Tag: SHLD

Wal-Mart (WMT) shares are selling off today because they announced they are reducing CapEx plans to $14.4 to$15.4 billion. Good..

Originally Wal-Mart had forecast capex of $17 billion for 2007 and then in July lowered that number to $15.5 billion when they also announced a $15 billion share repurchase plan. Chief Administrative Officer John Menzer said recently the retailer’s goal was to beat that $15.5 billion figure. They will. For the first 8 months of this fiscal year, comparable sales at U.S. stores were up 1.5%, compared with a year-earlier gain of 2.6%. For its fiscal years 2009 and 2010, Wal-Mart forecast capital expenditures of $13.5 billion to $15.2 billion.

Investor apparently wanted more of a reduction but if the past is any predictor of the future, these new numbers are the upper limit of what we can expect. The good news is that they are steadily going down.

What really needs to be watched are the share repurchases. The last quarter $1 billion was bought and while a large number, it is a “base” level of what one would expect from a $178 billion company. Wal-Mart shares have not been this low in over 1/2 a decade now. One would expect them to be tripping over themselves to repurchase shares at these depressed prices like Sears Holdings (SHLD) Eddie Lampert is. I am looking for at least $1.5 to $2 billion in the current quarter, anything less is unacceptable. If current management is serious about shareholders, the almost $3 billion reduction in capex spending ought to go directly to repurchasing stock.

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Well that did not take long at all.

Just two week ago I commented that the Lands end store in a store concept was on track and Sears Holdings (SHLD) announced this past week that they have reached to 200 store goal ahead of schedule.

To celebrate the opening of the 200th Lands’ End Shop at Sears , the company is asking customers to share where they’d like to see the next Shop located. click here
“We’ve had an overwhelming response from customers to the Lands’ End Shops at Sears,” said David McCreight, president, Lands’ End. “People write to tell us how thrilled they are to have us in their communities. We also receive a number of letters saying ‘we hear you are in Sears — when are you coming to my town?'”

Lands’ End will accept customer suggestions for the location of the next Lands’ End Shop at Sears between September 25 and December 31, 2007. Customers can send their suggestions to nextshop@landsend.com, by calling 1-800-800-5800

“We’ve had an overwhelming response from customers to the Lands’ End Shops at Sears,” said David McCreight, president, Lands’ End. “People write to tell us how thrilled they are to have us in their communities. We also receive a number of letters saying ‘we hear you are in Sears — when are you coming to my town?'”

I have been saying since February that the future of Sears retailing is the Land’s End concept. Now, that being said we need some more information when earnings are released. For instance, we know that Lands end will report another record year for sales and earnings. But, when you double your locations sales and earning are bound to produce record results. Now that Lands End is becoming a more dominant earnings driver for Sears Holdings, we need to know how it is doing.

While I agree with Lampert that same store sales are not the end all be all metric for retailers, if Lands End is going to be the future, we need to know how the stores with the store-in-a-store (SIS) concept are performing vs those that do not have it. Are the retail operation at these locations experiencing positive results? If they are not, at least is the decline less that those without them?

My opinion is that those stores with the SIS concept are experiencing much better results than those without. Even if sales are level, profitability should be far greater. Lampert could easily boost shares and quell the naysayers out there by releasing this information. But, he may keep the results under wraps while he finishes buying the $2 billion worth or stock he wants at the current low prices.

I do not expect them to break it out at the next earnings announcement but I would like to see it when the annual results are released. If the results are what I anticipate them to be, it would illustrate positive momentum on the retailing level and really go along way to help shareholders (of which Lampert is the largest).

On another note. It is real satisfying to see Lampert not let anything stop him from accomplishing stated goals to shareholders. It would have been real easy to slow down the expansion given the current retail environment and just focus on share repurchases. As a shareholder it is nice to know that when the Chairman says “we are going to do “X””, it gets done.

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In mid May I wrote a post about selling my Citigroup shares to Sears Holdings (SHLD) Chairman and ESL leader Eddie Lampert.

In it I lamented the fact that I was thinking along the same lines as Lampert but did not stick to my guns and bailed on Citi (C) shares at the same time Lampert was buying them. I vowed not to make the same mistake again and re-entered my Citi position. This turned out to be a great test as recent events (has anyone heard anything about a credit market issue?) have caused my Citi position to drop from $54 to todays $45 (Lampert’s original entry price was estimated to be around $54 a share). Rather than cutting my losses last week (August 9th) I picked up more shares at $47.57 in part of my vow not to make the same mistake twice and I do not mind getting paid a 4.6% and growing dividend to wait. At the same time I picked up more Sears Holdings shares some 30% off it’s high from earlier this year at $130 and change.

