Sears Holdings: Retail Blues Equal Stock Greens?

A consumer environment at the apex of, what can only be described as the very definition of fragile doesn’t lend itself to positive business results at retailers. Specifically retailers which struggled even before the US went recession-official. Sears Holdings (SHLD) was one of those retailers. And after this morning’s quarterly results it still is.

While not suffering the doomsday fate of electronics retail specialty chain Circuit City, the department store giant and its approximate army of 3800 stores reported a loss of $1.16/share ($146Million). Hedge Fund impresario Edward Lampert was known to make magic happen with the cash horde at Sears in years prior, however in today’s economic and financial climate it is getting harder to keep ahead of the curve. The company did make some gains in hedge transactions with Sears Canada but it also took a charge with the closing of 14 ‘under performing’ stores.

Excluding all special items the loss ran to $0.90/share, which still almost doubled the analyst predictions of a loss $0.49/share. Revenue was down year over year by 8% ($10.7Billion) and the all important same-store sales metric was down over 10%. Sears did however do some trimming around its bulging edges, chopping almost $600Million in inventory and installing another $500Million share buyback. And yes, those that have followed SHLD’s share price descent know all too well about these buyback announcements. They, the buybacks, come practically quarterly as Lampert and co. try to resurrect a failing share price and a company that still sits on over $1Billion in cash.

Forecasting is proving to be an increasingly difficult endeavor for retailers and Sears is no different. Offering the public the unsparing sentiment that previous forecasts are ‘no longer relevant’. The economic difficulties just add to the struggles of an already battered Sears retail operation. Going into Christmas and 2009, the analysts covering the company aren’t ready to sell a turnaround story just yet. Forecasting earnings of $1.10 on average for next year, Sears sits at a forward P/E ratio in the low 30s. Far too high in this climate, as general merchandise competitors Wal-Mart (WMT) and Target (TGT) have forward P/E ratios in the 15 range. On the lower and higher end of clothing and appliances, J.C. Penny (JCP) and Home Depot (HD) respectively, sport forward multiples of 13.

Why does Sears deserve such a premium? Perhaps the market knows, as it has been able to stay irrational for much longer than anyone anticipates, but today all these Retail Blues have turned into Stock Greens for Sears. SHLD has rebounded with the market to the tune of 13% to price around $36/share in today’s trade. Sears can and surely will survive the economic turbulence of North America, but the question for Investors is where can it possibly go?

To put it in perspective, Sears as a retailer, is executing far less successfully that either Wal-Mart or Target, and would have to beat estimates by 100% in the next year to be valued by the market the same way. But Sears is not just a retailer some will say, its also a holding company! Sears as a holding company, doesn’t appear to be doing much of anything of late, except of course buying shares of Sears.

This one will continue to under perform its peers in the year to come.

Disclosure: Author holds no position in the above mentioned companies

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