Monday, January 14, 2008

Housing Hurting Sears: No Surpirse

The housing situation is really taking a chunk out of Sears. The good news? It won't last forever..

Sears reported preliminary results Monday and as anticipated, the news was bad.

The skinny:

* For the year ending February 2, 2008, they expect net income to be between $744 million and $864 million, or between $5.13 and $5.96 a share vs $6.42 estimates
* Net income for the fourth quarter ending February 2, 2008 will be between $350 million and $470 million, or between $2.59 and $3.48 per fully diluted share.
* Expect to end the fiscal year with approximately $1 billion in cash and cash equivalents, excluding Sears Canada.
* Sears Domestic's comparable store sales declined by 2.8% during the nine-week period, while Kmart's comparable store sales declined by 4.2%. Total domestic comparable stores sales declined 3.5%
* During the ten weeks ended January 11, 2008, they repurchased 4.9 million common shares at a total cost of $513 million (or $105.46 per share) under the share repurchase program. As of January 11, 2008 they had remaining authorization to repurchase $223 million of common shares.

Nothing in these results surprised me. Think about it. If retailers like Target (TGT) and JC Penny's (JCP) who also are experienced declining store traffic in recent quarters are having trouble selling $30 shirts or pants, ought not we expect Sears to have a bit more trouble selling a $1500 washer and dryer set?

Here is what made me really happy. " The expected cash and cash equivalents balance indicated does not give effect to any share repurchase activity after January 11, 2008." Do the math. $1 billion in cash (excluding Sears Canada) and only $213 million in repurchases remaining. Sears could easily complete the purchase but is choosing not to in order to protect the balance sheet. They could have finished it and then used debt to buy more or finance operations like both Starbucks (SBUX) and Home Depot (HD) have done but that, while making things look good short term, would have been a mistake long term.

Bottom line, retail sucks right now (except Wal-Mart). There is no way to sugar coat it. That being said, if you accept that, you need to look toward the future. Even with the "end of the world" for Sears that the commentators were babbling about, look at the big picture. Lampert is thinking like an owner who is in this thing for the long haul, not a CEO who needs to make a number or risk losing his job next quarter.

Now, while the lack of appliance sales really hurt now, when housing turns, that same pain becomes joy as the sales hit of the $1500 washer and dryer not being sold today becomes a gain of the same when it does. Here is where Lampert's discipline comes in. Sears will enter this period even stronger as the share count will be dramatically reduced, debt will STILL be irrelevant and this will cause EPS and cash to jump.

It was another "bash Lampert" day on CNBC but, are shareholders at Macy's (M), JC Penny (JCP), Kohl's (KSS), Home Depot (HD) or Lowes (LOW) fairing any better? No they aren't. Now, of the aforementioned companies, who has the strongest balance sheet? Sears...

Here is another point. Remember earlier last year when all the talking heads and analysts were pushing daily for Sears to make a huge acquisition? Remember the Home Depot rumors? Any large purchase of that size would have included massive amounts of debt. How bad would that decision to go ahead have looked today? Any retailer who did such a deal would be hurting big time in the current environment. Rather than a decrease in earnings, we would most likely be taking about huge losses. Do not expect to hear them talking about this either...

They were wrong then and this time next year will be proven wrong now..

Disclosure: Long SHLD, None in others

Todd Sullivan's- ValuePlays

↑ Grab this Headline Animator

Visit the ValuePlays Bookstore for Great Investing Books


blogger templates | Make Money Online