Sears reported a 43 cent loss (53 cents without items) today vs a $1.15 gain last year. Lousy but not surprising..
Our first quarter results reflect the difficult economic environment and intense competition for consumer business. That said, since May 3, 2008, our sales declines have moderated somewhat,” said W. Bruce Johnson, Sears Holdings’ interim chief executive officer and president. “As a result of actions we have taken and will continue to take to manage our costs, our current forecast for 2008 reflects higher EBITDA than we achieved last year. At the same time we are managing costs, we will continue to invest in our future by hiring talented leaders and improving our online and multi-channel capabilities.”
Cash Position
They had cash and cash equivalents of $1.4 billion at May 3, 2008 (of which $656 million was domestic and $757 million was at Sears Canada) as compared to $3.5 billion at May 5, 2007 and $1.6 billion at February 2, 2008. The $0.2 billion net decline in cash and cash equivalents since the end of fiscal 2007 primarily reflects $517 million of cash used in operating activities, capital expenditures of $178 million and total long-term debt payments (net of new borrowings) of approximately $131 million. These amounts were partially offset by a $646 million increase in short-term borrowings, primarily through borrowing on our $4 billion credit facility. As of this date borrowings on the facility have been reduced to $400 million.
Inventories
Merchandise inventories at May 3, 2008 and May 5, 2007 were $10.3 billion. Domestic inventory levels declined from $9.5 billion at May 5, 2007 to $9.4 billion at May 3, 2008. Sears Canada’s inventory levels increased from $0.8 billion at May 5, 2007 to $0.9 billion at May 3, 2008. The increase in Sears Canada’s inventory is primarily due to the change in exchange rates.
Share repurchases:
The Company also announced today that our Board of Directors has approved the repurchase of up to an additional $500 million of the Company’s common shares. This authorization, when added to the $143 million remaining as of May 3, 2008 under previous authorizations, provides us with a current aggregate authorization of $643 million. Share repurchases may be implemented using a variety of methods, which may include open market purchases, privately negotiated transactions, block trades, accelerated share repurchase transactions, the purchase of call options, the sale of put options or otherwise, or by any combination of such methods. Timing of repurchases is dependent on prevailing market conditions, alternative uses of capital and other factors.
Bruce Johnson added, “We continue to have a strong balance sheet which, when combined with our expected free cash flow generation in 2008, enables us to take steps to invest in our business, consider other alternative investment opportunities, pay down debt, and repurchase our shares.”
Sears repurchased 0.4 million common shares at a total cost of $40 million (or $94.19 per share) under the share repurchase program during the first quarter of fiscal 2008. Since the third quarter of fiscal 2005, when the repurchase plan was first approved, they have repurchased approximately 33.1 million of the common shares at a total cost of $4.4 billion pursuant to the program. As of May 3, 2008, they had approximately 132 million common shares outstanding.
Now the hysterical folks out there will screaming about a loss that ought not be all that surprising. Those of us who invest in the business, look at the balance sheet and cash position and recognize those are a solid as ever. As a mater of fact, when compared to competitors JC Penny (JCP), Kohl’s (KSS), Macy’s (M) and even Home Depot (HD), Sears has by far the strongest balance sheet. It also is the largest appliance retailer by FAR. Since that category currently is being hit very hard by housing, it only stands to reason that they will suffer more than the others.
The balance sheet is what will position Sears to capitalize when retail finds footing and rebounds. Also, nothing has been said about the brand positioning the company is undertaking.
I will be a tough ride in the near term. The question is “would you be better off as an investor of any of the about companies”? No. Your investment would be impacted the same or worse and of more importance, the balance sheet of the company you are invested in has been more negatively impacted as well.
What to do? Hold on. Maybe we get lucky and be able to get more in the mid 70’s. It all comes down to your time frame. If it it years then this is just a blip on the screen and a great buying opportunity. If it is months, then you are panicking and if you invested in a big box retailer for the short term in the current environment, you should be.
It should be noted they are forecasting higher EBITDA than last year (an unusual move) and Johnson said they are going to “consider alternative investments”. Something will happen, just a matter of time…
Disclosure (“none” means no position):Long SHLD, None
23 replies on “Sears’ Results and Some Interesting Statements”
Can always count on you to shed some light to the madness.
