Investors Ignore These Strong Results

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In a surprising turn of events on Monday, Sears Holdings Corporation (NASDAQ: SHLD) investors completely ignored the surprising earnings guidance in favor of the news regarding the CEO leaving. The company reported that earnings would smash the analyst estimates of $0.86, but the market focused more on the replacement of the CEO due to family health issues. The stock plunged 6.4% on Tuesday as investors became concerned that the return of Chairman Eddie Lampert to the CEO role would cause the retailer to stagnate again.

The company operates as a specialty retailer in the U.S. It operates under the Kmart and Sears segments with major brands such as Kenmore, Craftsman, DieHard, Joe Boxer, Lands End, and Jaclyn Smith.

Q4 guidance

While originally the focus for a small gain on Tuesday morning, the updated earnings were completely overshadowed by the CEO issue as the day progressed. For a stock that saw analysts reduce earnings estimates over the last 60 days, it was shocking to see the company guide to much higher numbers than originally expected.

The company provided the following guidance:

  • Total domestic comparable store sales for the nine-week period declined 1.8% largely due to sales declines in the consumer electronics category at both Sears and Kmart.  Excluding the consumer electronics category, total comparable stores sales decreased 0.2%, with Sears Domestic increasing 2.4% and Kmart decreasing 2.4%.
  • Sears Domestic and Kmart online sales increased approximately 20% with the largest growth occurring in multi-channel transactions
  • Adjusted EBITDA, which excludes certain significant items as set forth below, for the fourth quarter will be between $365 million and $465 million as compared to $351 million last year
  • Net income is expected to be between $132 million and $212 million, or between $1.25 and $2.00 per diluted share. 

The new mid-point of $1.63 nearly doubles the previous $0.86 estimate. Even 60 days ago, analysts only expected $1.35. Ironically though, analysts got more negative while margins and results turned around. Amazingly the highest analyst only forecast earnings of $1.29 for Q4. See the below highlights from Yahoo! Finance:

 

<img src="/media/images/user_15227/screen-shot-2013-01-08-at-123930-am_1_large.png" />

Appliance & tool rebound

The market focuses on the weakness in the retail sales over the last several years, but a glaring reason is typically ignored. Sears is well known as a leading appliance, tools, and lawn equipment retailer. That sector has been hit hard by the housing crash and combined with electronics accounts for nearly 50% of revenues. The Kenmore and Craftsman brands could see a strong turnaround as the housing market rebounds.

The company made a point of highlighting that the appliances were part of the reason for Sears comp sales to turn positive. The stock could become a stealth play on the rebound in the housing market. Home improvement retailers Home Depot (NYSE: HD) and Lowe's (NYSE: LOW) and appliance maker Whirlpool (NYSE: WHR) have hit multi-year highs recently.

In fact, Whirlpool has soared from $55 in the summer to over $105 now. The rebound has been miraculous and could’ve possibly foretold the positive numbers out of Sears.

Likewise, Home Depot and Lowe's have doubled in a little over a year. Clearly Sears has clothing and electronics that detracts from the direct comparison, but a large part of what benefited those stocks are what caused the big beat for Sears.

Stock price/valuation

The stock has plunged back to yearly lows and only trades with a $4.3B market cap. The retail operations remain a concern, but the better than expected holiday season should help alleviate some of the liquidity concerns.

Combined with the major brands and real estate, Sears continues to hold assets that far exceed the current market price. As an example, Whirlpool has a market cap nearly double that of Sears.

Conclusion

The market continues to value Sears Holdings based on the look of the retail stores even though the stock should be valued based on the valuable brands and real estate assets. It has the ability to become a secondary housing play as the focus stocks have already soared.  

Sure, the tech background of the exiting CEO might be the reason for the 20% surge in online sales, but all indications continue to suggest that Lampert still had considerable input into the daily operations. Investors should focus less on the CEO leaving and more on the better than expected results. As with most stocks, buying at the yearly lows tend to provide better long-term returns.


Mark Holder and Stone Fox Capital Advisors, LLC own positions in Sears Holdings and Lowe's Companies. The Motley Fool recommends Lowe's Companies and The Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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