Housing Hurting Sears: No Surpirse

Todd, I think you are absolutely right. In fact, I would go further and say that Sears’s results were better than expected. Compare their 3.5% decline with 11% at Kohls, 6% at JCP, 5% at Target, 11% at Circuit City, etc.

On a relative basis, Sears has a stronger balance sheet, and saw less of a slowdown in sales then did “better run” competitors.

Dr J

vlado,

will look at it

SHLD lowered earnings and said comps. would decline 3.5% for the ENTIRE QUARTER, not just for the month of December. It’s an important distinction from the numbers Dr. J noted. That means comparables were equally as bad as competitors for the month of December, inclusive of Black Friday. Most disturbing are the margin numbers, something ESL was beholden based upon his professed strategy of profit over sales. Big changes are needed; perhaps some executive realignment are required to get Eddie and Sears pointed in the right direction.

Listen. We know Sears books are good. Meaning that they have solid cash flow to “weather the storm” of the dreaded r word(I dont know about you but I am pretty scared. Can you detect the sarcasm? ), they have good management under the guidance of mr. Lampert(even if Mr. Lampert wasnt there I would still take a look at it in its present conditions). Next, they have a quality plan for boosting sales(ie. Todd’s conclusion of Brandnames/mini-stores in a larger store). As for sales and margins….well everyone is hurting. I dont even care too much about how much land they own. Like Jeff Mackie said,(I paraphrase) “Playing Sears as a land investment is like playing an airlines as an aluminum investment.” They sell the land to boost profits, it’s a one time thing. I’d rather see them use the land they have more wisely. Now…do we care that Sears isn’t the most popular? No, were aren’t here to win a popularity contest. This is a weighing contest. We are longterm investors(i shouldn’t need the double meaning but it’s necessary for some people).

i’ve commented many times previously on this blog about margins… again, appliance margins are not good; if you attribute the profit shortfall to poor appliance sales, you are smoking something fresh. appliances run in the 20% range, with margin recovery in services and delivery fees. electronics runs in the 0-3% range, sometimes negative in the computer category.

the margin shortfall was due to increased electronics sales (re: low margin), soft apparel sales (note: a good margin category; this is of concern because the category was a bright spot in previous quarters. you once touted Lands End as the savior for Sears apparel; not the case, obviously) and poor tools sales (read – generally good margins, esp. with private labels like craftsman). to clear the $12B in inventory, they got promotional. that’s good, but killed margins and profitability and that’s bad. i predicted in a previous post on your blog that this would happen. they had declining sales, profit, and share when housing was good (again, appliances share declined from ~35% in 2000 to ~27% in 2006); they will have declining sales, profit, and share when housing is bad. listen, shld will continue to decline until they can figure out how to shore-up traffic, sales, and profit, something the brilliant mind of ESL hasn’t been able to solve at this point. they can add brands all the brands they want (snapper, by the way, is lower margin than the house branded Craftsman), but it won’t mean squat if customers don’t come into the stores (or shop online).

very fair thesis, ryan. i won’t argue at all. the logic is sound. my issue, and i am a retail veteran who was long shld, is in the execution. eddie financially re-engineered the company – pared debt, bought back stock, stoked cash-flow. all very positive. no arguments from me. the issue, however, relates to the core of the business – retail. there’s a reason credit agencies won’t raise company ratings. there’s a reason goldman, eddie’s old employer and an investment bank to the company no less, issued a sell rating. why? because he (and his management team comprised of former fast food / mckinsey / ibm / capital one execs – all smart, mensa-types, but not-a-one with any operational experience) haven’t proven capable of operating a business that sells products to – gasp – actual customers! here’s something to ponder: the President of Lowe’s, a 37 year veteran of the company, doesn’t have a college degree. Yet, his operation continues to eat SHLD lunch in appliances, tools, and home. Why? He understands retail. LOW EBITDA margins are almost double SHLD, by the way, and SHLD competes in much higher-margin categories like apparel (vs. low margin categories like, um, lumber)! That’s about as salient a point as I can make with regards to execution excellence. you have it, or you don’t.

eddie may throttle the business to the point that there is little pure-retail left and that may be true. the value might actually lay in the services network, real estate, and brands. but you shouldn’t invest in the business because you think shld, as a retailer, can resurrect itself unless some fairly dramatic changes are made to the right-size the business. don’t fool yourself with regards to housing, either; the business struggled in good times and will struggle more in tough times.