I guess Sears-KMart has still has value as a REIT, though it looks like Commercial Real Estate is just about ready to fall off the cliff too. What the company’s value is if it sold off real estate and brands would be, I know not.
Lampert is a financier who doesn’t know squat about running a company especially a retailer. He’s got no CEO and he’s proven he can’t run it. Soon enough, even with his ego, he’ll start looking for wings to pluck off and sell.
I think Bill Ackman (who owns a ton of Sears stock too) falls in the same category. Sure he deserves credit for recognized the massive problems with credit, specifially AMBAC and MBIA, but what Ackman thinks he can accomplish with Sears, Target, Borders and B&N is beyond me, especially when you take into account that he recognized the housing/credit crisis coming and yet chose to invest in retailers that will be hurting for some time.
If Lampert decides he wants to run AutoNation too, then dump the stock immediately.
Forgive them, for they know not.
i think people forget where the stock has come from.. an eight fold increase even after the recent sell off…
not bad for 4 years…no?
were sears the only retailer suffering i would be worried, since wal-mart and target are the only ones not, i cannot get too excited about poor results
first of all, yes, there is value at SHLD. for whatever reason, that value continues to remain unlocked and in many respects, is declining in value with each passing day.
second, i don’t believe the company is well positioned when and if the economy turns. yes, it has a clean balance sheet, but that doesn’t mean much if consumers prefer to shop the competition instead. I find it interesting that the retailers doing well in the current environment are every day low price retailers. high / low, heavily promotional retailers are suffering. i don’t believe this is due to economic changes but do believe it is a fundamental shift in the market. there’s a reason lowe’s and home depot continue to take appliance market share away from sears and have done so for the last 6 years. shld share has declined about 20% during that time. in fact, those two companies combined now control more of the market than Sears so you are incorrect in saying, “It also is the largest appliance retailer by FAR”. Please check your facts before throwing out inaccurate statements. NPD is a good resource.
Third, I’d like to refute your comment. “since wal-mart and target are the only one not” – incorrect. Costco continues to take share and while Lowe’s announced poor comp sales (still 150 basis points better than Sears), it continues to manage its profitability at a superior rate. SHLD will continue to suffer without viable retail leadership. Lowe’s has a combined 120+ years of industry experience among its stable of senior leaders. Sears has one industry veteran – it’s current interim CEO. The CFO is from the credit card industry, the CMO is from the software industry, it’s chief strategist is a former life-long consultant, there is no chief merchant… SHLD remains a case study in how NOT to run a viable retail business.
your opening comment is telling, “Lousy but not surprising..” actually, it’s very surprising. SHLD was projected to post a $.15 / share gain, not a loss, so, yes, that’s a suprise. NO OTHER BROAD-BASED RETAILER LOST MONEY last quarter. Not even Home Depot. I’m sorry – that is surprising and lousy. here’s the quote from the AP:
“Excluding a gain on asset sales, the loss in the current period came to 53 cents a share, the company said.
Analysts were expecting a profit of 15 cents a share”
i’m sorry – that’s just pitiful.
to me, their current performance is telling – they continue to manage high inventory levels, even with exceedingly high (and unprofitable) markdown strategies of the last two quarters. why won’t management learn from prior mistakes? i find it an egregious misuse of company funds – look, if business continues to decline, then i would expect inventory levels to decline as well. instead, they essentially are unchanged from prior year, save for a $100m domestic decline. Not enough from my perspective. Gap is doing a great job managing lean inventories, selling at full price with better margins – as smart as Eddie is, i’m truly surprised his team can’t get a similar strategy executed.
as for your comment about SHLD forecasting higher EBITDA, management has absolutely no credibility here. they haven’t hit a sales, margin or profit estimate in the last 7 quarters. disappointing.
finally, stock price on Jan 31, 2004 was $98.95, down 7% from the current price. AMZN is up 83% during the same time period. WMT is up 3%. LOW is down 18%.
Actually Sears chart looks like a nice proxy for housing values in California or Vegas or Florida. The stock actually is back down to where it was back in October 2004.
Again, Lampert job was financial, cheap financing, squeeze out cap ex cost from the company and it worked in the cheap credit era, but it’s never been a company that has grown sales under Lampert, so that means ultimately it’ll be about what is the value of breaking it up.
sure the balance sheet is not leveraged but SHLd is selling assets and reducing working capital to fund the retail turnaround and making its balance sheet look healthy.