I took a large amount of satisfaction in the news that Lampert boosted his stake in Citigroup by 63 percent during Q2. In a SEC filing, ESL Investments held 24.8 million Citigroup shares at the end Q2, up from 15.2 million shares during the first quarter. Compound this with the news of the additional $1.5 billion Sears share buyback plan announced Monday and it has been a very good couple weeks for my investment reasoning.

Since ESL was founded in 1988, Lampert has lost money only twice, in 1990 and 2002 (he followed the 2002 losses with 45% and 54% returns in 2003 and 2004) and has treated clients to annualized returns of 24%.

Based on his history, Lampert will not make any public proclamations about the job Citi CEO Chuck Prince is doing and whether or not he should keep it. He works behind the scenes and this is probably part of the reason he is almost always able to get the changes he wants enacted with little push back from management.

Time will tell how this works out I am very optimistic that based on his track record and my thinking along the same lines recently (after a very irritating lesson earlier in the year) that these investment will turn out very well indeed.

Yesterday I said the only thing I really cared about was the number of shares Wal-Mart (WMT) bought back in the last three months and a minimum of 22 million shares was the number I was looking for. The results were released today and the share count was reduce from 4,128,0000 shares to 4,102,000 in the last three months for a total 26 million share reduction.

Good, but for some reason I am not totally happy. The reason? They updated their full year guidance for earnings per share from continuing operations for 2008, which now is estimated to be between $3.05 and $3.13. This is down from the initial forecast of between $3.15 and $3.23 per share. Now, this is only a 3% reduction and the market is over reacting today to it like they have been everything else the past month but bad news is bad news.

Here is the thing. Wal-Mart still sits on $6 billion in cash. Why aren’t they picking up shares like Eddie Lampert is at Sears Holdings (SHLD)? One would think that Lee Scott would want to announce anything but a EPS decrease at this point. Any goodwill he got at the annual meeting with the shareholder friendly announcements he made is just about wiped out today. Why not accelerate the share repurchases to avoid that announcement? It is not like shares have run up in value to level not seen before, we have seen these levels for the majority of the 21st century.

Wal-Mart announced a $15 billion repurchase plan in June. If they bought back another $6 billion in the remainder of this year, that would reduce the share count by…. 3%! Where have we seen that number before? Oh, yeah, it is equal to the earnings reduction announced today. They could have avoided today’s announcement. Now, there is the possibility that Wal-Mart may be doing the old “reduce expectations and then beat them” game but based on it’s history, that is not very likely.

I think I am staring to wish Lee Scott was not there again. It has been an 18 month turnaround that looks to have stalled.

Next batter…

There was an article yesterday in “Financial Week” magazine about Sears Holding’s (SHLD) Chairman Eddie Lampert. The first sentence in the article denotes to tone of the misguided prose to follow: “Time is running out for Edward Lampert, the hedge fund manager who controls Sears Holdings.”

Okay, let’s just ignore the basic fact Lampert controls 50% of the company and until HE decides he is done, he will be in charge of Sears. Let’s also ignore the almost two decades of 29% annual returns he has given his investors. Further, we also need to ignore the trivial little fact shares in Sears Holdings have risen over 200% in the almost three years since the merger was announced. Let’s also ignore Kmart was in bankruptcy when Lampert bought it and Sears it had LOST $5.5 billion in the three years prior to his purchase. Let’s also ignore that he has taken that mess and turned it into an entity that has over $3 billion in the bank and throws off almost a billion dollars a year in cash flow. Again, in only two years since the merger was completed..

Now that we can ignore those facts, let’s get to the article. You can read the whole thing here before we get into it.

FW: “Slack sales and falling profit have knocked 20% off the share price since May, ratcheting up the pressure on Mr. Lampert to come up with a new strategy that will reverse the slide.”

VP: In a recent post I noted that each of the last three years have seen shares of Sears Holdings fallen 16%-25% from spring to the end of summer. This is nothing new for shareholders.

FW: “Sears’ recent announcement that net income will fall by almost half in the second quarter, the first decline since Mr. Lampert took control of the company in March 2005, shows his strategy of boosting earnings through cost cuts is no longer working.”

VP: Perhaps the author missed earnings news from Target (TGT), Macy’s (M), Home Depot (HD) and Lowes (LOW) and others in which they all also lowered expectations for investors. This is an industry event, not necessarily a company specific event.

FW: “Mr. Lampert’s options include the kind of financial engineering many expected from him when he merged Kmart into Sears in a $12.3 billion deal that left his hedge fund with a 43% stake in the combined company: sell Sears’ real estate or pull off another acquisition. His other choice: try to reinvigorate Sears by pumping a significant amount of cash into remodeling the stores and boosting advertising, the type of investment he’s been reluctant to make since installing himself as chairman.”

