Here is a Bloomberg interview with Fairholme’s Bruce Berkowitz in which he talks about Sears Holdings

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

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Funny how perceptions rule investing. The Gap (GPS) reported earnings Thursday and investors like the news, sending shares up 5% during a day that saw a 300 point drop on the Dow (.DJI). In reading the plan, which I think is a very good one, I could not help thinking, “where have I heard this before”.

First, the numbers:
** Net earnings were $265 million or $0.35 per share.
** Gross margin increased 220 basis points to 34.8%
** Completed our $1.5 billion share repurchase authorization, purchasing almost 30 million shares in the fourth quarter.
** Generated $1.4 billion in free cash flow,
** Full year earnings were $833 million or $1.05 per share, versus $0.93 last year.

Very good numbers considering sales fell 5% (comp. sales down 3% vs 7% last year). But, like I have said before, given the current environment, retailers investors should expect deterioration here.

CEO Glen Murphy laid out the new direction:
1- A renewed focus inside the business on return on invested capital.
2- The only sq. footage growth will be outside the US
3- Improve earnings with a focus in growing margin dollars. Said Murphy during the earnings call, “We understand the importance of top line growth. We certainly understand the importance of store comps. But in this environment, given where we are in our turnaround, it is the prudent approach to focus on growth in gross margin dollars.”
4- Finalize a by brand, by channel, by country, a set of real estate plans.
5- Biggest area of opportunity is in cost of goods sold currently “nowhere near were it should be”
6- Complete current share repurchase and added an additional $1 billion.

Isn’t this almost Sears Holdings (SHLD) Eddie Lampert’s playbook verbatim? Now clearly there are some difference (Sears owns far more real estate, has more advantageous leases and have a different model shopper) but the essence of the plan is Lampert’s. Reduce costs, maximize return on investment and repurchase shares.

Gap will not be hit nearly as hard a Sears due to housing as they sell no appliances, lawn mowers etc. and that will cushion them. Also, consider the company is essentially debt free with only about $190 million outstanding. That translates to a very strong balance sheet.

To date Murphy has done a fantastic job and looking at the metrics he has to work with, he has the opportunity to wring more profits out of the company just by controlling costs even if the retail environment continues to falter (it should).

I have been watching Gap shares for almost a year now but I am hesitant to commit more money to a retailer now given all the uncertainties out there but when it is time, Gap is creeping up the list quickly.
Disclosure (“none” means no position):Long SHLD, None

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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

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Sears Holdings (SHLD) Eddie Lampert released his latest shareholder letter. While much of is a recitation of results, there are clear signs into the companies direction.

It is going to become all about the brands:

First this:
“One of our most important resources is the great brands we own, in particular DieHard, Craftsman, Kenmore, and Lands’ End. All four of these brands have significant equity with customers and provide tremendous opportunity for value creation. To illustrate, let me discuss one of them, DieHard, in more detail. Based on brand recognition studies, DieHard leads in customer recognition among car battery brands by a wide margin, but it lags dramatically in market share. Why? We believe it is due to fewer points of distribution. As a proprietary brand, DieHard is only available in 900 Sears Auto Centers and 1,400 Kmart stores. Yet it is competing with other batteries that are available in thousands of locations across the country. Further, a car battery purchase is a duress purchase event, in which the customer is looking for the nearest, most convenient solution. Unfortunately, it is not always us, but there is an opportunity for us to rethink our brand distribution strategy to create value. “

Then:

“Our mission is to provide our customers with the products and services they want. And, we need to be prepared to supply them where and when our customers want. In many cases, that may not be exclusively through our stores. Instead, it could be online, via catalog, or possibly even through other retail outlets. We will now have a dedicated brand team who will manage our branded products – Kenmore, Craftsman, and DieHard, that way. Furthermore, we will have a Real Estate business that will act as an internal landlord, providing access to space and maximizing the value of that space over time. In order to be successful in the future we need to more quickly adapt to the changing marketplace and we believe that this structure will help us do that. We have begun the process of transforming the organization to this new model, but it will take some time to build the processes and information systems necessary to support the structure.”

There is more, including a record year that saw Land’s End post a 12% profit gain and others, but I wanted to get this out early. More to come later………

Read the full letter here:
Disclosure (“none” means no position): Long SHLD

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Whitney talks about what to look for in the current environment.

Frannie Mae (FMN), Freddie Mac (FRE), Merrill Lynch (MER), Sears Holdings (SHLD)and Target (TGT) are discussed.

Whitney says the “break up” value of Sears is $250 a share. He goes into good detail on it.

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

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