Wednesday, July 11, 2007

Sears Holdings: The Hybrid Retailer

So, Sears Holdings (SHLD) reported sub-par expectations on Tuesday and as I read the various reports and "analyst" comments, something jumped off the page. The first analyst compared Sears to retailers like Target (TGT), JC Penny (JCP), Kohls (KSS) and Macy's(M). I read the comments and they all seemed legit. Same store sales are down at Sears in excess of the others. This must be bad. Then I read another report and that analyst commented that Sears was in trouble because it's appliance and "big ticket" items were down like retailers Home Depot (HD) and Lowes (LOW).

All this got me to thinking, what is Sears and how should we set expectations for it? Is it a home improvement retailer like Home Depot, an electronics one like Best Buy (BBY) or a clothing retailer like JC Penny? The answer is neither and all of them.

Sears garners revenue and profits from both the big ticket washers and dryers, lawn and garden equipment, large screen tv's and electronics and children's shoes and family photos. Home Depot gets revenue from the former, Best Buy the middle and JC Penny the latter. None of them do all and because of that, we cannot judge and set our expectations for the retail performance of Sears according to our expectations for them, but look at all of them. We must expect the home appliance and electronics sections of Sears to continue to suffer as long as the sector's major members do. This is not due to a failure of management or "Lampert's store neglect" (today's excuse being thrown around in the media) but simply due to "people not buying these items anywhere".

Clothing. Even thought apparel is turning around at Sears (Land's End will have a record smashing year and womens and children's apparel are doing very well) one must sell a whole lot of clothing to make up for the lost sale of a $2000 washer & dryer or TV set. These are issues that JC Penny and Macy's do not suffer from. It also means that when housing begins it's turn around, that fact that Sears has turned the tide in clothing retailing will lead to spectacular results as folks begin buying those washers, dryers, refrigerators and TV's again (they will).

What does this mean? Sears is not necessarily suffering from "bad management" , but "bad expectations". The people setting the public expectations for Sears are comparing it to other retailers "in total" and not separating out the divisions. Just because Sears is a retailer does not means that because we expect "x" at JC Penny, we should expect the same at Sears. Sears is essentially in a retailing class by itself. It's Kmart divisions competes with Walmart (WMT), it's clothing with JC Penny and other clothing retailers, it's home appliances and lawn equipment with Home Depot and it sells electronics against Best Buy. In order to set our expectations for Sears earnings, we must included expectations for all these areas as they all effect Sears. Currently, way to much comparison is being placed on the clothing retailers and not enough on the home improvement chains.

This is leading to over ambitious expectations for Sears and when they do not deliver, we have events like today. There are pithy headlines about Sears being a "broken retailer" but I have to wonder, did not Target, Home Depot and Best Buy just finish dialing back expectations for the near future? Are they "broken" or is it just a general slowdown for anyone who has significant exposure to those big ticket household items? I think it is the later. Just because Sears is not making excuses, do not be lulled into thinking they are immune from housing.

It is ok though, I will be in the market with Lampert today and we welcome the shares you want to sell.

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