Another Blowout Quarter at Sears

Long time readers of this blog know that I’ve been bullish on Sears Holdings (SHLD) for a long time. I’ve repeatedly made the case that bears focusing on same store sales were missing the point. Chairman Eddie Lampert’s strategy with prior retail endeavors, as well as with Sears Holdings, has been to not focus on overall sales, but rather on profitable sales.

Sears’ financial results have shown that this strategy is coming to fruition, but the bears have been winning with SHLD as of late. In fact, the stock has been amazingly range bound for months, hovering between $115 and $125 per share, as the chart below shows. Despite the pattern of higher than expected profits, the stock has been stuck. It manages to open higher after posting quarterly results, only to see the gains vanish by the end of the day.

This morning Sears reported fourth quarter earnings of $4.03 per share, 41 cents ahead of estimates, which stood at $3.62. Again we see the stock rallying in pre-market trading, rising $9 right now to $126 per share. If the recent past repeats itself, the stock won’t hold those gains and will continue to trend in its narrow trading range. This result would not be surprising if we continue to hear about falling sales.

However, I am still holding out hope that today’s gains hold and we get a breakout above $125. It’s amazing to me that the company is purposely trying to reduce sales by only selling products that they can earn a profit on, and yet when they deliver such results, people complain of market share losses.

Investors need to realize that over the long term earnings drive stock prices. If sales were all that mattered, not profits, then the Internet bubble never would have burst. Consider how many dollar bills I could sell if I only charged 95 cents for them? My sales would great, sure, but my stock would be worthless without profits.

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One Thought on “Another Blowout Quarter at Sears

  1. Chad Brand on March 15, 2006 at 8:01 AM said:

    Eddie Lampert’s letter to shareholders (available on searsholdings.com) goes into great detail about their view of same store sales as a gauge of comapny health. That might be helping the stock today, even though anyone who has been watching SHLD closely should already be very familiar with this strategy.

    One of the more important parts of the letter is the following quote about cash and inevstment:

    “At the end of the fiscal year, after distributing $5.4 billion in cash as part of the merger transaction, Sears Holdings had $4.4 billion in cash on hand, including $664 million in cash held at Sears Canada. Sears Holdings has generated significantly more cash than we have spent on share repurchases and capital investment, and has considerable additional debt capacity to support value-creating investments if available.”

    That cash position equates to $27 per share, and investors will likely get excited about possible “value-creating investments” which might not pertain directly to the Sears business.

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