A portion of the cash flow from operations is from working capital reduction. and assets sales are contributing to the cash balances on the BS.
Inventory days are getting longer and longer. i am not sure that EL want to turnaround SHLD. nothing in their financials indicate there is any intention to do so: capex are down, inventory is being trimmed and sitting in warehouses longer and longer, no retail talent evident by non existing option plan…etc
The longer this turnaround takes place the less and less intrinsic value SHLd has because all the valuable assets will fund a losing retail operations.
Am I missing something here? appreciate your thoughts?
For disclosure I am long SHLD)
anon,
couple of things…
appliances. Sears is still the single largest retailer of them. yes HD and low sell more but that is like saying sears and wmt are the largest electronics retailers. no single operator sells more than sears
while the other retailers did not post losses(jcp,kss,m), i would argue it is because they are far less tied to housing thant shld
i did not through out costco or bj because i o not consider them a similar retailer, bby either… trying to compare apple to apples
assets. the plan has always been to shed the nonperforming ones, that is where the value was when it was bought..
don’t forget. target still wants hundred of locations from shld. given the current environment, everyone is cutting back. eventually the RE arm of shld will become a reit and make tons being a landlord.
brands……appliances….
do you really think later this year we will not see kenmore and craftsman in hd and low? if you are selling more of your product through other channels and then leasing your poorer locations to other retailers, you can make a bundle…
gap… i have posted on them. they are doing the very same thing lampert did when he took over shld…
gap sales fell 11% last Q. cost cutting lead to profit gains. Familiar?
i think lampert took them as far as he could and it smart enough to know that and step aside and get other people in there and change up the model. a $53 billion sales company will not turn on a dime. let’;s not forget kmart was done and sears was on the brink when he bought them. now they are both profitable.
i do not have a problem of that or take it as an admission of failure. I call it being smart..
analysts: they have not been close to shld’s actual results in years. no reason to expect them to be now. i am no more depressed when they miss them than i am excited when they beat them
actually, todd, i don’t think you will see brands sold at other retailers, at least not in the foreseeable future (i.e. <36 mos.). there is no brand president yet and eddie won't make that kind of decision. doing so is a death knell for the core retail business and he's not willing to throw in the towel.
appliances – let’s be clear here; the company is losing share to better competitors. if the argument is “the business will come back when housing turns”, the logic is flawed. they lost share in a good market, they’re losing share in a bad market. when housing turns, the decline will likely accelerate.
ok, so, for apples to apples, LOW and HD, both 100% tied to housing, turned profits and had better comps. SHLD, which is maybe 60% tied to housing, lost money. Kmart is a discounter and 80% food and apparel based, and posted accelerating negative comps from the prior quarter while direct competitors posted accelerating positive comps. That means the company is both a bad home retailer and a bad discount retailer. Bad is bad.
gap is actually doing things different, so i respectfully disagree. yes, they’re cutting costs, but they are also reducing inventories, selling more at regular price, improving margins, and cleaning up its balance sheet. even when esl was driving profits out of the current business, it was through asset sales and cap ex reduction. not seeing that at gap. also, while comps fell, profit increased because of less markdowns. shld continues to invest in non-productive inventory leading to higher markdowns leading to less profitability – thus leading to a .53/share loss. that’s just got to drive esl nuts.
i believe a previous poster was correct – the value is in the break up and esl will eventually come to this realization.
incidentally, target is not looking to buy ANY of SHLD locations or take over their leases. perhaps it wanted to years ago, but not currently. this is from direct sources at both companies. not sure where you got your information; it’s inaccurate.
anon,
“direct sources at both companies”? come on…….
i have a hard time swallowing that. the last research report I read in December had said target had looked at over 200 Shls /kmart locations. taking them over is cheaper than building from ground up,
now, while they probably have scaled that back along with other expansion plans given the environment, to go from 200 to zero in 6 months…..doubtful.
you cannot through out “sources” unless you can back it up….the majority og the sears leases are on terms ANY retailer would kill for (99 years, pathetic terms). they have to be looking at them. same size locations, malls (or near them).
