by Tom Taulli | September 10, 2013 2:36 pm
Shares of Sears Holdings (SHLD) are up 7% today, continuing what appears to be a short squeeze.
But despite the stock’s recent jump, Sears’s business continues to struggle. In the latest quarter, the company sustained a loss of $194 million or $1.83 per share, up from a loss of $132 million or $1.25 per share in the same period a year ago. During this period, sales dropped by 6.3% to $8.87 billion and same-store sales fell by 1.5%. Keep in mind that the company has posted 26 consecutive quarterly sales declines.
Should you buy Sears on the hopes that the company will manage to find a way back? Or is the situation hopeless? Let’s take a look at the pros and cons:
Scale and Brands: Sears has a massive retail footprint, with nearly 2,500 full-line locations across the US and Canada. The company continues to dominate home services, making more than 14 million service calls per year. Sears also has an extensive line of proprietary brands, including Kenmore, Craftsman, Lands’ End, Joe Boxer and Sofia by Sofia Vergara. Such brands generally allow for higher margins and are a draw for customer foot traffic.
Streamlining: Sears has certainly taken tough measures to increase liquidity and reduce its cost structure. Over the past year, the company has improved inventory turnover, closed down locations, sold off 14 properties, unloaded the Sears Hometown and Outlet business, and spun off half its stake in Sears Canada. Because of these efforts, Sears has a liquidity position of $7 billion. In other words, it’s a long-shot that the company will face any financial problems in the near-term.
Digital: Sears is making a big push to transform itself into a next-generation retailer. At the heart of this is a social shopping platform, called Shop Your Way. It has a marketplace of more than 60 million products, plus a rewards program. And yes, it leverages Big Data to analyze user behavior, allowing for better targeting of offers. Sears has also rolled out tablets across its stores, making it easier for associates to access product specifications and search for inventory. The devices also make it possible for them to provide checkout services anywhere in a store.
Appliances: With the upturn in the real estate market, this business should be strong, but that hasn’t been the case. Sears has been losing ground to other major operators like Home Depot (HD) and Lowes (LOW), who have been investing more in their merchandise and staying competitive with pricing. Another issue is Sears’ relationship with Whirlpool (WHR), which makes products for the Kenmore brand. The partnership frayed as Sears looked elsewhere for product partners like LG Electronics and Samsung Electronics.
Macroeconomic Trends: The US economy has been in recovery for some time, but it has still been fairly lackluster. The fact is that Sears’ customer base continues to struggle as wages remain stagnant. Another factor has been the elimination of the 2% federal payroll tax cut. Such problems have also impacted many other retailers like Walmart (WMT) and Macy’s (M), making them more inclined to pursue promotions and discounts to get new business. But the result could be further pressure on margins across the retail industry.
Leadership: The current CEO of Sears is Eddie Lampert, a top-notch hedge fund manager. His fund, ESL Investments, has a whopping 56.2% stake in the company. But the skills of an investor are often not the same ones needed to lead a struggling retailer. If anything, a better option would likely to be to find someone who has extensive industry experience and has been able to pull off turnarounds.
Sears isn’t the only retailer facing challenges — others include Toys “R” Us, Staples (SPLS), Barnes & Noble (BKS) and JC Penny (JCP). But given its size and brands, you would think Sears would be able to find ways to achieve sustained profitability. True, turnarounds are far from easy … but some retailers, such as Best Buy (BBY), have proven themselves capable.
So should you buy Sears on those hopes? No — the company has shown few signs of any improvement, and the situation looks like it will continue to remain bleak.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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