Stay away from Sears before earnings

The stock is climbing even as business gets worse. That doesn't bode well for the quarterly report Thursday.

By InvestorPlace Nov 19, 2013 1:21PM

Sears store on in Milford, Connecticut Spencer Platt/Getty ImagesBy Will Ashworth

Sears Holdings (SHLD) is hotter than a pistol in 2013, with the stock price boasting 56% returns. Eddie Lambert, CEO and the largest shareholder of Sears stock, continues his chess moves to extract value for shareholders.

In fact, even though its retail business continues to deteriorate, the stock keeps drifting higher, passing a $60 mark that shares have only sparingly seen in the past two years.

However, third-quarter earnings are on tap for Thursday, with analysts expecting the company to lose $3.13 per share in the quarter.

When Sears reported second-quarter earnings in late August, the stock proceeded to move from $39 to $60 over a two-week period. But I don't think Sears will do the same after Thursday's earnings.

Running out of tricks

To be blunt, Sears is running out of rabbits it can pull out of its hat. Sears earnings obviously haven't been sending the stock higher, but other gimmicks have been.

Spinning off Land’s End and its automotive centers, for example, will bring Sears some much-needed cash. . . but that’s about it.

Sears paid $1.9 billion for Land’s End in 2002. If it had remained a separate entity continuing on its growth path, I suspect it would fetch at least double that amount. In the hands of Sears, though, it has lost its brand attractiveness and likely will be spun-off for less than Sears paid over a decade ago.

As for the auto centers, the trade publication Tire Business estimates they generate $1.5 billion in revenue annually. Sears will be lucky to extract $2.3 billion in value on both divestitures.

And then there's the retail operations. The best days are gone, as seen by the ugly earnings on tap for the third quarter. Sears has achieved 26 consecutive quarters of negative same-store sales. Sure, other stores like Gap (GPS) have gone through their own periods of negative comps. But Gap just went through four straight quarters in fiscal 2011 before hitting its stride a year later.

As for overall sales, they're expected to fall more than 5% for Q3, and a total of 8% for the full year.

While it's possible to turn around sliding sales, that's only if you've got seasoned merchants running the show. Unfortunately, no one’s ever accused Lampert of being a merchant. So Sears has its work cut out for it.

Sell SHLD now

InvestorPlace editor Jeff Reeves suggested in September that Sears would face serious solvency problems in 2014 -- obviously a screaming warning sign for fans of Sears stock.

At the same time you can find lengthy diatribes by firms such as Baker Street Capital that outline the unrealized value of the stock. Like most value investors, Baker Street’s argument is based on the underlying real estate of Sears (because it's obviously not based on Sears earnings), which it values between $7 billion and $10 billion.

Adding in its other businesses while subtracting debt and pension liabilities, Baker Street says Sears' stock is worth $92 to $169 per share -- well above the current price around $65.

Still, I wouldn't expect Sears shares to move higher after earnings like they did last quarter. Why? There aren't the same catalysts (Land’s End, Auto, Sears Canada and more) available to fuel another leg up.

Sure, if you agree with Baker Street Capital’s assessment (I don't), then you shouldn't have a problem owning its stock at these prices.

But operationally -- as seen by Sears earnings -- Sears is nearly a bigger embarrassment than J.C. Penney (JCP). . . and that’s saying something.

So heading into earnings, I would steer clear of Sears.

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As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.



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