Sears Bears Get Hammered… Again

The bears on Sears Holdings (SHLD), and there are plenty of them, are again getting crushed today. This marks the second straight quarter that shares of SHLD have spiked after posting blowout earnings. As I have been telling everyone since the Sears/Kmart merger closed, Eddie Lampert’s strategy for the company is working, despite negativity from retail analysts that still haven’t a clue.

Sears Holdings stock is jumping $17 this morning, for a 12% gain. Their first quarter earnings were even better than wildly bullish investors like myself could have hoped for. Earnings came in at $1.14 per share, a stunning $0.50 above the consensus estimate of $0.64 per share. Here’s the nail in the bears’ coffin; same store sales for the period dropped 4.8%!

The bearish case, which has been laid out by retail analysts on CNBC and in newspapers and magazines nationwide for months, has been that without positive comp store sales and increases in market share, Sears would get eaten alive by Wal-Mart (WMT) and Target (TGT), and their stock would tank as a result.

As I’ve said before, and I’ll say again, the company is not trying to increase same store sales, or overall sales. They care about one thing and one thing only, profits, because they know that over the long term profits are the only thing that matters if you want a stock price to go up. If today’s blowout numbers don’t back up this theory, I don’t know what does.

Sears Holdings is one of Peridot Capital’s largest holdings and will continue to be, despite today’s $17 move higher.

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*UPDATE* 1:59pm

With Sears stock now up $21 on the day, I realized I forgot to mention one thing in my original post. Check out the SHLD share repurchase plan. During Q1 2006 they bought back 3.3 million shares for $413 million. That comes out to $125.65 per share. The stock is at $159 right now. They know what they’re doing, on so many levels. Okay, my cheerleading is over… for now anyway.
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4 Thoughts on “Sears Bears Get Hammered… Again

  1. Jay Walker on May 19, 2006 at 10:50 AM said:

    While I agree profits matter – they aren’t and can’t be created out of thin air.

    Increasing profitability is key, of course, but at some point, revenues and sales matter. A recognized key to profitability is increasing inventory turns – YOY same store growth.

    Longer term, it’s tough for any retail business to increase valuation metrics, without increasing same store sales.

    Jay Walker
    The Confused Capitalist
    http://confusedcapitalist.blogspot.com

  2. Chad Brand on May 19, 2006 at 11:11 AM said:

    I’ve heard this a lot, and it is certainly true that at some point Sears will have to grow its revenue base, whether it be from increasing square footage at Sears and/or Kmart, or via acquisition. However, this does not have to be a short term strategy, and the recent success at SHLD bears this point out. Kmart and Sears were being managed so poorly that there is huge leverage at both stores by simply increasing efficiency and managing the existing store base better. Once their 3,000+ stores are all at maximum profitability, there is no doubt that growth will become a focus at the company.

    The ley in this case, though, is that we are far from that point. Operating margins for Q1 were 3.67% at Kmart, 2.63% at Sears, and (0.01%) at Sears Canada. Since Kmart was the first of the three that Lampert turned his attention, let’s assume that 3.67% operating margins are the peak at that chain (I doubt this will be the case, but let’s be modest with our assumptions). Is there any reason to think that margins at Sears and Sears Canada (assuming they gain full control) cannot reach the same level as Kmart is now? If that is attained, company-wide operating margins will increase 33% from current levels.

    As you can see, there is clearly further to go on the margin expansion front. Once they exhaust that upside, I’m certain you will see a shift in strategy. Why haven’t they begun the growth phase yet, even as many are continually criticizing them for simply cutting costs and boosting margins with no sales growth? My guess would be that with more than 3,000 stores, most having been managed into the ground by prior management teams, they don’t want to bite off more than they can chew. Turning around two of the biggest retail chains in the country is a tall order, and one many thought could not be done. Thus far though, they seem to be doing an awfully good job.

  3. csdorotoc on May 22, 2006 at 11:46 AM said:

    Isn’t this a race between the buyback and the margin erosion? The success of say AZO was built on buying shares back faster than the business declined. But Sears gets too popular then the buyback won’t take place and the value of the business may decline faster than the company can build up cash. The whole strategy is built on the idea that buying stock is a better investment than the stores. This cute trick can’t be pulled over and over again.

  4. Chad Brand on May 22, 2006 at 12:26 PM said:

    I’m not sure what margin erosion you are referring to. Margins are rising at stores that had been previously run into the ground. It is true that SHLD management feels that the stock is a better use of cash than opening a new Kmart or Sears store. Given the competitive landscape, and the fact that they already have more than 3,000 stores in the U.S., I can’t say I disagree given where the stock trades.

    As for AZO, there has been no business decline. Growth has been single digits, which does show that they prefer meager profitable growth as opposed to aggressive growth that could cannabalize the current store base. I would expect the same strategy with SHLD. If the return on capital is attractive, they might expand the store base once they have the entire company running efficiently and profitably on a consistent basis. If the returns aren’t attractive, and the stock is no longer cheap, I would think they will use the cash for other things, such as acquisitions.

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