Where have you been shopping lately? At Macy's (NYSE: M) for clothes, or Wal-Mart (NYSE: WMT) for toys or at Bed, Bath & Beyond (Nasdaq: BBBY) for a new set of linens? Chances are Sears Holdings (Nasdaq: SHLD) hasn't gotten much of your business lately. At least if same-store sales are any guide.
The retailer, which operates the Sears and Kmart chains, seems to lose more foot traffic with each passing quarter. Indeed, same-store sales fell again the fiscal second-quarter -- by a sharp amount -- and it's starting to look as if this retailer may go the way of Montgomery Ward and Ames -- to the graveyard of ex-retailers.
Meanwhile, shares are rallying, thanks to a series of financial maneuverings. Yet, it won't be too long before management runs of out of tricks, and falling sales take this stock far lower.
Squeezing out cash
Ever since hedge-fund titan and Sears Holdings Chairman Eddie Lampert merged Kmart and Sears Roebuck and Co. in 2005, he's been on a mission to bleed cash out of the business. It's actually quite simple: If you stop putting money into stores, then you can generate good bottom-line results -- at least for awhile. Eventually, you end up with fewer customers and operation costs begin to outweigh sales. Kmart in particular has become a poster child for a neglected retail brand. In the second-quarter, same-store sales plunged more than 4%. Sears stores saw this metric drop 3%. Remarkably, Sears has already been closing underperforming locations, so these are the results being posted by presumably stronger stores in the chain.
Management's plan to stem the erosion: Close more underperforming stores. Of course, this process can only continue until there are no more stores left to close.
Yet, you would have no idea of Sears' deep distress if you looked at the stock price chart. Lampert and his board have managed to keep raising cash by selling off various assets (with plans to sell Sears Hometown and the outlet stores slated for sale this quarter). Those moves have derailed the thesis of short sellers that Sears' $4 billion debt load will soon choke the balance sheet. And short-covering has been a key factor by this stock's recent upward move.
Excluding the effect of asset sales, Sears lost $1.18 a share in the second-quarter, even worse than the $0.84 a share consensus forecast. Analysts now say Sears could lose $3 a share in the current fiscal year, and a similar amount in each of the next two years as well. Goldman Sachs, which rates the stock a "sell" with a $33 price target, is troubled by lower revenue spread across high overhead, or what they call "severe SG&A deleverage," a process which involves selling off assets to reduce debt. That price target, which is roughly 55% of the current share price, equates an EBITDA multiple of 11. And even that target is pretty rich compared to other retailers.
Sears' supporters note that the company still has a considerable amount of real estate. "However, many locations, leased or owned, tend to be in economically challenged communities or in older malls that continue to experience declining traffic patterns," note analysts at Morningstar, who say that fair value for this stock is around $37.
Risks to Consider: As an upside risk, a rise in consumer spending could give a lift to all retail stocks including Sears.
Action to Take --> Morningstar's Paul Swin neatly sums up this retailer's predicament: "Sears can't shrink its way to profitability. Sales keep declining as fast or faster than management can cut costs and reduce inventory. Store closings will not be enough."
Many older investors continue to hold on to this stock as a legacy position, recalling the days when this was a Dow component and a solid performer. Those days are long gone and the recent rally provides the perfect opportunity to unload this holding before it tumbles back down.