Sears boosts its stock price

Sears Holdings is losing sales to Wal-Mart and other competitors. So why is its stock so hot?

By Kim Peterson Jan 12, 2011 4:25PM
Credit: (© Carolyn Chappo/AP)
Caption: Shoppers exit a Sears store at a mall in Meriden, Conn.Ah, Sears Holdings (SHLD). Butt of a thousand jokes. Seller of good tools and, well, other stuff.

Sears gets no respect. So why, after taking a tremendous hit in May and June, is the stock at $75 and trending up? Why is the company's forecast beating expectations even as sales drop and the competition continues to steal business?

For that answer, you need to take apart the stock a little bit. Sears is one of the most interesting stocks out there, and you'll see why in a minute. Let's get into the financials:   

Shrinking shares. Sears has been aggressively buying back its shares, and this week announced that it had snapped up 1.2 million shares in its fourth quarter for a total cost of $77 million. It has board approval to spend another $187 million on shares going forward. Post continues after video:
The share buybacks have been going strong for years. This great chart from Bespoke Investment Group shows that the number of outstanding SHLD shares has dropped from 160 million in 2007 to about 109 million today. Buybacks decrease the share portion of the earnings-per-share equation, making EPS more attractive.

Concentrated ownership. About 75% of all shares are owned by only three entities, reports Bespoke. Sears is completely tied up with Ed Lampert, a 40-something billionaire and hedge fund manager.

Lampert's hedge fund, RBS Partners, owns 48.2 million shares, and Lampert himself owns 17.1 million. Fairholme Funds is the other big owner, with 14.7 million shares.

Huge short interest. OK, so when you take out those three owners, much of the rest of SHLD is getting shorted. In fact, Bespoke reports, about 44% of the remaining shares are sold short. If the company keeps up its share buybacks, Bespoke writes, the shorts will be forced to cover -- or short interest could rise to 100%.

It's the assets, baby. Lots of articles bemoan the future of Sears, especially as Wal-Mart (WMT), Target (TGT) and other rivals steal business. Sears outlets saw a 6% drop in same-store sales in December -- yes, the December when the entire retail sector seemed to come back to life.

Mark Holder notes on Seeking Alpha that Sears will end the quarter with $1.1 billion in cash and $8.3 billion in inventories -- but the company's market cap is $8.2 billion. Those asset figures don't even include the Sears and Kmart brands, Holder notes, or the real estate holdings that could be turned into cash.

Mixed financials. Sears' quarter doesn't end until Jan. 29, so we won't get the report until next month. But this week, the company said its earnings would be $3.39 to $4.12 a share. Analysts had been expecting only $3.09.

That bright outlook is largely due to a tax rate that fell to 32% after Sears worked out some federal and state tax issues. One analyst noted that the tax benefit added some 35 cents to 42 cents to EPS.

The outlook takes some of the pain away from Sears' sales and profit numbers, which have been flat or in decline. It is simply too tough for Sears to compete with Wal-Mart and Target, and that picture doesn't look to improve anytime soon.

The future. Despite its retailing woes, Sears is definitely undervalued. As noted earlier, its market cap doesn't even equal its cash and inventories. And the company will likely continue buybacks, giving Lampert and RBS an even bigger piece of the pie. At some point, the shorts will have to cover.

If Sears can just achieve modest growth while keeping its cash flow intact, there's every reason to suspect that the share price will continue to ramp up.
Jan 12, 2011 10:21PM
Mr. Lampert's fuzzy endgame is now clearer. He intends to get back at all of the short-seller's who questioned his brilliance, in time for the economy to rebound and sell off the real estate, when values improve. He can easily sell the brands to the competition who have retailers running their organizations. Sears has a 4 year "interim" CEO with finance background and they just promoted from within with a new President and she has a similar finance background. The end game is about 3-5 years away, but Sears and K-mart will be spoken about to our grandchildren in the past tense. I currently work for the company and I am constantly amazed by the ineptitude and lack of retail fundmentals running the organization. A simple fix would be to hire a retail fix-it person for President and restore credibility to the stores organization with proper marketing, branding, pricing, infra-structure improvements and a cultural overhaul. Of course, this would interfear with Mr. Lampert's ultimate endgame.   
Jan 12, 2011 10:00PM
I agree with the comments, I have worked at both K mart ,in the days before walmart, and later for Sears , when the Kmart took over Sears it changed from a customer focused professional service and knowledge retailer to a come and get it . The company no longer valued the personal relationship with the customer . After many years of building the customer trust and selling them a quality product backed with a Craftsman satisfaction guarantee !!!! Customers valued PROFESSIONAL CUSTOMER ASSISTANCE
Jan 12, 2011 7:16PM

I worked for K-Mart before and after Sears came along. It was a good place to work before Sears moved in. At the new K-Mart/Sears I was a supervisor at the service desk. I was told to tell the cashiers that their hours would be cut unless they got more credit card applications. I believe this is illegal. With this economy, the last thing people need is "EASY CREDIT" shoved down their throats. I had very angry customers just by asking if they would like to apply. We were told we would be discriminating people if you did not ask. Hmmm, ask the 16 year old with 2 babies if she wants credit? Of course she does. Can she pay it back? Of course she can't. Only in America.

As a customer, my last purchase was a bathroom shelf stand. Out of three boxes, we found enough undamaged pieces to create one stand. Quality merchadise?? I think not.

Jan 12, 2011 6:38PM

K-Mart/Sears are two loser companies with no retail leadership.  It clearly is the worst retailer out there.  Why do you talk about stock ownership?  Target and Wal-Mart are places people love to shop and have a brand that customers love.  Sears/K-Mart are places you would only go to if you can't find Target.  Anyone who recommends this stock is really not making a call on a retailer....What investments in the future have they made...Who are the Management and what are they doing to make this company competitive?  Why would anyone want to shop in their stores?  Last you really have to ask how long this company can last? 

You really can't buy the stock based on visiting their stores?  If you have limited dollars to invest in retail...


Jan 12, 2011 7:28PM

Sears tools primarily the automotive tool lines have increased in quality at very low increase in cost compared to other tool lines... The craftsman brand is not losing steam in fact is gaining respect as the tool of choice over snap-on and others.


There is value here

Jan 13, 2011 5:28AM
Wal-Mart suffers from the same miseries that are stated here for Sears: lack of customer service, declining interest in the customer, negative attitude toward employees,etc. Yet, they seem to just keep on going and going.  Does that mean that the comments made toward Sears/Kmart don't matter and their day to day operations have nothing to do with efficiency or corporate direction? Seems to me that Sears is getting a bad rap with these comments.
Jan 13, 2011 5:23PM
I went into a Sears over the holidays. I was treated so poorly that I tracked down a manager to tell him that I now understood why there were more employees than customers in the store. He thanked me and went back to chatting with his coworkers about a football game. He didn't care about the who, how, what or where of the the problem. I hope the real estate sells well - from what I see it's all they've got.
Jan 15, 2011 10:29AM
I agree with some of the other comments about Sears. They have terrible customer service and even managers in the stores could care less if you are a happy customer. I use to always buy washers and dryers from Sears as they had the best selection and best prices. These days you can buy the same item at Lowes or Home Depot at a better price. The Kenmore brand of washers and dryers is Whirlpool so you can get a Maytag/Whirlpool for the less money than going to Sears and having to deal with their poor service and charge for delivery service. At this point I will never set foot in a Sears real reason to.
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