It is hard to get all worked up over these results at Sears Holdings (SHLD) for a few reasons.
1- They were expected
2- Cash is higher than predicted
3- Debt is lower
4- The share count is lower (20% lower in the last 4.5 years)
5- They plan you have been clamoring for is being implemented
So, first the results:
Net income of $426 million, or $3.17 per diluted share, for the fourth quarter ended February 2, 2008, compared with net income of $811 million, or $5.27 per diluted share, for the fourth quarter ended February 3, 2007. For the fiscal year ended February 2, 2008, net income was $826 million, or $5.70 per diluted share compared with net income of $1.5 billion, or $9.58 per diluted share, for the fiscal year ended February 3, 2007.
For the quarter, domestic comparable store sales declined 4.5% in the aggregate, with Sears Domestic comparable store sales declining 4.0% and Kmart comparable store sales declining 5.2%. For the year, domestic comparable store sales declined 4.3% in the aggregate, with Sears Domestic comparable store sales declining 4.0% and Kmart comparable store sales declining 4.7%. Declines for both the quarter and fiscal year include a more pronounced decline in comparable store sales in the month of January
2008.
The reason? The same as every other retailer save Wal-Mart (WMT). The weather is lousy, people have no money, housing, etc… Sears is no different in most respects except they have more tied to housing that either Macy’s (M), JC Penny (JCP) and Kohl’s (KSS) because of the huge number of appliance sales.
What really matters:
Sears had cash and cash equivalents of $1.6 billion at February 2, 2008 (of which $743 million was domestic and $879 million was at Sears Canada) as compared to $3.8 billion at February 3, 2007, a decline of $2.2 billion. For the year, the significant uses of cash included $2.9 billion for share repurchases, approximately $580 million in capital expenditures, debt payments (net of new borrowings) of approximately $600 million, and approximately $220 million of contributions to pension plans.
On January 14, 2008, they forecasted domestic cash and cash equivalents would be $1 billion at year-end, without effect of share repurchase activity after January 11, 2008. Subsequent to January 11, 2008, they repurchased $40 million of common shares.
During the fourth quarter of 2007, they repurchased approximately 5.3 million common shares under the share repurchase program at a total cost of $553 million, or an average price of $104 per share. For the full year, they repurchased 21.7 million common shares under the share repurchase program at a cost of $2.9 billion, or an average price of $135 per share. As of February 2, 2008, they had remaining authorization to repurchase $183 million of common shares under the program.
We have the odd position that the sales results were poorer than expected but the financial condition of the company is much better. Given a choice between the two, and in an economy like this one currently, it is more often the case than not, I will take the latter.
We are at a point now where we close the door on Sears as it is and look to the future. A 900% plus gain since Lampert took over Kmart in 5/2003 to the present, is there a problem?
What does the future hold? Sears brands will begin to show up all over especially in the likes of Home Depot (HD) and Lows (LOW). I can very easily see a scenario in which both retailers, given their current situation try ti outbid each other for an “exclusive” deal for the lines (Craftsmen, Kenmore, Diehard).
Kmart will eventually disappear. The real estate arm will look to maximize the value of each location and those locations will be either as a Sears, or another retailer. Either way, who cares. A large part of the eventual revenue will come from the REIT portion of the company. For evidence of how this can evolve, check out Vornado’s (VNO) history.
As the main brands become sold in various other retailers, the flexibility and the options in the real estate grow profoundly. The actual value of a Sears and Kmart location actually diminishes in terms of the company’s revenue and the value of what can be done with the floors and walls increases.
Will it happen in 2008? No. Don’t forget, retail as a whole still currently is lousy. That being said, progress is all we should really expect and want to see. The company will still produce $6 billion from operations that will buy back more shares and pay down more debt while we wait.
More later as I digest this more..
Disclosure (“none” means no position):Long SHLD, WMT, None
4 replies on “Sears Holdings: A New Chapter”
Profit Down, Sears May Hold Yard Sale Wall Street Journal, 02/29/2008
“The reality is for the last year and a half this has been an asset play and only an asset play. Now, he’s admitting that in his letter,” said Gary Balter, a retail analyst at Credit Suisse who on Jan. 14 lowered his rating on Sears to “underperform,” from “outperform.” “The first step is selling brands, selling real estate, selling off [Sears] Canada,” he said.
This article kinda gives these announcements a negative spin, which reflects Wall Street’s sentiment. They are describing this as though it were a failed venture.
When Berkshire saw diminishing returns from it’s textile business they closed it down and cut their losses, eventually becoming the conglomerate that they are today.
Sears Holdings’ situation is a bit different. Eddie is finding alternative distributions for his brands which have the potential to increase cash flow, and is also parlaying the stores into an REIT play.
keep in mind eddie made the potentially brilliant move of protecting his brands with $1.8B in securities. When he did it, very few in the mainstream media recognized the real reason – protecting valuable assets to either spin them off or sell them completely. i hadn’t really considered the reit angle, but i do think it makes sense. listen, eddie is as bright as they come and i genuinely believe he is doing all he can to turn around the titanic. that said, he is creating optionality in the company – a reit (good idea, vlado), a brand portfolio (don’t forget Lands End), and a massive services business that is still the largest in retail. i don’t get the ecommerce angle other than he can generate a better return on capital in the online space than in the offline. that said, if the brand and protect are damaged goods, what’s it matter. i can envision a time when perhaps the Sears brand name is just a services business. afterall, the CMO did come from IBM. sound like a familiar situation?
unrelated, but i really wish eddie would get past trying to relive his Kmart investment. it was a stroke of genius; we get that. buying Kmart out of bankruptcy was brilliant and those who invested in 2002 have enjoyed tremendous returns. pat yourself on the back – it was 6 years ago. The combined company, however, has done nothing since the merger – the stock price is flat for 3 years and i don’t see that changing anytime soon. stop looking back and start looking forward; it’s beginning to sound insecure, bordering on whining. the time is nearing when you have to unlock some value and start writing about a different success story. afterall, you don’t read about warren buffet reliving the old re-insurance days in his annual letter to shareholders.
A Portfolio Warren Buffett Would Love
U.S News & World Report, 02/29/2008
Bruce Berkowitz manager of the $6.8 billion Fairholme fund talks about Sears Holdings.
anon,
I agree with alot of what you stated above and I also got a similar sense of justification on Eddie’s part: “it’s beginning to sound insecure, bordering on whining”.
One thing to keep in mind when comparing Warren Buffet’s situation to Eddie Lampert.. Buffett was flying under the radar back then.. with no pressure from the media. Eddie has been getting a lot of critism in the press.