Behind The Moneyball

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The news release reads like a headline from The Onion, the humor website whose headlines seem close enough to reality to make people do a double take. Perpetual retail laggard Sears Holdings (NASDAQ: SHLD) has elected Paul DePodesta, of "Moneyball" fame to its Board of Directors, in hopes that his analytical superpowers can turn the troubled chains of both Sears and KMart around.

"What Paul DePodesta … did to bring analytics into the world of baseball is absolutely parallel to what needs to happen — and is happening — in retail," said Greg Girard of IDC Retail Analytics in an interview for the Chicago Tribune. Something certainly needs to happen at Sears Holdings and some credit must go to Eddie Lampert for at least thinking outside the box for a solution.

An Unfair Game?

Michael Lewis' book "Moneyball" was subtitled "The Art of Winning An Unfair Game." But is it really unfair that Sears Holdings has lagged in sales behind major competitors Target (NYSE: TGT) and Wal-Mart Stores (NYSE: WMT) yet the stock is up 22% over the last 52 weeks actually outperforming the S&P 500? It seems that a company with losses per share (-26.84), negative profit margin (-7.10%), negative analyst expectations for growth (-163.90% for the next five years), and a negative return on equity of -48.62% whose stock is up on the year is doing better than it deserves. More likely, it deserves its negative credit rating from Fitch and the 45% short interest it sports.

With a debt burden of $4 billion to total cash of $622 million and a 2011 loss of $3 billion a Sears Holding turnaround is a much taller order than Billy Beene's Oakland Athletics baseball team and won't be just a matter of finding schlubs who can still get on base. The DePodesta character is quoted in the movie, “Using the stats the way we read them, we'll find value in players that no one else can see. People are overlooked for a variety of biased reasons and perceived flaws. Age, appearance, personality. Bill James and mathematics cut straight through that. Billy, of the 20,000 notable players for us to consider, I believe that there is a championship team of twenty-five people that we can afford, because everyone else in baseball undervalues them.”

DePodesta has his work cut out for him because Sears Holdings has 293,000 employees to turn into a championship team. In Moneyball, DePodesta was working with undervalued players but now he's dealing with an overvalued company if analysts' price targets of $17 and change are to be believed.

Working The Stats

DePodesta is charged with the task of leveraging the daily stats from Sears Your Way reward numbers, creditcard holders, and mobile and social app trends into a win for Sears Holdings. While Sears still enjoys the quality reputation of its Kenmore appliances, Craftsman tools and Diehard brand, years of sales declines makes energizing a demoralized staff a huge task. If DePodesta can actually make meaningful inroads on turning a last in place team to a winner there should be a Harvard Chair in Economics named after him.

Sears Holdings operates in the US and Canada, and rival Target is making big moves into Canada. Target has 1,782 stores in the US presently and its foray into our northern neighbor is promising for them and worrisome for Sears Holdings. Target has a 2.40% yield and a 13.21 P/E. Target is only up 14% over the last year. For Sears Holding stock to outperform them, that seems unfair especially when analysts expect double digit growth (per annum) for Target over the next five years.

And what about Wal-Mart, the world's largest retailer, with a 2.30% yield and a 14.13 P/E? This name is only up 14.74% over the last 52 weeks. Wal-Mart had managed to shake off its lethargic stock performance of the last few years and start making some gains for long time shareholders. While analysts expect growth at just above 9% over the next five years (per annum), this is certainly a more consistent play than Sears Holdings.

The Last Inning

If this was football we'd be calling this Eddie Lampert's Hail Mary. Instead this is the kind of game where dejected fans (i.e. Sears Holdings shareholders) may just want to leave the game early and avoid the traffic rather than wait for the ninth inning DePodesta miracle. Target and Wal-Mart deserve their better scores, I mean sales numbers. Sears Holdings is unfortunately, a team that's lost its will to win.


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