Interpreting Sears

The hardest part of making any strong stand in Sears Holdings (SHLD) is that the bet is really on Eddie Lampert than it is on the entire company. 

Sears same-store-sales fell 5.6% in the last 9-weeks of 2006, but its main blame was lawn and garden products (is a slower home market to blame for lawn maintenance? actually, probably on new buys of that equipment yes).  Warm weather is also to blame.  Kmart same store sales were down 1.2% on lower transaction volumes.  While the sales were down, the company is boosting the guidance to $4.87 to $5.39 on an EPS basis, up from $4.03 last year.  It also said it will end with about $3.5 Billion in cash and equivalents.

The company didn’t announce that it repurchased shares in the quarter, so Lampert must have seen better buys elsewhere.  The street has long speculated they wanted to buy other retailers or at least take larger stakes in them and the "new target" rumors come every 30 to 60 days.

So when you invest in SHLD you are betting on Willie Shoemaker on a healing horse instead of Secretariat, or at the risk of a controversial this is to many retail analysts a comparison of creation versus evolution.  You cannot argue against the fact that Lampert has made megabucks for holders and the lack of a transparency makes this just that more fun and interesting to measure.  Cramer touts Sears (even calls it "Shield") all the time, even when they have what anyone else would say is very negative news.  The company is perhaps the most under-followed and least understood on Wall Street out of retailers, and out of those few analysts that do follow this Deutsche Bank has on several occasions in late 2006 laid out the scenario that could propel the shares much much higher.

SHLD trades at roughly 20-times earnings, which isn’t high for a story stock in retail, and it has a market cap of $26 Billion.  The problem with so few analysts involved in the stock is that if any serious momentum gets going in any direction you could see the move get exaggerated.  Shares of SHLD are still up 2.3% around $170.00 on last look; its 52-week trading range is $115.95 to $182.38.

Jon C. Ogg
January 10, 2007