Sears: A Sentimental Favorite
Tim is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If any additional proof was necessary the once high-flying retail industry leader Sears (NASDAQ: SHLD) was a fan favorite, today’s your day. As the stock hovers around $64 a share and change – a nearly 20% pop for the day – one is left to wonder why. The surface reasoning is pretty clear – according to CFO Rob Schriesheim Q1 should handily beat analyst expectations in a number of areas, and now the company has planned a spin-off of the Outlet and Hometown assets into a separate entity, primarily to raise cash -- in this instance an estimated $400 to $500 million of it.
One area expected to beat estimates in Q1 is inventory management, a key measure that speaks directly to operational efficiencies and was woefully inadequate in Q4 of 2011. According to Mr. Schriesheim having a better grasp on inventory was a major improvement over last quarter. If it turns out to be the case – and there’s no reason to think it won’t – that is certainly a step in the right direction. Following closely on the heels of the operational improvements were the same store sales figures – at least domestically – for both Sears and Kmart stores. Canada continues to disappoint, but today's all about warm and fuzzy, so we'll ignore the 6%+ drop in sales up North.
Same store figures here in the States dropped a mere 1% for Sears – compared to just over 5% in the same period last year – and Kmart sales results remained flat, declining 1.6% in Q1 just as in 2011. Clearly these are big steps in the right direction, but worthy of this type of run-up? Things are getting out of control here and if you’re in need of further proof how’s this – year-to-date Sears stock has more than doubled in price – taking into account today’s run-up. And odder still is you can bet when the company announces earnings later in the month – not to mention Wednesday’s shareholder meeting when Chairman Eddie Lampert takes the stage – the run-up may not be done.
In addition to the aforementioned not-as-bad-as-expected sales figures for Q1, what really got the Sears ball rolling this year was the announcement the company planned to close over a hundred stores and sell a number of assets, and the quarterly numbers will reflect that in a big way. A large part of the expected gains in earnings from operations in Q1 – Sears has suggested as much as $195 million on the top end – will be the result of a $235 million asset sales gain. Even backing that out, the quarter will be an improvement, but does it really warrant this kind of excitement? The spin-off is really just more of the same, selling assets -- in this case to the public -- to fund operations.
Along the fire sale lines, now the scuttlebutt is Sears is also shopping their Lands End division in an effort to raise much needed cash. Investors are clearly hoping a leaner, meaner Sears will be the first step to its return to greatness. But as Wal-Mart (NYSE: WMT), Target (NYSE: TGT) and even Macy’s (NYSE: M) continue generating same store sales increases that are through the roof, a Sears comeback to anything close to what it was is way down the road. And while the cash generated from store closures, asset sales and the new company will prop the company up in the near term, it’s 2013 investors should really be focused on – well, long-term investors that is. As Gary Balter, an analyst with Credit Suisse put, "while these (Q1 2012) results are a nice recovery from the fourth quarter, they still do not point to the cash flow trends necessary to finance the business without selling additional assets.”
Until Sears is able to show real sales growth in its core business and generate enough cash flow to sustain itself, it's a solid investment option for daytraders and short-term, momentum players. But for those betting on a Sears turnaround and a subsequent return to glory, make yourself comfortable because it’s going to be along, bumpy ride.
The investment opinions included are just that, opinions. Investing involves risk, as you well know, so consider your decisions wisely. Tim holds no position in the securities mentioned in this article.