it is a no brainer……
appliances.. of course their “share” has shrunk. the chain has while hd and low have grown. it would have been mathematically impossible for anything else to happen. that being said, their company appliance sales had grown considerably until Q2 last year and have fallen off a cliff since. their mix is predominantly big ticket items, the gains they will experienced when housing turns will be outsized just as the losses have been…stand to reason
36 months to put a kenmore dryer on hd?……<12 is the answer you are looking for..
the gap / sears comp. is spot on. shld 4 years ago was where gap is today in terms of operations..
read what murphy says….he parrot lampert. has ground US expansion to a halt, shrunk offerings (inventory)…
do not forget, gap when he arrived was in infinitely better shape than kmart / sears was when lampert arrived…
Boy, Sullivan, you sure are pathetic. All your subjective arguments are nonsense. Let’s talk about the facts.
Fact: Sears posted a loss, while numerous other retailers did not.
Fact: estimate and expectation was that Sears would show a profit, but it did not.
Fact: Sears’ sales have been going down for a long time.
Fact: Sears is still a retailer.
One should wonder – what is the value of a company that cannot make a profit? Since you allegedly focus on the “values” of investments, you should concentrate on that.
By the way, please reply to this post within 30 minutes, like you always do. Not only do you make bad calls, you also have no life – is the comment section in your blog so important that you have to moniter is constantly? lol
another anon insult…way to step up..
blogger has this neat feature that emails comments…zip to my blackberry…one button touch and i can reply
i am taking a shit responding to you right now which is about what your post deserves…it was a toss up between this or watching the dog lick it balls..
now, since it did post a loss dregs such as yourself will sell giving me a better chance to pick up share on the cheap..
great buys seldom look that way at the time….
well, time to wipe…see ya’
When Sears began to do well, and the stock was going to $200, all the analysts were projecting that out to future, saying the Eddie is a genius, he can turn it around, etc.
Now that Sears is having a little trouble in a bad environment, that is being projected out as well.
Its the same story time and time again. Too much “analyst-think” and not enough focus on some very important factors.
A. ESL is tied up over 50% in SHLD. Eddie has been making money for his partners for 20 years. Is that going to just end? Did he turn dummy in a year and a half? I think not. Eddie is powerfully incentivized to make this work, somehow.
B. Everyone is still 100% focused on the retail story. Number 1, like you said, a $53B company doesn’t turn on a dime. That takes years. Number 2, there are so many levers that Eddie has to create free cash flow, that the ultimate success or failure of their current retail strategy will tend to matter less over time. This a cash story, not a retail story. Retail plays a large part, but it’s not the only show. Eddie has shown that the retail stores are no longer the only focus of Sears as a company.
C. I don’t get the argument that a better economy won’t help Sears because “they are losing market share.” Bull. A better economy will help them just like every other retailer out there. If you are looking for the economy or Sears’ sales to skyrocket by the end of the year, you might as well sell now. These things take time.
D. Everyone is talking about the company, no one about the valuation. $50B in sales. $11.5B market cap. Billions in valuable real estate. Small improvements in the business will dramatically improve their cash flow, and you’ll get a double whammy as improving outlooks create better investor sentiment. Higher multiple on higher cash flows.
jeff,
Brilliant……..
From now on my pseudo name is annello..
Todd,
Glad we’re on the same page.
for the record, i’m the same anon – i try to avoid personal attacks.
i’m happy to back it up my previous comments related to real estate – i have an intimate financial with both companies at the senior executive level and feel my information is, shall we say, bulletproof reliable.
i will hold you to the <12 mos - actually, your previous post stated by YE. when you're wrong, you should put up a negative post and call eddie to task, something you've yet to do. if you're right, i'll write a very positive response extolling your foresight.
i think analytically, you have to admit the performance – financial or retail – over the last 3.5 years has been poor, both pre-bubble and post-bubble. as a retailer, the business is failing. yes, the value is in the break-up OR from non-retail components. however, esl continues (unsuccessfully) to try to operate the retail business and has tried to turn around two struggling operations for 6 years (6 with kmart; almost 4 with SHLD). yes, these things take time, but come on – how many free passes does someone get? esl will eventually monetize his hedge, the same hedge we all seem to agree upon – its brands, its reit, and its services (don’t for get this is 15% of total sales!). until then, wall street, analysts, and retail veterans will continue to discount the enterprise significantly. wall street is doing so accordingly.
