Sunday, May 6, 2007

Sears Holdings To Spend It's Cash Hoard

Sears Holdings announced Thursday it currently expects that net income for its first quarter ending May 5, 2007 will be between $200 million and $235 million, or between $1.30 and $1.53 per diluted share. In the first quarter of fiscal 2006, the Company reported net income of $180 million, or $1.14 per diluted share. At those numbers we will have 14% to 34% EPS growth. Excluding one time items from 2006 and 2007, the high end range of the estimates gives us 13.5% EPS growth in a challenging quarter.

What did the street focus on? Domestic comparable store sales (as usual) for the first twelve weeks of the thirteen-week fiscal 2007 first quarter which ends May 5, 2007 for its Kmart and Sears stores. Kmart comparable store sales decreased by 4.7%, primarily due to lower transaction volumes across most businesses.

Results were buffeted by an improvement in children's apparel sales and this marks the second consecutive quarter an apparel segment's sales have increased. Last quarter it was women's apparel. This is huge because once mom's start going there for their kid's and themselves, the retail results begin to really pick up. Home appliances and lawn and garden were down. No kidding. We are in a housing slump and had miserable weather to this point this spring. Lawn and garden will pick up now that the weather has changed for the better and housing will turn around this summer spurring increases in both segments. When you add this to improving apparel results, the second half of this year looks to be very exciting for us shareholders

Lampert has several options available aside from retail results to boost EPS and share price this year.

  • -He still has $604 million on the share repurchase plan left. This simply means that at today's price of about $180 he could repurchase 3.6 million or 2.3% of outstanding shares.

  • -Cash on hand, the metric most Lampert followers watch will be "about $3 billion excluding Sears Canada", essentially flat from earlier in the year. In March, the Sears Canada number was $700 million and I expect this to remain constant after the excellent quarter they just reported seeing a C$29 million swing in results from a loss to a profit. With this amount he could pay off 100% of Sears debt and complete the buyback program.

  • -He has also created over $1.8 billion in securities with the DieHard, Craftsman and Kenmore brands. He will use these when the time is right to make a big acquisition or sell them for additional revenue. With many retailers stumbling, there will be assets out there soon he can add at good prices.

Shares plummeted over $10 in after hours Thursday and those who bought in picked up over $2.50 a share Friday, and will see much more by year end. It is tough to get rich betting against Eddie Lampert. If you do not own shares, I would get some. Sears Holdings is in the infancy of what it will eventually become.

At the annual meeting on Friday, Lampert answered shareholder questions in a Buffet like Q&A session. Some notables:

  • In early March I opined "I am rapidly becoming convinced that the future of Sears retail operations will become predominately Land's End merchandise". It would appear I was correct on that one as Lampert announced they were doubling the "store in a store" Land's End concept in Sears locations from 100 to 200 this year.

  • Kmart is bringing back the famed "blue light special" that was so successful for so long

  • Sears has a new marketing campaign entitled "Sears: Where It All Begins" with a new commercial that analyst Bill Dreher called "brilliant". These begin Sunday, May 6th

  • Will expand the Craftsman and DieHard brands in Kmart locations

Personally, I feel the Craftsman and DieHard move should have been done long ago but probably was not due to production constraints with current suppliers. At any rate, the expansion of sales channels of these products will provide more value to the names and add more value to the recently created securities created from them. What does that mean? Essentially, Lampert created a bond - like instrument based on the Craftsman, Kenmore and DieHard brands. Holders of these "bonds" receive interest payments based on the performance of the brands. The better the performance of the brands (more sales) the more value these "bonds" then have. Here is the brilliant part. Currently these "bonds" are valued at approx. $1.8 billion and as these brands are sold through more channels, that only increases. In theory, Lampert could use them as cash to buy another company. Because there are future payments attached to the "bonds", he would then be able to pay a discount for the company to it's current price based on the future value of those payments.

Another way to look at it is Lampert now sits on about $4 billion in cash at Sears. By creating these securities, he essentially created another $1.8 billion "out of thin air". The value of these brands was always there, he just found a way to monetize it.

2007 will be a seminal year for us shareholders, much like 2005 was for Kmart holders. My guts tells me that several acquisitions are on the way that will transform Sears holdings forever. Lampert seems to like brands so do not be surprised to see several smaller ones involving brands, not necessarily sales outlets. By doing it this way, he gives more people reason to go to Sears and Kmart locations to get those brands and by adding them to the "securtization bonds", increases the value of them also.


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