VP: Or a third choice. Rather than pour good money into wastefull enterprises that have proven inefficient, how about we fix them by making multi million dollar IT investments so we do not continue losing money. How about we also stop discounting our merchandise chasing unprofitable sales just for the sake of a “analyst metric” and actually sell our goods at a profit. Now, sales will be negatively affected but profits will rise (they have). Then, after we have stopped the hemorrhaging of our finances, we can take a good look at where we stand and go from there, at least then we will have a financially strong balance sheet. This was Lampert’s plan from the get go by the way and to date it has worked.

FW: “Cash flow, which surged early in Mr. Lampert’s tenure, has been declining since last year. Total cash is expected to drop to $2.8 billion by August from $4 billion in February.

A plan announced this month to repurchase $1 billion in Sears shares will buy time but it won’t reverse declining sales.”

VP: This is entirely misleading. Cash flow has decreased,true. Why? Easy, Lampert and company have bought over 2 million of Sears shares and paid off debt. In the last year they reduced debt by almost $1 billion and bought back 2 million shares at a cost of about $350 million. If we do the simple math $4 – $2.8 = $1.2 billion OR almost exactly the same amount of money spent of debt reduction and share repurchases. HMMM.. funny how that works out. Right, buying back shares and sales have nothing in common, but, buying back shares, reducing debt and earning per share do and isn’t that what we value stock prices on?

FW: “Rather than fix stores, he could opt for a financial maneuver to raise more cash—such as selling real estate. But that won’t fetch as much as it would have before demand for shopping mall real estate slumped around the country.

Or he could try to bolster the company with the acquisition of another retailer, perhaps a grocery chain like Safeway or a big-box retailer like B.J. Wholesale Club. But his record so far with Sears and Kmart raises questions about his ability to integrate a third acquisition.”

VP: Correct he could do any of those but to expect Lampert to sell real estate or even float it as a option in the current environment is just silly. Has anyone notice out there that when he sold chunks of Sears and Kmart real estate it was, as it turned out to be, almost the peak of the market? If, anything, one should expect him to be a buyer in today’s market and not a seller.

Can anyone tell me what a grocery retailer and a clothing retailer have in common and how we would need to worry about the “integration” of the two? This is a bit like Berkshire Hathaway (BRK.A) shareholders fretting because Dairy Queen and Geico Insurance have “no synergies”.

This is what happens when you set out to write a negative piece on a company that you do not really understand, you miss some things..

With all the clatter out there about Sears Holdings (SHLD) results and the frustration out there a look back is necessary. I was emailed a copy of the press conference announcing the merger of Kmart and Sears by the blog “Concentrated Value” and it was very revealing given what has transpired since and what may happen down the road.

Lampert on Earnings:
“And given the large ownership that we will have on the Board, we will be able, similar to what Kmart has been able to do for the last couple of years, we will be able to manage the business strategically and for the long-term without having to worry about figuring out how to make monthly same-store sales, hit a specific target, and without giving any type of quarterly earnings guidance and then trying to manage the business to that guidance. We understand the potential for the combination. We’re going to manage to the potential, and we’re not going to manage to try to generate sort of steady progress. It’s going to be probably lumpy progress over time.“

Lampert On Real Estate Value
” I don’t think any retailer should aspire to have its real estate be worth more than its operating business. There’s been a lot of speculation about real estate strategy, real estate value, and I think that there is some truth to the notion that there are certain retailers whose real estate is worth more than its operating business. I think while that may have been true at Kmart at one point in time, we’ve worked very, very hard to improve the profitability of each of our stores and to make those stores worth a lot more as an operating business than as real estate. The more money the store makes, the more valuable they are as operating businesses, and that’s something that I think the combined company can do very, very well.

To the extent that we have stores that can produce the type of profit that we’re looking for, we would have to consider other alternatives. I think well-run retailers over time should be able to earn a 10 percent EBITDA to sales ratio. I think when you look at Home Depot, you look at Target, you look at The Gap, they all achieve that metric. And again, that’s not something we think that we’re going to be able to do anytime soon, but that’s something that we’re going to work towards. We’re going to work towards best-in-class financial metrics and best-in-class customer metrics.”

Lewis on Cost Savings
“Savings we expect to be fully realized by the end of the third year. We expect this transaction to be accretive in the first year, excluding some onetime costs”

Lampert responding to the comment: Beyond doubling the synergies here, you are not just doubling the challenges also; taking 2 admittedly weaker retailers and just increasing the challenges that both of them face in one larger perhaps weaker retailer entity?

