Thinking Retail Stock? Swap Out Sears for Dillard’s

by Will Ashworth | November 17, 2011 12:51 pm

Sears (Nasdaq:SHLD[1]) said earlier this week that it would begin selling Barnes & Noble’s (NYSE:BKS[2]) latest Nook e-reader. Unfortunately, like everything Sears does, it’s a day late and a dollar short. Although there are plenty of admirers out there of Sears Chairman Eddie Lampert, I have no idea why. Sears continues to deliver nothing but misery for shareholders yet investors continue to buy its stock. Don’t. Consider Dillard’s (NYSE:DDS[3]) instead. Here’s why:

Sears just announced a widening third-quarter loss that was worse than Wall Street had expected. Factors affecting the poor performance, according to a report by the Associated Press, include bad results in Canada, lower consumer electronics sales and import clothing sales at the company’s Kmart stores. Same-store sales dropped 0.7% at its Sears stores and 0.9% at its Kmart stores.

There just aren’t any bright spots at Sears and there hasn’t been for some time. The company has had 18 consecutive quarters of declining sales. That will test the patience of almost anyone, but unfortunately, Lampert appears to have very little. Since buying Sears back in 2005, he’s tried everything but the kitchen sink to get the department store relevant again. Very little has worked.

Now he’s trying smaller formats, boosting online sales and taking its DieHard, Craftsman and Kenmore brands on the road. Costco (NASDAQ:COST[4]) now sells Craftsman tools. That’s great from a licensing standpoint, but it doesn’t fix the main problem that Sears is a dreadful place to shop. Since 2005, Sears has spent twice as much buying back its shares as it has on fixing up its stores. That will always be a losing proposition in retail.

One area where Sears and Dillard’s are comparable is in real estate – both companies own some of their store locations. I can remember when Lampert bought Sears and all the financial gurus talked about its lovely real estate assets. Where are those same analysts today?

The truth is Dillard’s actually owns a much larger percentage of its stores than Sears does. By my estimation, Dillard’s owns approximately 87% of its stores compared to about 30% for Sears. It is for this reason that Dillard’s announced[5] in January that it was going to create a real estate investment trust to own and operate its holding. The department store would lease its locations from a company division.

In good times and bad, this structure would allow Dillard’s to pay a decent dividend to shareholders. Any way that the company can unlock value in its assets to the benefit of shareholders always makes sense. As a rule, retailers probably shouldn’t own real estate, but Dillard’s is a family business going back several generations. Since it’s too late to turn back the clock, it might as well make lemonade out of lemons.

Dillard’s third-quarter report was the polar opposite of Sears. Highlights included a 127% increase in earnings per share and a same-store sales rise of 5% and. During the quarter, it repurchased $123.7 million of its stock at an average price of $42.66. Considering its shares closed on Wednesday at $49.87, it was a wise purchase. For the first nine months of the year, it made $2.17 a share, more than double the same period last year. It definitely is moving in a different direction than Sears.

As of this writing, Will Ashworth did not own a position in any of the stocks named here.

 

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