the fact of the matter is that even with great leases and crappy comps, eddie could run the business still make money. at least until this past quarter. target wanted the terms, not necessarily the land, and esl would only sublease them. tgt said no way and walked from the table. the market fell off a cliff and as a result, tgt is looking elsewhere (i.e. international). doesn’t mean they won’t come back to the table, but the deal isn’t live currently.
one thing most pundits overlook is the positive performance of sears canada. the us portions of the business declined 8% last quarter, but total business declined only 6% do to better than expected performance north of the border. there significant, undervalued assets up there.
for the record, i am long shld, but a frustrated investor.
one final comment related to jeff’s post on valuation – yes, 50b in sales but 5% ebitda, that’s 2.5b in profit – and declining (note – not cash flow; that’s a different calculation). now, real estate is of value, but significantly less than it was just 1 year ago. if the consumer market is down 25% (and more in less desirable locations like many of shld’s leasees), then let’s assume there’s been a similar decline in commercial. we’re not there yet and probably a false assumption, but still an empirical data point. when brands are combined, is it worth more than $12B? sure. but esl has no intention of breaking the parts from the whole anytime soon.
as for the comment, “small improvements in the business will dramatically improve their cash flow” – poppy cock, balderdash. The operation has been completely UNSUCCESSFUL at making any kind of small improvement in the business, good economy or bad! will it perform better? well, can it get much worse than losing money?
esl has 70% of his personal net worth tied up in shld. he will make money here, somehow, someway. the question is when and at what price. for longterm investors, this is the bigger question. is it a 100% bagger from current price? if so, when? 5 years? 10 years? or is it a 30% bagger? therein lies the investment gamble and that is not something you can quantify.
rather, the last two posts were NOT from the other anon. i avoid personal attacks. i do, however, think you’re better than stooping to his level, todd.
Anon,
The fact is, I have no clue where the ultimate value is going to come from this investment. What is your argument? Is it that Sears retail strategy has had much trouble in the last year and a half? If so, I agree with you.
Is your argument that the company won’t be worth $12B or more in the future? Then I highly disagree with you.
I don’t know how fast it’ll turn, I don’t know how high it’ll go. The point is, when I can’t come up with a plausible scenario, all rational factors considered, that I lose money buying Sears at it’s current valuation, I’m comfortable making an investment. You said it yourself, Eddie will find a way to make money off of this investment (he’s already made lots).
Knowing that the downside is nil and the upside is tough to quantify is something I’m 100% comfortable with. It’s reasonably possible that the company can produce over $2B in annual free cash flow when the economy turns up. They can engage in sales of underperforming retail locations. They can license out the brands to be put in other retailers.
The point is, Eddie can wring a heck of a lot of cash out of Sears, without catching up with the Wal-Marts of retail. Would I buy Sears at $220/share? Probably not.
Valuation matters. When you eliminate the downside, the other options look darn good. I know I have people working there who want to make money as badly as I do. Arguing whether the retail stores will turn around is futile. I don’t know if they will, and frankly it matters little to me.
If you put yourself in a probabalistic mindset, the uncertainty shouldn’t bother you. I respect your thoughts, and your points are valid. I just think you are too easily glossing over how the market is valuing Sears and its cash generating prospects.
I can reasonably predict how much cash flow Coke will have in 5 years. I cannot do that with Sears, admittedly. But the way that the auction mechanism works in the stock market is such that I’m more comfortable investing in the latter than the former at their current values.
jeff – a very fair post. i appreciate the non-dog private part reference, non-toilet humor.
as a former employee and current vendor, i do believe the value of the parts exceeds the whole. i also believe eddie is delusional in thinking he can turn around the business. i would argue, and have done so on other boards, eddie has brilliantly organized the business as a hedge. securitizing the brands, separating the assets into individual businesses. he needs to incorporate the real estate component as a reit, the component with the greatest value. esl is trying to turn around the business, but has a hedge if it doesn’t.
