This one surprised me. The WSJ ran an article Friday that made things at Sears (SHLD) look dire. Let’s take a closer look.
A summation of the article is pretty simple. Sears’ cash will be far below last years levels when they report and thus, investors will run for the exits.
The article starts off with this quote, “Now, some analysts wonder whether falling sales, slimmer profit margins and other woes are causing cash flows to decline to a level that could hinder a turnaround.”
The very reason Sears split into 5 separate entities was to avoid this very scenario. It will allow each division to pursue deals outside of the current locations. This was witness just last week by the Diehard deal with Orange County Choppers. I am having trouble figuring out what any cash deterioration at Sears would hinder more deal like this. I can easily see how they will expand sales of those items and actually increase cash. I can also easily picture licensing deals for Craftsmen tools and Kenmore appliance that throw more cash Lampert’s way.
Later in the article comes this gem “…Sears to draw on a $4 billion credit line. But this might not be received well by creditors, especially if it looks like the borrowing is being done to fund further stock buybacks.”
Now, has Lampert ever borrowed to repurchase shares? Ever? If we go just the end of Q3, Lampert had $734 million of cash in hand. The company said that, as of Jan. 11, it had used $513 million of that cash to repurchase stock in Q4 and as of Nov. 27, it had paid back a $625 million credit facility.
Both of these were done from cash from operations. If Lampert had ANY inclination to repurchase shares with debt, he surely would not have paid off the credit facility. Lampert has been constantly paying off debt since taking over Sears and that is the reason the company has the best balance sheet of its competitors (JC Penny (JCP), Macy’s (M), Home Depot (HD) and Kohl’s (KSS)). As a matter of fact, since taking over Sears, Lampert has reduced its outstanding debt every year and FY 2008 that just ended will be no different.
The article also laments the fact that cash is lower this year than at the same time last. But, it casually misses the fact that Lampert has repurchased almost $3 billion in stock in the last 9 months vs $800 million total the previous year. Now, had he not done that, the cash balances would be similar.
The same people who are wringing their hands over the cash account today at $1 billion are the same ones who were complaining when it was at $4 billion and Lampert was just sitting on it. Back then they were championing Lampert to spend it on a Home Depot, Radioshack (RSH) or Macy’s acquisition. In retrospect, any one of those moves at the prices they were at then would be a complete catastrophe today. I wonder were all the articles pointing that out are?
So, Lampert invested that cash on Sears by repurchasing stock. By doing so, he has increased shareholders percentage ownership of earnings in excess of 13% rather than destroying it with an abysmally timed dilutive acquisition to appease folks. Thank you Eddie.
The essence of this article is based on a flawed premise. It is a bit like speculating about the cash drain at Berkshire Hathaway (BRK.A) should Warren Buffett try to outbid Microsoft (MSFT) for Yahoo (YHOO). It will never happen so making the speculation is just filling a page with words. To be honest, I had a hard time finding the premise.
Whitney Tilson, said Friday on CNBC that he was “aggressively buying shares in the 80’s” recently. To quote Whitney “we are buying a 30 cent dollar”.
Disclosure (“none” means no position): Long Sears, None in others
4 replies on “Another Misleading Sears Holdings Article”
Peter Eavis is just one cog in a gear of many that helps make up the Market machine.
You did an excellent job calling out all the errors in his piece, but I must remind you
that this seemingly insignificant cog in the gear is indispensable in assuring the
continuing operation of the Market machine. Can you imagine a day when the Market
ceases to operate inefficiently? That would be the day you and I lose our competitive
advantage in this game.
(Disclosure: I’m not done picking up shares yet)
vlado,
i agree. i’ll take whitney tilson’s opinion any day over these guys
Point of Clarification – he has borrowed for buybacks (Per 10Q page 31):
During the third quarter of fiscal 2007, we utilized a portion of the total availability under our $4.0 billion Credit Agreement (as defined and discussed below), along with operating cash inflows, to fund $0.9 billion in third quarter share repurchases while, at the same time, meeting the above-noted seasonal working capital needs associated with the period preceding the holiday selling season. Accordingly, as of November 3, 2007, we had $640 million in secured line of credit borrowings outstanding, including $625 million borrowed under the $4.0 billion Credit Agreement. The entire $625 million in Credit Agreement borrowings has been repaid as of November 27, 2007, and therefore, has been classified within short-term borrowings on our consolidated condensed balance sheet as of November 3, 2007
anon,
thank you for reading…
i would not consider a 24 day credit faculty “borrowing to repurchase shares”. it was used for the repurchases and to provide adequate cash flow for operations. when the cash came in during those three weeks, the credit faculty was paid off..
i would compare it to using your credit card to buy dinner and paying the bill in full when it came in. i would not classify that as you “adding to your debt” to go out to dinner.
now, if the credit faculty was NOT paid off immediately or in a reasonable time, then you would have a point.