It’s been a while since the last one…
Even after coming way off its highs of last year, Sears’ stock is trading at the nosebleed valuation of more than 26 times this year’s expected earnings. In comparison, discount retailers such as Wal-Mart Stores (WMT) and Costco Wholesale (COST) — both of which reported higher same-store sales in September, even as consumers deserted other stores — are trading in the mid-to-high teens. Not to mention lower profile retailers like TJX Cos. (TJX), whose chains draw brand-conscious consumers looking for a bargain, which is trading at a multiple of about 11.
Part of the reason for the anomaly could be Sears’ inclusion on the no-short sale list; indeed Thursday, after the ban expired, Sears fell sharply. Sears also benefits from a relatively small float, as several loyal investors have stuck by controlling shareholder Eddie Lampert. And the company has been steadily buying back stock, even as cash generation has slumped.
At some point, though, the faith in Mr. Lampert displayed by these investors may start to crumble. Recessions are the ultimate in Darwinian exercises for retailers. Every time there’s a severe economic downturn, a smattering of big and small retail chains go bankrupt. Recent months have already seen a handful of specialty chains file for Chapter 11 bankruptcy protection, including Steve & Barry’s, Linens ‘n Things and Mervyn’s. Others, like electronics chain Circuit City (CC) and drug store operation Rite Aid Corp. (RAD), face serious challenges. Sears’ prospects in an extended downturn aren’t much better.
OK…So let’s for a minute just sit back and reflect the inclusion of cash rich (it currently holds more cash that all the other combined), low debt (it currently has less than any of the other did) Sears with any of the above retailers. Why not look at is next to Macy’s (M), Kohl’s (KSS), JC Penny (JCP) or even Home Depot (HD)? My guess is the article would then have been far less dramatic or interesting as people would have come to the logical, “well, all of retail is suffering now” conclusion.
What the author alludes to but chooses not to focus on is that unlike at the above, Sears is still churning out profits and cash flow. He does note that Sears tumbled today after the “no short ban” was lifted. A 680 point drop on the Dow today would lead some to believe that perhaps this was not a “Sears specific event”?
The Sears shareholder base. This has merit. 86% of the shares are held by investors who typically have a holding period measured in years. In fact, Chairman Lampert himself controls 51% and isn’t going to be selling anytime soon. So, aside from the “naked shorting”, of Sears shares (IS THE SEC’S CHRIS COX STILL ON THE JOB?), in any given day only about 14% of the shares are going to be sold by anyone other than those who view purchasing a stock as “ownership”, not trading paper.
That math ought to lead anyone to conclude that there isn’t a ton of downside to shares, or , if there is, based on the reputations of the investors that hold shares, they most likely will eagerly be snapping them up.
Sears is a complicated investment both due to the various businesses and parts it has, and its evolving ownership base. A true “why isn’t it going down” analysis really cannot honestly be done in a pithy 3 paragraph piece…
When you have a stable investor base that is not inclined to sell, many of the usual daily market machinations and their effect of the stock price tend to not matter as much. That by the way, is a good thing…
I just may have avoided the 23% drop this month in the Dow..
Disclosure (“none” means no position):Long SHLD, none
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6 replies on “Another WSJ Hatchet Job on Sears”
Or maybe not
SHLD has plenty of problems:
1)Steady decline in marketshare and revenue even prior to the current unpleasantness.
2)The only retailer on the planet that doesn’t try to upgrade their stores or locations. That feeds #1.
3)Domestic cash flow has been crashing this fiscal year. Kmart will almost certainly go cashflow negative in the 3rd quarter and Domestic Sears might come close too.
4)Sears Canada became a cash cow during the rise of the Loonie, now with the Loonie suddenly crashing margins and revenue and cashflow are all going to take a sudden turn south (TJ Maxx provided a preview of that today).
4B)Buried in the last 10K was a mention that SHLD could suffer investment losses if the Loonie were to have a substantial drop. Sears also keeps almost half of its cash on hand in Canada and presumably in Canadian dollars.
5)SHLD competitors don’t have the cashflow history SHLD does, but they do have track records of growth and they can all cut capex and hunker down. Sears is already bottom of the barrel in capex spending so it doesn’t have anything left to cut except to start shutting down poor performing stores or possibly liquidating KMart altogether.
Todd,
I don’t know about you, but what I would really love to see from Eddie right now is a massive buyback. He could take probably 20 or 30 million shares off the table at current prices if he wanted to. In my opinion his actions over the next year or so will tell a lot about where he wants SHLD to go. If he issues a massive buyback or diversifies the company the BERK comparisons will be much more legitimate. What do you think Todd. Where do you think he’s going with this?
i don’t see him doing anything with the cash now but sitting tight until things relax out there
If he does nothing then I think all of the comparisons to Buffett are for not. This is the single best enviornment I can ever remember for finding value plays trading at just insane prices. If Eddie sits on his hands and does nothing then in my opinion he is making the mistake of a lifetime. Just look at what WEB bought up throughout the early 70’s… especially with the 73-74 bear market. Eddie has a once in a lifetime opportunity in the coming months to do the same, and to do nothing would be a tell tale sign that he has no intention of doing what Buffett did with BERK. He has been sitting on his hands now for over 4 years… time to put up or shut up, basically. Hopefully we can stop with all the Buffett comparisons regardless… they are not the same people, not even close.
Todd,
I own Sears and have for the last 2 years. I have a very small portfolio, but I know it will grow. I buy companies as a business and not as a stock certificate. When others were commenting on Eddie Lampert’s poor judgement for not expanding he said he was paying down debt and controlling costs stating that other companies who are expanding in markets are making a mistake because of the slowing economy. He was far ahead of the game.
I really do see an improvement in the company. I see Sears trucks everywhere. I had Sears come out and fix our oven and washing machine.
Is it not an advantage to Sears that Circuit City is almost Bankrupt, Linnen N’ Things is liquidating, Best Buy having issues, etc? The last retail standing will do very well. If he is smart enough to turn the lights down at some stores to save money in an obvious near depression in retail shouldn’t investors love that in a manager of their investment? I see some unbelievable value in this company and am buying shares when I can.
I saw that the large owner and Ceo of the Sands Casino lended his own company $250 million or whatever it was because they couldn’t get a loan.
Do you feel that Eddie has the resources to do this if necessary for Sears? Basically, my question is could Sears ever file for bankruptcy and kill the shareholders even with the massive amounts of assets? I am curious to see how safe my investment is. I could care less about the daily fluctuation of the stock price as long as it doesn’t go to zero in a bankruptcy filing!
BK??? No
that is advantage to lampert owning 65m shares..
there is still a billion in cash sitting there…
don’t worry