turn.
anon,
jcp and khl both are suffering neg. comps, that is why jcp is at 52 wek low.
target is trading water…
yes he will invest in the business and the recent ad campaign is indicative of that
perhaps you missed jcp’s 2.6% comp increase in november (and +.2% ytd) or kohl’s 10% comp increase (+2% ytd.) or Macy’s 13% comp increase (+.7% ytd.) or Target’s 11% comp increase (+5.1% ytd). Not exactly treading water…
http://www.reuters.com/article/pressRelease/idUS196639+06-Dec-2007+PRN20071206
This is in comparison to SHLD’s YTD comp decrease of -5%. Face the empirical facts – they’re losing share and customers. They launched the new ad campaign over the summer and its obviously not resonating with consumers. frankly, i would argue that’s money not-well spent as it isn’t generating any kind of return. ad campaigns in retail are fairly meaningless, honestly. costco doesn’t advertise and their business is a winner. you could argue the same with amazon.
retail is detail – its around operational execution and customer-centric merchandising. based upon these metrics, the SHLD business continues to decline. even if ESL is able to invest in the business when the market turns (a big if), will customers come back? the trash heap is littered with past brands that weren’t able to stem the tide. unless eddie brings on-board some real retail help – not ex-mckinsey, ex-fast food, ex-software, ex-financial service MENSA types – the business is going to continue to struggle. Alan Questrom made a mint turning around Federated, Barneys, and then JCP by focusing on pairing debt, improving cash flow AND driving major changes in merchandising and store operations. Where is that kind of talent at SHLD today? Questrom, by the way, sits on the board of WMT.
Anon,
i was talking eps comps….
that being said, if you want to compare sales only, we can say jcp and kss are flat and kohl is modest.
target is good and i have said that in other posts, although they did just come out and warn. target and wmt are each other competition, not jcp, and sears.
none of them are tied to housing like Sears which is why i always throw the hd and low comps in there when i talk about them. sears is the #1 appliance seller. when housing sucks, and it has not been this bad in decades, they will suffer. simple.
housing will turn. the good news is on the last earnings report they did say that both traffic and sales are doing better than expected. folks are buying large screen tv’s and other electronics, not washers and dryers that have far better margins. simply put, people are going to the stores..
the wishbook ad campaign did not get revved up until october, its results will be seen in this Q’s earnings and traffic numbers.
i do not expect grand results soon. it am happy to watch the share count tumble as we wait for housing to turn. when it does, eps on same total earnings will be 15-20% higher…
im gonna side with anon on this one. feels like the buffet saying when a good manager meets a bad business, the business always wins. I like lampert and the idea that he will protect my money etc, but at the end of the day shld is really bad news and has shown no reason to believe beyond the fact that it has lampert in the house. Comparing this to kss, tgt, wmt is not even fair and really im not sure why we even compare this to hd or low either. It is really bad in all categories and consistently going the wrong way. Furthermore if its doing bad in good times, why should it do well in bad? I agree its cheap and its always tempting to apply other people’s margins to it and dream but none of this seems to make sense. I cant even make sense of how little money they make considering they supposedly have the “brands”. As you can tell I needed to get this off my chest, as I was a brief owner who thought it better just to stick to the easier money and stop dreaming.
cash per share? wouldn’t a better ratio be cash per share price?
jud,
not really. we want to know as a shareholder how much of the cash available is ours for balance sheet purposes and how that stacks up to the debt per share.
if we are talking about the “value” of that cash vs purchase price then we would look at its correlation to share price as we could say, we are getting $15 per share in cash for a $100 investment for example.
todd – i’m sure you saw the following article:
http://www.thebostonchannel.com/news/14891009/detail.html
this is one of the reasons that eddie faces an uphill battle. the guy has gotta get some professional retail and services help to better manage his business. do other companies have similar issues? of course… but the impact of a Geek Squad screw-up on a growth business like Best Buy is dramatically different than a Home Services screw-up on a declining business like Sears.
also,i suggest you spend some time in a Sears or Kmart store this weekend. Would be curious as to your take. After competitively shopping multiple locations last weekend, it appears as though the business continues to struggle mightily.
anon,
saw it and dismissed it. that channel ran the same piece on both hd and low’s in the past. they run a hack piece on any type of contractor every month or so. it is essentially the same piece with a different contractor placed in it
it was just sears’ turn…
i have spent time on the stores in MA. they look busy to me..
Todd,
As part of the last earnings announcement, Sears stated it’s goal was to get inventory down to below where it was at the end of Q4 last year. Implicit in that statement is that Sears will have another $2b cash on its books at YE. Agree? So assuming no buybacks, which of course they are doing, but assuming they aren’t Sears is trading at roughly 4x cash. Not too shabby to have $30 per share in cash at YE.
Also, I’m wondering why they haven’t announced or reupped their buyback. I’m assuming they are running it down. Thoughts?
anon,
off the top of my head i think there is still $900m left under the previous repurchase..
that will be finished thus Q, if not already.
the new plan will be announced in march at the annual meeting..
how much cash? $2b seems reasonable. consider $1.5b now -$900 million (current repurchase)+ what comes in. I think it may be a bit more but real hard to tell.