“You made the sure statement that you’re talking about 2 weaker retailers, and I would say that there is probably unanimity of opinion that that’s the perception of the 2 companies. My perception of Sears is that in terms of the Sears experience, the Sears service, and certainly the Sears products, they’re every bit as good as any of its competition. The problem is they are not where the customers are, and that’s the big opportunity. It is not that the retailer per se is weak, but if you have the greatest store and it’s not near where the customers are, that’s a problem. So I think Sears has a very, very different problem in a sense, or had a different problem than Kmart had. So I think that it’s a pretty substantial opportunity to simply bring Sears experience and the Sears product closer where, by the way, Home Depot, Best Buy, Lowe’s, Target, Wal-Mart, that is where they are building, that’s where they’re growing. We’re there. We know it because they seem to want to open stores near us, meaning Kmart, because we are perceived as a weak competitor.

In effect, Sears in a Kmart box in that same environment ought to do very, very well. So that’s the presumption; we’ve got to make it happen. So I think that is really the answer to the first question. In terms of cross-merchandising, we’re going to try all different types of things, and I think that we have the ability because we have such a large store base to experiment. And we’re going to get some things right and we’re going to get some things wrong. But we’re going to have a flexible culture, and with a flexible culture, we’re going to correct our mistakes quickly and move onto something else.”

Lampert on Capital Allocation

“I would say that in terms of capital allocation, I mean that is something that I think that this company will do very, very well. It is great to have internal opportunities where you could actually take the free cash flow and invest it in the business. We have a very significant opportunity, whether it is converting the Kmart stores to Sears, whether it is converting the Kmart stores to a better version of a Kmart store. But we are going to have very strict return on capital requirements, and we’re going to want to allocate the capital to where the best — where it is best used. And if the best use is to repurchase shares, we’re going to look at that. If it is to build new stores, we’re going to look at that.

I think it is important that at least through the transition period, we have a very, very strong balance sheet. And I think that Kmart went through a period where it had a weak balance sheet, and we basically built up sort of undeniable financial strength. I think once Sears sold the credit card business, its balance sheet was very, very significantly strengthened. And I think on a combined basis, you look at the combined cash flow, we feel obviously very comfortable with where we’re coming out of the box. But I do think that at different stages of opportunity, you have different capital structures, and it is something that I think we will critically review on an ongoing basis.”

So, where are we? Lampert and Lewis are managing the business exactly as they said they would just over two years ago. Lampert anticipated a bumpy earnings ride and it has been, he promised balance sheet improvement as a priority and has accomplished that, they also said they had no set idea as to merchandise and was going to try various ideas and are doing it. Notice no mention of the Land’s End expansion currently underway and this illustrates they are flexible and still looking at ways to improve and coming up with new ideas.

All in all, the plan is being executed as initially proposed. It seems the first two years were being spent fixing the financial mess the two separate retailers were in and now we are onto the sales end. That this stage of the plan has coincided with the housing bust and it’s corresponding effect on all retailers like Home Depot (HD), Target (TGT), Lowes (LOW) and Macy’s (M). It does also mean that other retailers will get cheaper and may mean that Lampert may choose to invest the cash in another retailer rather than build new stores from scratch.

Either way, it will be exciting

Now, the recent stock activity. Take a look at a long term chart of Sears Holdings here. The summers of 2004, 2005 and 2006 all saw large percentage share price declines of 15%, 26% and 15% respectively followed buy large run ups and no, same store sales were not increasing back then either. This current one is a great buying opportunity as shares are off 26% from their all time high, just like 2005. Let’s call it the “Annual Sears Summer Stock Sale Event”
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Wal-Mart (WMT) said Friday that a high level apparel executive resigned after the transition to more trendy items from low-priced basics failed to do anything for clothing sales. Claire Watts, executive vice president of apparel merchandising, stepped down Thursday to “pursue other interests,” said Sarah Clark, a spokeswoman for the world’s largest retailer. Yeah, “other interests” like “looking for a new job”.

Promoted along with the company’s move to relocate clothing operations to NYC was GAP veteran Dottie Mattison, formerly chief merchant for Walmart.com. She will oversee women’s apparel, jewelry, shoes and accessories as well as product development. Let’s honest, even if she only manages to bring the apparel offering at Wal-Mart to average, it will be a huge plus for earnings. As it stands now other retailers like Target (TGT), Macy’s (M), Sears Holdings (SHLD) and JC Pennys (JCP) are miles ahead of Wal-Mart.

Many people, including yours truly feel the changes are due to pressure from Allen Questrom has suggested them since joining the board in early June. Questrom was chairman and chief executive of J.C. Penney Co. from 2000 to December 2004. Now, JC Penny has been a great turnaround story so let’s let a guy who was there for the genesis of it make some suggestions, like I said before, can they do any worse?