There are over 4000 Sears and Kmart retail stores in the US and
) continues to struggle to achieve profitability. Dwindling sales,
bad management decisions, and no clear attempts to improve branding
strategies have led to major declines in the company's stock price.
Most recently, Sears reported dismal Q1 earnings, posting a massive
net loss of $2.63 per share, down from a profit of $1.78 per share
in the prior year quarter. The steep slide far exceeded analysts'
consensus estimate for a loss of $0.60 per share. Revenue dropped
9% to $8.5 billion, also missing analysts' expectations of $8.74
billion. While unfavorable weather was partly to blame for soft
sales of spring seasonal merchandise, it fails to account for the
overall weakness - especially in the beleaguered Kmart division.
Sears continues to present a dreary image: For Q1 2013, the company
reported a year-on-year same-store sales decline of 3.6%, which
means that there have been seven straight years of same-store sales
declines. The only positive number was a 20% increase in online
The company has been working to better integrate its online channel
and retail stores, and to leverage the millions of customers in its
loyalty program called "Shop Your Way." "Shop Your Way" has
generated more than 60% of the company's revenues in the last
quarter, and on average, the members of the program spent 18% more
money in the stores than those who were not members.
However, just a boost in online sales would not be enough for the
company to stage a turnaround. The company took a $3 billion loss
in fiscal year 2012, and is expected to lose considerable amounts
at least through fiscal 2016. The company has been able to survive
over the past few years mainly due to sales of real estate and
other assets. Massive store closures, especially at Kmart, and
tighter inventory controls have also helped. Yet Sears lacks the
one thing it truly needs to bounce back: a viable plan to reverse
seven consecutive years of declining same-store sales.
's proprietary fundamental metrics, the company is bleeding red ink
across the board. Sears is the worst performer in its peer group as
seen on the quality-value chart below.
Sear's fundamental stock quality is worse than 75% of its peers.
This is mainly due to weak revenue growth, decline in net income,
poor profit margins, and weak financial standing relative to its
- The department store chain has seen revenues fall from $9.3
billion in Q1 2012 to $8.5 billion in Q1 2013. This along with an
increase in SGA costs has led to a reduction in the bottom line
from a gain of $189 million in Q1 2012 to a loss of $279 million
in Q1 2013.
- Gross margins have declined from 27.7% in Q1 2012 to 25.5% in
Q1 2013. Increased clearance markdowns and bad timing mainly
drove a decline in gross margins when it came to vendor
allowances - especially with closing stores that led to inventory
- The company is carrying a significant amount of debt, as well
as substantial pension fund liabilities. Sears has an equity to
debt ratio of 0.26, which is lower than the industry average of
0.67, indicating weak financial standing relative to its peer
group. Additionally, interest coverage ratio of -0.83 is lower
than the industry average of 3.11, indicating the firm's weak
ability to meet its short-term obligations.
To add to the weak quality metrics, Market IQ's Valuation
parameters suggest that the firm is overpriced (see chart below).
However, according to Sears Holdings' chairman Eddie Lampert, the
company's real estate portfolio is easily worth more than $20
billion. Assuming that assets are worth $20 billion, then this
literally means that the company is sitting on top of an
unconventional gold mine, making current market capitalization of
$4.5 billion a bargain.
In recent years, Sears has made a habit of spinning off its
holdings to raise cash and ease investor concerns over liquidity.
SHC Realty was launched in 2010 to conventionally market available
properties in an attempt to create value for stockholders by
selling and leasing them. In December 2011, Sears completed the
spin-off of its Orchard Supply Hardware Stores chain. In 2012, the
company separated Sears's Outlet and Hometown and Hardware stores.
Additionally, Sears completed a partial spin-off of its Canadian
unit and sold 11 of its stores to mall operator
General Growth Properties
Earlier this year, Sears launched Seritage Realty Trust as a
"nationwide developer of commercial real estate" to help oversee a
Sears portfolio containing several properties. Most recently, Sears
new business unit
, Ubiquity Critical Environments, with the mission of converting
some of the closed Sears and Kmart stores into facilities for data
warehousing, network co-location centers, and business continuity
operations. Ubiquity is also spearheading a new initiative to lease
cell towers to be built at existing Sears facilities.
Sears has also suggested that the company may divest itself of
Lands' End, a higher-end apparel brand and e-commerce outlet that
the company acquired in 2002, given its deteriorating financial
performance. Other possibilities for sale are proprietary brands
such as Kenmore and Craftsman.
Sears is stuck in the middle of an increasingly polarized
department store market that has diverged into high-end and low-end
spheres. As a mall-based mass merchant, Sears has failed to specify
a niche and articulate the well-defined identity necessary to
compete with high-end rivals like
). Additionally, its mall-heavy real estate portfolio has suffered
as customers have flocked to stand-alone big boxes like
Wal-Mart Stores Inc.
Costco Wholesale Corporation
(COST), while its stores, starved of capital investment, often felt
Eddie Lampert, who has chosen to run it as a financial asset rather
than as a retail business, has grossly mismanaged the chain. With
revenue on a downward trajectory for the past half-decade and the
company posting considerable losses recently, many wonder what
assets the company may unload next. Slipping sales, questionable
strategies and tight finances doesn't warrant investment in the
retail behemoth unless the company turns profitable or at least
shows signs of a turnaround. However, despite dismal fundamentals,
the underlying or breakup value of Sears' real estate assets merits
a substantially high valuation, which may make Sears a potentially
This article was written by Adil Yousuf and originally appeared
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