Sears Bankruptcy? Really? Let’s Just Look Closer

So when Jud emailed me this yesterday I spit coffee out my nose. I recommend not doing that, it hurts. Anyway, since things are slow here for the moment, let look at it.

So the jist of the article was that:
“It’s the economy, stupid. We are in a recession, sales and profit margin are falling year over year at Sears. Commercial real estate values are falling. Eddie wil unlikely sell any property at an attractive price anytime soon. In recent years, under the leadership of Eddie Lampert, Sears cut marketing expenses to the bone. There’s nothing left to cut. In its latest quarter ended May 3, 2008, the company posted a pretax loss of $64 million vs. pretax income of $381 million in the same period last year. As the economy gets tough for some extended period and the housing bust continues to get worse, departement stores like Sears will lose more business to the discount retailers. It will be increasingly more diffcult to turn a profit at Sears and K-Mart.

Sears Holding has bought back $2.96 billion dollars worth of stock in 2007, and that leaves Sears with very little or no money on hand to endure an economic downturn. That stress has clearly shown up in its latest quarter, as it had to borrow $646 million dollars in short term commercial paper to cover some cash flow issues.

I have a hard time believing that Sears will turn a profit this year, with almost $10 billion dollars in total current liability, and only $13 billion dollars in current assets, mainly comprised of $10.3 billion in inventory. A bankruptcy filing for Sears Holdings is a real possibility in the next two years if it continues to struggle.”

Where to start. Yes Sears did lose $64 million last quarter its first quarterly loss in over three years. That also left it with $1.4 billion (yes billion) in cash on the books. It should be noted that almost three times Macy’s (M) and Kohl’s (KSS) combined! That number is twice what sits on the books over at Home Depot (HD). It is also essentially equal to that of JC Penny (JCP) and Lowes (LOW). The main difference between JC Penny, Lowes and Sears is that Sears carries 40% LESS long term debt that Penny’s and Lowes do.

Sears carries the same amount of debt as Kohl’s does despite having in excess of three times Kohl’s sales and has 1/4 the debt of Macy’s despite almost doubling its sales. If we look at Home Depot, Sears tallies 65% of the sales the Depot does yet carries less than 20% of the debt of its appliance rival. In short Sears has the strength of balance sheet second only to Wal-Mart (WMT) and Target (TGT).

The exercise here is that if we are looking for a retailer that may face bankruptcy, I think a cursory look could find more likely candidates.

But hey, why listen to me? Let’s hear what none other than Bruce Berkowitz has to say.

Read more of Berkowitz’s thoughts on Sears here:

One also can easily look at the stunning success of the Land’s End brand.

From the article:

“But one part of the $50.7 billion company is sparkling: Lands’ End (SHLD). The apparel subsidiary is thriving with its reputation for impeccable customer service and sturdy-but-stylish designs. While Sears doesn’t break out numbers, retail analyst Anne Brouwer of Chicago’s McMillan/Doolittle estimates the unit made $200 million on $2.2 billion in sales last year. The Lands’ End Web site, where the brand rings up 80% of sales, is among the retailing industry’s top 10 by several measures. And offline sales are rising as Sears has put Lands’ End boutiques in more than 200 of its 935 mall stores. Retail consultant Howard Davidowitz calls the business “Sears’ shining star.”

More:
“Lands’ End was not such a gem when Sears acquired the company in 2002 for $1.9 billion. At the time, its apparel was available only online or through catalogs, and was generally seen as well-made but staid preppy gear. Seeking a chance to broaden its apparel offerings, Sears quickly began stocking Lands’ End shirts and slacks in stores, though it kept the two brands’ Web sites separate. But Lands’ End got lost in the aisles until Lampert took over Sears and pushed to build the brand. In mid-2005, a month after McCreight became president, Sears opened the first Lands’ End boutique in a White Plains (N.Y.) store.

With its own look and branding, McCreight’s store-within-a-store worked. He says transforming the brand’s catalog image into a physical space was “a once-in-a-lifetime career opportunity.” Analyst Brouwer figures the Lands’ End boutiques bring in at least $200 in sales per square foot annually. That’s just a third what a top retailer such as Nordstrom (JWN) produces, she says, but it’s far ahead of the $137 per square foot Sears averages from its goods and apparel.”

Almost forgot. The “had to borrow $646 million for cash flow issues” statement. A quick read of the last earnings release told us that as of the time of the release $400 million of it has been repaid. In other words it was a non-issue.

No folks, a Sears BK is not in the cards. Think of it this way. Sears is heavily levered to housing (a top appliance seller) yet despite the worst housing environment in 6 decades they lost $64 million. If housing just returns to historically average levels (it will) the profit again begin to flow.

I am buying more after the next earnings release. Do I expect a loss. Probably a nominal one unless Lampert pulled a rabbit out of his hat with the excess inventory. Chumps will sell off shares and I will pick some more up. I bet Ackman and Berkowitz will be there with me.

Good company…..

Disclosure (“none” means no position):Long SHLD, WMT none

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