Well, its official, the boo-bird are back out on Eddie Lampert after Sears Holdings (SHLD) recent quarter. Now, it should be noted this is after Q1 results that “surprised” everyone being better that expected and the stock rallied from $35 to near $80.
So, who is right, the cheerleaders or the boo-birds? Neither.
Unlike any other retailers, Sears is mainlined to the US housing market. With 40% of the US market share for appliances, what happens in housing is acutely felt at Sears. With that appliance share, when housing is good, Sears will do well, unfortunately, the opposite hold true. When folks comes to Sears for an appliance for a new home, they will pick up paint in the paint dept., lawn tools, bedding, TV’s etc…
Let look at some number more closely. At Q1 2007 American’s were buying (at an annualized rate) $281 billion in “Furnishings and durable household equipment” (furniture, appliances). That represented the high water mark for that category (wasn’t that the peak in most housing markets also?). FY ending 2/2007 also marks the high water mark for Sears Holdings earnings (the annual average in 2006 vs 2005 for consumer expenditures rose appreciably). By the time Q4 2008 rolled around, consumers were now buying $259 billion a year of those products, a $22 billion annual decline. Remember, Sears holds 40% of the US appliance market. (Note, not all of the $22 billion are appliance sales but with Sears selling appliances and furniture, it is safe to say a significant chunk of the revenue declines at Sears can be traced directly here).
As of Q2 2009, that number is now at $251 billion annually. As of just Q2 2008 the number was $276 billion, an unprescedented one year drop. Anyone still wondering why Sears is seeing declines? ….
Appliances are the main reason folks come to Sears, absent that reason, Sears is just another retailer. So, when housing rebounds, one ought to expect Sears to once again show top-line growth. For that reason, the Q1 Cheerleaders came out way to soon and will probably stay hidden until Q1 or Q2 2010 when housing begin to gain some footing. The good news for them is that by then comps. will be so low that Lampert & Co. will be able to step over them.
Now for the boo-birds. You will be correct for now. BUT, lets look at what Lampert has done. He has steadily used Sears cash to repurchase shares. This is meaningless now but when housing does turn, the 20%+ fewer shares there will be outstanding will mean that a $1 million profit next year will equate to a 20% higher per share number, that is huge. For that reason, Lampert will not even have to deliver profit dollars in absolute numbers anywhere near what he did in the past for shareholder to reap large gains.
For several years the boo-birds have been saying Sears is “dead”, “dying” etc. Yet it has maintained a balance sheet healthier than almost every large retailers with the exception of Wal-Mart (WMT) and Target (TGT). Sears is not going to become extinct. The stories you are reading today are essentially reprints from any bad quarter over the last 4 years. Ignore them. Will Sears still be a big box retailer 5 years from now? Maybe, maybe not. The point is, “Sears Holdings” will still exist.
Sears is also making radically changing its online presence in a way that will differentiate it from all other brick and mortar retailers. It way too soon to know if this will payoff but if it does, the payoff will be multiples of what was invested. Pay attention to MyGofer, my gut tells me there is something there consumers will flock too.
My friend “Davidson” has this take on Sears:
While Lampert has improved the financial structure and efficiencies, he has not yet unlocked the value of the brands, i.e. Lands End, Die Hard and Craftsman. He needs to lay out a plan of attack in my opinion that lets investors understand his thinking on expanding brand distribution. At the moment they appear to be locked-up within a dull plain wrapper that is frayed at the corners.
He is right. Lampert’s silence is just fine when things are going great, but, when things are shaky, nervous investors need to be reassured or communicated with more. Lampert need not hold investors hands or bother giving guidance to Wall St., but an occasional letter to shareholders would not hurt. Davidson is right in his call for Lampert to communicate the strategy, shareholders “think” they know the strategy, but no one really “knows”.
I do get the whole “long term approach” Lampert espouses, but if folks are not clear where the ship is ultimately headed to, I’m not sure they can accurately look at where it is today and make an accurate assessment of progress.
A note: After Q2 Morningstar raised its “fair value” for Sears to $105 (hat tip reader Justin)
Just remember, most of what is said out there is simply “noise”.
Sears = Housing, don’t forget it.
Disclosure (“none” means no position):Long SHLD, WMT, none
