Wednesday, August 1, 2007

"Financial Week" Lampert Article: Swing And A Miss

There was an article yesterday in "Financial Week" magazine about Sears Holding's (SHLD) Chairman Eddie Lampert. The first sentence in the article denotes to tone of the misguided prose to follow: "Time is running out for Edward Lampert, the hedge fund manager who controls Sears Holdings."

Okay, let's just ignore the basic fact Lampert controls 50% of the company and until HE decides he is done, he will be in charge of Sears. Let's also ignore the almost two decades of 29% annual returns he has given his investors. Further, we also need to ignore the trivial little fact shares in Sears Holdings have risen over 200% in the almost three years since the merger was announced. Let's also ignore Kmart was in bankruptcy when Lampert bought it and Sears it had LOST $5.5 billion in the three years prior to his purchase. Let's also ignore that he has taken that mess and turned it into an entity that has over $3 billion in the bank and throws off almost a billion dollars a year in cash flow. Again, in only two years since the merger was completed..

Now that we can ignore those facts, let's get to the article. You can read the whole thing here before we get into it.

FW: "Slack sales and falling profit have knocked 20% off the share price since May, ratcheting up the pressure on Mr. Lampert to come up with a new strategy that will reverse the slide."

VP: In a recent post I noted that each of the last three years have seen shares of Sears Holdings fallen 16%-25% from spring to the end of summer. This is nothing new for shareholders.

FW: "Sears’ recent announcement that net income will fall by almost half in the second quarter, the first decline since Mr. Lampert took control of the company in March 2005, shows his strategy of boosting earnings through cost cuts is no longer working."

VP: Perhaps the author missed earnings news from Target (TGT), Macy's (M), Home Depot (HD) and Lowes (LOW) and others in which they all also lowered expectations for investors. This is an industry event, not necessarily a company specific event.

FW: "Mr. Lampert’s options include the kind of financial engineering many expected from him when he merged Kmart into Sears in a $12.3 billion deal that left his hedge fund with a 43% stake in the combined company: sell Sears’ real estate or pull off another acquisition. His other choice: try to reinvigorate Sears by pumping a significant amount of cash into remodeling the stores and boosting advertising, the type of investment he’s been reluctant to make since installing himself as chairman."

VP: Or a third choice. Rather than pour good money into wastefull enterprises that have proven inefficient, how about we fix them by making multi million dollar IT investments so we do not continue losing money. How about we also stop discounting our merchandise chasing unprofitable sales just for the sake of a "analyst metric" and actually sell our goods at a profit. Now, sales will be negatively affected but profits will rise (they have). Then, after we have stopped the hemorrhaging of our finances, we can take a good look at where we stand and go from there, at least then we will have a financially strong balance sheet. This was Lampert's plan from the get go by the way and to date it has worked.

FW: "Cash flow, which surged early in Mr. Lampert’s tenure, has been declining since last year. Total cash is expected to drop to $2.8 billion by August from $4 billion in February.

A plan announced this month to repurchase $1 billion in Sears shares will buy time but it won’t reverse declining sales."

VP: This is entirely misleading. Cash flow has decreased,true. Why? Easy, Lampert and company have bought over 2 million of Sears shares and paid off debt. In the last year they reduced debt by almost $1 billion and bought back 2 million shares at a cost of about $350 million. If we do the simple math $4 - $2.8 = $1.2 billion OR almost exactly the same amount of money spent of debt reduction and share repurchases. HMMM.. funny how that works out. Right, buying back shares and sales have nothing in common, but, buying back shares, reducing debt and earning per share do and isn't that what we value stock prices on?

FW: "Rather than fix stores, he could opt for a financial maneuver to raise more cash—such as selling real estate. But that won’t fetch as much as it would have before demand for shopping mall real estate slumped around the country.

Or he could try to bolster the company with the acquisition of another retailer, perhaps a grocery chain like Safeway or a big-box retailer like B.J. Wholesale Club. But his record so far with Sears and Kmart raises questions about his ability to integrate a third acquisition."

VP: Correct he could do any of those but to expect Lampert to sell real estate or even float it as a option in the current environment is just silly. Has anyone notice out there that when he sold chunks of Sears and Kmart real estate it was, as it turned out to be, almost the peak of the market? If, anything, one should expect him to be a buyer in today's market and not a seller.

Can anyone tell me what a grocery retailer and a clothing retailer have in common and how we would need to worry about the "integration" of the two? This is a bit like Berkshire Hathaway (BRK.A) shareholders fretting because Dairy Queen and Geico Insurance have "no synergies".

This is what happens when you set out to write a negative piece on a company that you do not really understand, you miss some things..


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