Where have you been shopping lately? At
Macy's (NYSE:
M
)
for clothes, or
Wal-Mart (NYSE:
WMT
)
for toys or at
Bed, Bath & Beyond (Nasdaq:
BBBY
)
for a new set of linens? Chances are
Sears Holdings (Nasdaq:
SHLD
) hasn't gotten much of your business lately. At least if
same-store sales are any guide.
The retailer, which operates the Sears and Kmart chains, seems
to lose more foot traffic with each passing quarter. Indeed,
same-store sales fell again the fiscal second-quarter -- by a sharp
amount -- and it's starting to look as if this retailer may go the
way of Montgomery Ward and Ames -- to the graveyard of
ex-retailers.
Meanwhile,shares are rallying, thanks to a series of financial
maneuverings. Yet, it won't be too long before management runs of
out of tricks, and falling sales take this stock far lower.
Squeezing out cash
Ever since hedge-fund titan and Sears Holdings Chairman Eddie
Lampert merged Kmart and Sears Roebuck and Co. in 2005, he's been
on a mission to bleed cash out of the business. It's actually quite
simple: If you stop putting money into stores, then you can
generate good bottom-line results -- at least for awhile.
Eventually, you end up with fewer customers and operation costs
begin to outweigh sales. Kmart in particular has become a poster
child for a neglected retail brand. In the second-quarter,
same-store sales plunged more than 4%. Sears stores saw this metric
drop 3%. Remarkably, Sears has already been closing underperforming
locations, so these are the results being posted by presumably
stronger stores in the chain.
Management's plan to stem the erosion: Close more
underperforming stores. Of course, this process can only continue
until there are no more stores left to close.
Yet, you would have no idea of Sears' deep distress if you
looked at the stock price chart. Lampert and his board have managed
to keep raising cash by selling off various assets (with plans to
sell Sears Hometown and the outlet stores slated for sale this
quarter). Those moves have derailed the thesis of short sellers
that Sears' $4 billiondebt load will soon choke thebalance sheet .
And short-covering has been a key factor by this stock's recent
upward move.
Excluding the effect ofasset sales, Sears lost $1.18 a share in
the second-quarter, even worse than the $0.84 a share consensus
forecast. Analysts now say Sears could lose $3 a share in the
currentfiscal year , and a similar amount in each of the next two
years as well. Goldman Sachs, which rates the stock a "sell" with a
$33price target , is troubled by lower revenue spread across
highoverhead , or what theycall "severe SG&A deleverage," a
process which involves selling off assets to reduce debt. That
price target, which is roughly 55% of the current share price,
equates anEBITDA multiple of 11. And even that target is pretty
rich compared to other retailers.
Sears' supporters note that the company still has a considerable
amount ofreal estate . "However, many locations, leased or owned,
tend to be in economically challenged communities or in older malls
that continue to experience declining traffic patterns," note
analysts at Morningstar, who say thatfair value for this stock is
around $37.
Risks to Consider:
As an upside risk, a rise in consumer spending could give a
lift to all retail stocks including Sears.
Action to Take -->
Morningstar's Paul Swin neatly sums up this retailer's predicament:
"Sears can't shrink its way to profitability. Sales keep declining
as fast or faster than management can cut costs and reduceinventory
. Store closings will not be enough."
Many older investors continue to hold on to this stock as a
legacy position, recalling the days when this was a Dow component
and a solid performer. Those days are long gone and the recent
rally provides the perfect opportunity to unload this holding
before it tumbles back down.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.