Sears: The Poor Life At A High Price

Sears Holdings (SHLD) has been the Cinderella story of the 2012 market, which came out of nowhere to lead the pack as the best performing SP 500 stock. Beaten down last year on news of store closings and possible bankruptcy, the stock suffered a fifty point drop at the end of 2011. That all ended the second week of January, and since then it has risen to within three points of its October high. What is behind the sudden reversal, and how has Sears Holdings’ Chairman and former hedge fund manager, Eddie Lampert, accomplished this feat? The first piece of this series will examine the recent explanations given for the revitalization of SHLD, namely the strength of their brands and the value of their real estate. Let’s go back to January of 2008 when SHLD had just finished an 85 point free fall. The week of January 14th Lampert announced a restructuring plan for Sears which prompted a twenty point swing in the stock over the next two weeks. At the time his hedge fund, ESL, owned 48% of SHLD shares and found themselves slipping further into oblivion. SHLD reached a high of 195 the previous April, was at 85 for the announcement and eventually reached 30 by the end of the 2008. It wasn’t until January of 2010, two years after the restructuring announcement, that SHLD returned to 85. In January of 2011 Sears reached another low at 28, but is now on pace to reach 85 in under three months. While the economy has been recovering since 2008, Sears Holdings has not. That being said, what is said to be behind the dramatic 2012 rise of Eddie Lampert’s retail love child? The merger of Sears and Kmart was partially built upon the concept that the combination of Sears’ brands and Kmarts’ real estate locations could provide a combined boom for both entities. The results, however, were depressing, and by 2008 sales had fallen to levels prior to the merger. Lampert knew that in 2004 the value of Sears real estate was low, due to the fact that most of their stores were mall anchors. The rise of online sales and the growth of competition like Walmart (WMT), Macy’s (M), and Target (TGT) has led to a steady decline of mall customers and sales. This decline previously led to the sale of their mall development company, Holmart, which was sold to General Growth Properties (GGP) in 1995. Over the years Lampert attempted many different compartments and spinoffs with Sears, and many in the following years would end in failure (Sears Grand, Sears Essentials, Great Outdoors). They have also attempted various online platforms which have failed to gain ground, including one which prompted a class action lawsuit. His policy of cutting overhead costs while raising prices did little to bolster the dying brands. The reductions in inventory and slapstick approach to merging Sears and Kmart resulted in reduced customer sentiment and widened the gap between Sears and the growing American culture. It also hurt Sears’ relations with their vendors and suppliers because the increased costs and reduced inventories hurt their margins. The newest strategies for Sears have been to reduce inventory (by $580 million) and to shut down stores (at least 79). These strategies claim to provide more short term cash flow for the retailer, but we have already seen how this hurt their business relations and sales in the past. Recently CIT Group (CIT) announced that it would halt loans to Sears’ suppliers, a cut at the future profitability for the suppliers and Sears alike. Without funding from CIT, the suppliers will begin to ask for cash advances or lines of credit from Sears. This will begin to eat into Sears Holdings’ cash and in fact was a contributing factor to the demise of Circuit City. Once financial concessions have been given to some suppliers the others will begin to demand the same offerings. The new cash inflows that the stock appears to be rising on may be eroded or overtaken by their suppliers’ demands for payment upfront, not to mention the future cost of shutting their stores down. Earnings Report: The Softer Side of Sears

Let’s take a look at one of their statements in their 2011 full year earnings report:

Operating loss was $1.5 billion for the year ended January 28, 2012, compared to operating income of $437 million

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