note that in all my posts, i do NOT argue about valuation or share price. i do argue about performance, which is dismal. hard to argue there. wall street is valuing the current business appropriately. is there downside? i believe there is. your question is whether there’s more downside at this point than upside? i don’t think so. services is probably worth $1b. brands are worth maybe $4b. real estate, let’s say at current market levels is worth $15b ($30/sq ft. – arguable, i’m sure, but given their second and third tier locations, i’m not sure who wants them). that values the company around $20b at current levels. is there a discount? yes. is it a justifiable, rational discount? yes. by not investing in the business, he’s actually decreasing the value of his real estate holdings the same way a homeowner decreases the value of the home by not investing in upkeep. now, what’s the potential value? as you said, i don’t know. is it double? maybe, esp. with share buy-backs. so, is sears worth investing? i would argue yes. if you can afford a 20% downside ($70/share), you can gain a greater than 20% upside (more likely).
my main issue is when people (supposed pundits) laud their current performance as “not surprising” or “better than expected”. the performance is terrible. call a spade a spade instead of blindly following the cult of eddie. the reality is that there is no hurry here, assuming he can make money in the coming quarters and not lose it. actually, maybe losing money is better- it might expedite the inevitable.
So, I do a google search to see what I can find out about the value of SHLD real estate and I find a WSJ article from Oct 2007 that says Sears break-up value is $300 a share thanks to it’s coveted real estate and an article by Hank Greenburg from Jan 2008 that has an off the record analyst saying the value of the RE is well below $10 Billion (which Greenburg seems to suggest is a consensus estimate) and in fact, the RE value of SHLD may be negative. So, I hope that clarifies things for everyone.
And Todd says successful investing doesn’t have to be difficult–insert raspberry sound here.
anon,
when i say “not surprising” i was not. in other posts and comments on them i have said i expect “dismal” results for at least through the summer..Lampert himself as much as said so at the annual meeting
that being said, a loss does qualify as dismal. to say they are disappointing based on “analyst” expectations well, don’t listen to the three or four of them that cover the stock. the shock ought to have been had the analysts actually been near the real results (again, anytime in the last three years) they have not be even close to correct in either direction.
i have also said in previous posts that “sears as we know will cease to exist in 5 years”. does that mean sears is done? no. i fully expect kmart to be history in 3 years and sears to exist in some format (although much smaller).
Since last summer i have said it is a brand story and only now is that happening. i will never get too worked up over a quarter or two in either direction.
i did not invest in sears as a “retail turnaround” but as a vehicle for lampert. until that story changes and the business stops producing cash for him, i’m in.
As for your reinvesting in stores leading to decreased value ala the home owner, the analogy does not really hold. were target to take over a shld location, it would be gutted. whether or not lampert has put a fresh coat of paint on it or new flooring, is immaterial. target would take it down to the concrete and start fresh, they are buying a shell, nothing more…
as for the shell, that is maintained by the landlord or mall operator, not sears…
having done the retail space rental thing more than a few times, what the interior looks like is practically irrelevant as long as it is structurally sound..
i think we are in a way arguing the same point from a different direction?
dingo…
ignore greenburg…he is seldom accurate…
how can you have a “negative RE value” with 99 year leases at chump terms? Herb likes to say crazy things to stir stuff up…
Anon, Todd:
We are really on the same page here, basically. I think what Anon is saying is that Sears is indeed performing horribly from a retail standpoint. On that point I agree.
However, like Todd, I am really not that surprised. When I bought into Sears, I knew that the retail story was not very strong, but I knew they had other assets with more.
The main point is that you need to have an extended time horizon. The analysts suffer from a crippling case of short-termism. If you can’t see out further than a few quarters, then god help your portfolio.
Lastly, of course they are trying to at least operate the retail business. The thing still produces serious cash flow, and Lampert would be a fool to merely give up on it. The focus should be: Where is he putting their capital? Well, it’s sure not in retail. He’s putting the majority of it in greener pastures: debt reduction, share buybacks, and pension reduction. The strength of their balance sheet is underrated.
You said you were frustrated. Don’t be. Just be patient with the hand being dealt right now and extend the time horizon of your thinking. Check back in 12-24 months and see what’s going on then…
Don’t just look at how the operating business and real estate are worth now…but look at what they will be worth in a few years. Not only will the operations be improved, and the brands utilized, but revised investor expectations will propel valuation. When analysts short term laser beam hits a more promising 12 months, the stock should be worth much more.
Till then, just hold on.