Sunday, October 21, 2007

The Hidden Value In Sears Holdings

Barron's did a piece this weekend on Sears Holdings (SHLD). In it the author detailed several value metrics which shed light on why Chairman Eddie Lampert apparently cannot buy shares fast enough this summer at these prices.

Here is the gist of the article:

Time Frame:
- It took retail veteran Allen Questrom five years to revive then dead JC Penny (JCP) from 2000 to 2004. Lampert purchased Sears in 2005.

Retail Operations
- Margins are only at 4.7%, half those of competitors JC Penny, Target and Kohl's
- The Lands End "store-in-a-store" concept will increase margins
- Kenmore appliances (high margin) are now being moved into Kmart locations
- Lampert could increase cash flow $3 billion a year lust by delaying payments to suppliers like other retailers do.

Real Estate:
- Sears owns 518 of the 861 legacy general merchandise stores located in the best malls in America. Those not owned currently pay well below market rents.
- Kmart leases 1,194 out of 1,333 locations at rock bottom rates and the 100 year agreements essentially give Sears ownership control of the location.
- The company recently added to its "land bank" when it absorbed excess Macy's (M) and Mervyn's locations.
- Bill Ackman, who recently took a stake in the company says that at the current share price of $132, the market essentially values this rich real estate at $33 per sq. ft.. By comparison, Target (TGT) sells for $341 /sq. ft, Home Depot (HD) for $277/ sq. ft, JC Penny for $144/ sq. ft, Kohl's (KSS) for $319 /sq. ft and Simon Properties (SPG)(Ackman uses this because he argues Seas Holdings is a conglomerate much like Simon) for $698/ sq.ft.
- The management of Target has made it publicly know that it has the desire to take over "hundreds" of Sears current locations either on or off mall.
- Mall owners would pay dearly to take over Sears locations and put in stores like Cheesecake Factory (CAKE), Barnes and Noble (BKS) or PF Chang's (PFCB). There is nothing to stop Lampert and Sears from becoming their own leasing and development operation with these locations.

Back in February I said that "Sears Holdings is in the infancy of what it will eventually become" and the Barron's article, if nothing else should illustrate the tremendous options Lampert has at his disposal to enhance shareholder value.

How could you bet long term against this guys track record?

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