Is the Sears selloff over?
Don't mess around with this troubled retail stock.
By Jeff Reeves
Sears (SHLD) has been on one wild ride in 2013. Though total year-to-date returns are a ho-hum 10% gain, the details are pretty crazy.
- From January to May, SHLD stock jumped about 35%.
- From May to August, Sears stock lost roughly 30%.
- From August to November, it gained about 40%.
- From its November peak, SHLD stock is down almost 30%.
Volatility is clearly the name of the game in this battered retail player. So is the latest Sears stock selloff only the beginning, or is it time to jump in and then ride the wave higher once more?
Unfortunately, it seems that this is only the beginning of more declines for Sears stock -- particularly in the long-term.
Lampert takes his lumps
Chairman and CEO Eddie Lampert is under pressure -- at least, his ESL Investments hedge fund is. Thanks to a lack of confidence in SHLD stock, his fund has been forced to return billions to clients. Earlier in December, ESL Investments announced that it was forced to reduce the size of its stake in Sears Holdings stock for the second consecutive year to fulfill investor redemptions. The total stake of ESL owns in SHLD is now less than 50% for the first time since 2008.
Spinning off any growth
While the recently announced spinoff of the Lands End clothing line could allow this brand to grow without the yoke of Sears' struggling retail model, the bottom line is that, well, Sears retail model is still struggling.
Investors who currently own stock in SHLD will get a stake in the spinoff, yes, but it only makes the battered remnant of Sears Holdings even less attractive. The same is true of the 2012 spinoff Sears Hometown and Outlets (SHOS), which has managed to post year-over-year revenue growth in six of the last seven quarters. If you pull these parts out of SHLD as the parent ... what's left?
Scorched Earth tomorrow for profits today: The spinoffs are part of a larger narrative: Eddie Lampert is simply pillaging Sears' assets one at a time. The hedge fund manager has been widely criticized by management experts for his decision to divide the company into more than 30-40 business units under the guise of maximizing each division's potential.
While that theory works for businesses like General Electric (GE), where business divisions are actually different, the structure at Sears has largely resulted in turf wars and infighting that damages the overall mission of the retailer at the cost of smaller internal groups.
Furthermore, Lampert has starved upkeep budgets to prop up profitability at the cost of store appearances -- with most retail analysts estimating Sears and Kmart spend the least capital expenditures per square foot among big players like Wal-Mart (WMT), Target (TGT) and Macy's (M). Heck, even bare-bones DIY mecca Home Depot (HD) spends more per square foot on its stores than Sears does. The general consensus is that Lampert is juicing short-term profits (which are still meager, by the way) at the cost of Sears' future.
What's the strategy of the month?: Lampert has boggled Wall Street with his rapidly changing strategy for Sears. Since his high-profile deal to merge Kmart and Sears in 2005, the combined company has burned through four CEOs. Through it all, Sears has confounded retail analysts by introducing and abandoning one strategy after another. The latest idea? Turn Sears into a membership chain centered around a rewards program. We'll see how long that plan lasts.
None of this adds up to a positive long-term outlet for Sears. And short-term? Well, the good news is that Q3 Sears earnings were roughly in-line with recent targets ... but that's only after lowered guidance and massive misses in Q1 and Q2.
The company is bleeding cash still, projected to suffer another year-over-year revenue decline in Q4 ... but hey, its loss might be narrower if this keeps up!
If you're willing to catch a falling knife, I suppose you could play around with a swing trade in Sears. But given the strength of the rest of the market, why would you bother?
More From InvestorPlace
- The Taper Is Coming: Top 3 Ways to Play Fed Tapering
- For American Retailers, China Isn't "Business as Usual"
- China's Jade Rabbit Makes Lunar Landing, Sends Moon Photos
As of this writing, Jeff Reeves did not hold a position in any of the aforementioned securities.
Lampert is nothing but a greedy corporate raider who adores Ayn Rand, who would have thought.
They need to go back to staffing the departments with trained personnel who are there to actually assist you in picking out what you need, or even trying to upsell you into a better quality purchase, etc. For example, last time I was in Penney's menswear section, there was nobody around to help me pick out a suit, match shirts and ties, make suggestions and insure that I walk out of there with not only a suit, but one that fit well and with a selection of shirts, ties, belts, etc. The only place you get that service at the shops now, is Sears Appliance department.
So, suit buying is done at Jos. A. Bank, or heaven forbid, the Men's Wearhouse, where you get the royal treatment the minute you walk into the store. (FYI: went to DXL the other day for the first time and was met at the door and "assisted" until I left. Great feeling and I bought more than I intended when I walked in. That is how the Department stores are supposed to work!)
Sears simply isn't "hip."
So how do you cure "uncool"?
Sears was your great grandfather's, your grandfather's and perhaps your father's store of choice. Generation X has passed it by. Generation Y won't even admit to ever going into one.
.....Sears business model needs to change...............
40 years ago, you would go to Sears for tools, sporting goods, clothing, appliances, flooring, etc. as they had very little competition except in clothing.
Now in 2013 - everyone has gone specialized. If you need tools, hardware, flooring or appliances - Sears is a great place, but so is Lowe's and Home Depot.
If you need sporting goods - you have Dick's, Sport Authority, etc. Sears in not competitive in this area anymore.
Clothing - even more competive now as you have Kohl's, Belk along with the other competitors from way back - Macy's, etc.
Sears just can't compete with these specialty big box stores - I will miss Sears, Roebuck and Co. as I have fond memories of their stores when they were the source for just about everything!!
It's all over but the bankruptcy filing. Sears came nowhere close to posting a number for Black Friday; NRF expectations +3.9%, actual -2.9%, Sears most likely much worse than -2.9%. The past week or so, Sears has been running those 50% off on Craftsman ads. What other conclusion could you logically draw?
Spinning off Lands' End sounds more like the punch line to a joke than a business plan. As a brand, it's 20 years past its prime. It was positioned as a value alternative to LL Bean. Lands' End product was better than acceptable quality, but lacked the small details that make for an exceptional product. Example: hoods on Gore Tex rain gear that do not stay on your head because the toggles on the hood do not cinch the hood. For Lands' End to have any chance of surviving on its own, someone will need to commit a ton of money to make the brand into something that is actually able to compete with the likes of Cabela's, 5.11 Tactical, and Duluth Trading. You've got a bunch of outdoor/tactical manufacturers out there who make outstanding products and have no problems selling them. What would make the most sense? Selling off Lands' End to another retailer looking for a private label product. But why would anyone buy it when St. John's Bay could be up for sale when Penney implodes? St. John's Bay is a better product line that doesn't need as much work to get it turned around.
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
The solid report comes a month after the retailer closed all of its Canadian operations.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.