Summary
Sears Holdings surprised Wall Street analysts by posting increased first quarter earnings versus the Streets expectation of a loss. But just how relevant is the earnings surprise to SHLD's turn around? for the answer, here's more.
Analysis
Sears Holdings surprised the Street announcing first quarter earnings of $26 million or $0.21 per diluted share versus a loss of $56 million or $0.43 per share last year. Analysts had expected a loss of $0.88 per share. Sears Holding’s share price increased to more than $63 per share in early morning trading only to fall to about $56.77 in the afternoon. Still, that’s about a 13% increase in price.
Sears management also announced that it had “successfully amended and extended [its] credit facility to provide $4.1 billion in financing through March 24, 2010”. Whether higher earnings or the extended credit line drove the early share price increase isn’t certain, but one thing is clear, it wasn’t higher sales as Sears Holdings also continued its nearly 53-month record of sales declines. According the company’s statement, sales for the first quarter declined about 7.4% in total, with Sears brand stores performing the worst. For the period, Sears domestic store sales decreased about 11.7%, while Kmart brand declined 2.1%.
Clearly, traders ignored the sales declines, focusing on the better earnings numbers and the renewed credit lines, when valuing the company’s stock. One notable trader, Jim Cramer, proffered that Sears had renewed its cash availability to buy back even more stock, suggesting its business as usual on Wall Street, despite the recession. You would have thought the financial meltdown of Wall Street’s biggest banks would have taught investors that value was not in earnings alone, but also in the quality of the earnings. However, that lesson seems lost on many Sears’ traders.
The fact is Sears brand, in particular, is hollow shell of the former company that once was America’s largest retailer. Granted the company was already in big trouble when Eddy Lampert merged it with Kmart, but things haven’t improved from either an investor or a retailer’s point of view. To the contrary, they have gotten worse. The latest round of store staff cuts, which began immediately after Christmas 2008, has left the stores void of floor staff and department managers alike. It’s almost as if Lampert saw what remained of the experienced sales associates as an infestation of little critters likely to infect the company with some dangerous bacteria.
That’s no longer a problem today. The critters are gone and so are almost all of the knowledge base that remained at Sears. Is Sears healthier now that the infestation has been removed? No, but the hedge fund maven has bought some time with their sacrifice, which the Street has, in its inimitable way, seen fit to reward, which is curious in itself.
You would think nonaligned investors would want to change management’s bad behavior with the goal of revitalizing the company’s retailing prowess. That certainly will never happen so long as Wall Street rewards short term thinking at the expense of long term growth. The alleys of Wall Street are littered with the remains of companies and investors alike, which chose the low road from one quick bubble to the next in order to secure quick gains, only to watch them evaporate.
To say just what Sears’ value is today is problematic would be an understatement. It has no future as a retailer, at least under its current leadership, and its real estate assets are declining in value as the recession enters its 17th month. Still the company is capitalized at about 130% of its book value including intangibles, which begs the question of what a realistic liquidation value is given the new financing matures in about 11 months.
Unfortunately, not much is likely to change at Sears Holding between now and then. At least nothing that is sufficiently material to say the company has turned the corner toward sustainable growth in profitability.
On the other hand, three more quarters of declining sales only makes both the Sears and Kmart brands less relevant to consumers, further reducing product brand values on the back of still lower real estate values. Yet, Sears will eventually turn one corner soon enough. That's the corner named "The Beginning of the End" for the once venerable retail chain. Who knows it may have already done so.
