by Dan Burrows | November 21, 2013 11:44 am
Sears Holding (SHLD) just posted a much wider loss for the third quarter amid sales declines at both Sears and Kmart locations. Yet SHLD stock still recovered early losses to rise Thursday and is now up more than 50% year-to-date.
Anyone holding SHLD stock must know by now that Sears Holding is a tire fire. SHLD — the retail monstrosity comprised of Sears and Kmart created by billionaire hedge-fund manager Eddie Lampert — is desperately ill and shows little promise.
And yet on a percent basis, Sears stock has done twice as well as the S&P 500 this year. Indeed, SHLD stock is beating the broad market index by more than 25 percentage points.
Sales at SHLD fall quarter after quarter and year after year, and can’t really reverse course when Sears is closing so many Sears and Kmart locations. Meanwhile, Sears earnings have been and will continue to be non-existent. There’s some indication that a new loyalty program is working — while SHLD is shedding assets — but this is hardly a successful turnaround story … at least not yet.
Based on all that, SHLD stock should probably be in the gutter, as it was for large portions of last year. But Sears stock doesn’t get valued that way — not when SHLD is sitting on at least $7.3 billion worth of prized commercial real estate, among other potentially lucrative assets.
SHLD may not make it as a retail chain, but there’s a tremendous amount of value locked up in the business that could flow to holders of Sears stock if they just hold on.
So, should you buy SHLD stock? To help decide, let’s look at some of the pros and cons:
Real Estate: A chunk of the SHLD Sears and Kmart locations — both owned and leased — are by one estimate worth $7.3 billion. In addition to those lucrative commercial real estate assets, Sears has other valuable properties, including Lands’ End, which could be sold or spun off to shareholders, as SHLD has done with other assets. That bodes well for Sears stock.
Valuation: The market doesn’t expect much from SHLD stock and values it accordingly. There are no earnings multiples for Sears stock because it has no earnings, but other measures show this to be a very cheap stock — if SHLD could ever make any kind of material improvement in sales. SHLD stock has a price-to-sales multiple (P/S) of 0.17. By comparison, much healthier Macy’s (M) fetches a P/S of 0.68.
So Crazy It Just Might Work: Lampert’s turnaround strategy aims to convert SHLD into a member-centric retailer through its Shop Your Way loyalty program. These loyalty program members get preferential treatment, like access to Sears stores from opening on Thanksgiving to closing time on Black Friday. There is some evidence it’s working. Loyalty program members accounted for 70% of sales in the most recent quarter, up from 65% in the prior period. And if it works, a bet on SHLD stock will surely pay off.
Losses Upon Losses: SHLD has no earnings and is not expected to turn a profit anytime soon. Sears earnings showed a wider loss of $2.88 per share of SHLD stock on an adjusted basis in the most recent quarter. Including special items, Sears had a net loss of $5.03 a share, also wider than the year-ago quarter. And that’s how it’s going to be. SHLD is forecast to lose $6.19 a share this year and $4.26 a share next year. Indeed, SHLD hasn’t booked a full-year profit since 2011. SHLD stock doesn’t trade on earnings, that’s for sure.
Sales Disaster: Those SHLD losses are a direct result of plunging sales and same-store sales. For the most recent quarter, sales fell 6.6% and same-store sales declined 3.1%. And that’s also the way it’s going to be. SHLD is forecast to report a sales decline of 8.3% this year and a drop of almost 1% next year. Furthermore, it’s hard to grow revenue when SHLD is closing so many Sears and Kmart stores. That doesn’t bode well for Sears stock.
Valuation: The 50% run up in SHLD stock this year has nothing to do with retail operations and everything to do with what Sears stock is worth in a sum-of-parts analysis of SHLD and its real estate. The problem is, SHLD has $7.3 billion in real estate assets and perhaps another $2 billion in other assets. Meanwhile, Sears stock has an enterprise value of $9.6 billion, which is theoretically what it’s worth in a break up. The real estate and other assets are fully reflected in the value for SHLD stock already — and maybe then some.
Forget about SHLD stock. The only thing propping Sears stock up is the break-up scenario, which is already fully baked into the current SHLD stock price. Operationally, there’s no reason to think Sears Holdings will ever turn things around.
If you don’t own Sears stock, don’t buy it; you’re too late. And if you do own SHLD stock, get out while you can. There are better risk/reward opportunities for retail investors.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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