Sears: Are We There Yet?
Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Since its recent announcement that it will be closing more than 100 store locations in the U.S., Sears Holding Corp. (NASDAQ: SHLD) has lost almost a third of its market value, continuing a precipitous two-month slide that has left many in doubt of the retailer’s future. In fact, if there is one word to sum up Sears’ recent performance it is just that: doubt. The struggling company has been metaphorically downgraded in the eyes of the public and now literally in the eyes of rating agencies. Companies are not built on the confidence of investors, however; they are built on sound business models and effective leadership. The question begging to be asked then is whether or not Sears still maintains these qualities and whether this beleaguered stock can weather the storm.
I always prefer to get the bad news out of the way first, so here it goes. Since Sears and Kmart first combined to form Sears Holdings Corp. in 2005, the company has seen its sales drop each successive year amid accusations of underinvestment in stores and services. Over the same period, its earnings per share have dropped from 3.09 in January 2005 to a pathetic current level of -3.38. To make matters worse, Sears has racked up over $2.6 billion in long-term debt and must cope with Moody’s recent downgrade of its Corporate Family and Probability of Default Ratings from Ba3 to B1. This improves the outlook for Sears’ competitors J.C. Penney Co. (NYSE: JCP) and Macy’s (NYSE: M), both of which have outperformed their struggling counterpart in recent years. All said, with bleak earnings estimates for the upcoming quarter and a plummeting market value, there is definite reason for hesitation in endorsing SHLD.
For starters, Sears has been in business since 1886 and was a constituent of the Dow Jones Industrial Average from 1924 to 1999. Some might argue that this kind of historical brand familiarity alone is enough of a moat to protect the company from failing, but let us continue. Sears recently hired ex-Brookstone CEO Ron Boire, who has previous experience at Best Buy and Toys R Us, as its new chief merchandising officer, a move that demonstrates Sears’ active role in addressing its weaknesses. Whether it involves dropping Kmart from the franchise or enhancing its online services, Sears must do something to stop the bleeding, and this is a positive first step towards making those changes.
As far as its financials go, Sears still has around $700 million in cash and $2.9 billion on its credit facilities, according to spokesman Chris Brathwaite, in addition to considerable inventory and real estate portfolios. In fact, with a price/book ratio of under .5, each share carries almost $20 per share in land alone!
If the company’s extensive assets aren’t convincing enough, however, the retail outlook may change your mind. The weekly ICSC-Goldman retail report has posted three straight significant gains for store sales, increasing its year-on-year rate to 5.3%, the highest it’s been in six months. Redbook, another retail indicator, has reported similar results.
In short, Sears is a symbol of American prosperity and for it to collapse would be nothing short of a tragedy. The overwhelmingly negative sentiment surrounding this company right now convinces me that there is still room for the stock to fall further, but I do not believe a company so entrenched through its brand name and with such a wide asset base can fail outright. For this reason, though I do not see Sears as a conservative or risk-free investment by any means, I do think that prices falling any lower than they are right now will represent an opportunity to buy into one of America’s most historically successful companies, albeit in a rut. 2012 will be a definitive year in determining Sears’ future, and if it is going to survive you don’t want to be the last one aboard the train.
Robert Coleman does not own shares in any of the companies mentioned in this entry.