SHLD profit up as stores go down

Implications: SHLD comp stores down 4.9% but 4Q profit up 27%. 

So far nothing Mr. Lampert has tried is helping to improve sales and some major investors are again wondering why he has not started selling some of his supposed valuable store properties.

In a long and rambling annual letter released in connection with his sales Mr. Lampert makes no mention of any plans to sell off properties and use the cash to buy other businesses. 

Analysis: As many readers of GLG News know, I have frequently commented on the fact that many investors are totally misguided in their thinking about two things involving SHLD.

Thing one is that the expected value of the Sears real estate illusory and the value of K mart real estate is minimal.

Thing two is that SHLD is mistakenly being viewed as a retail turnaround investment opportunity.

As I have stated previously, the value of owned Sears stores is controlled by the easement agreements that govern the use, size, configuration and operation of every Sears mall store. If every owned mall store were to be put up for auction, other than the few stores that would be bought by Nordstroms and or Dillards, I doubt that there would be ANY BIDS! The owned K mart stores are almost as valueless as the Sears mall stores. Not only are most of them in very poor physical condition, requiring a major renovation before any other big box could use them but most of them are located in older retail areas where just about all the potential buyers are already located. 

The continued decline in comp store sales combined with the lack of capital expenditures for new and/or remodeled stores attest to the reality that despite Mr. Lampert's comments to the contrary, he is viewing SHLD as simply a cash cow to feed his overall investment strategy.

If Mr. Lampert can continue to achieve his hedge fund average of 30% return on SHLD's excess cash flow of this declining retailer, it might make sense to look at it as another hedge fund bet on Lampert but lets not fool ourselves any longer thinking SHLD is a real estate or retail turnaround play.