Sears Has Investors Looking Forward — and Buying

by Beth Gaston Moon | February 24, 2012 7:00 am

Sears Holdings (NASDAQ:SHLD[1]) was able to deflect attention from a significant earnings miss this week by unveiling a fresh new plan[2] to shore up its bottom line. The nation’s 10-largest retailer will spin off its Sears Hometown and Outlet chains through a rights offering that will raise an estimated $400 million to $500 million.

That will give existing Sears shareholders the first, limited-time opportunity to buy shares of this new company. A rights offering differs from an initial public offering, which makes shares available to all retail traders (hence the word “public”).

Sears Hometown stores are smaller than the traditional model and have been opened in smaller markets. They focus on housewares, including appliances, Craftsman hardware supplies and lawn-and-garden tools. Sears Outlet stores, true to their names, sell discontinued, damaged or otherwise one-of-a-kind items at a 20% to 60% discount to regular retail price. Roughly 1,250 of these brands are involved in the spin-off.

Sears is unloading an additional 11 stores to General Growth Properties (NYSE:GGP[3]), which is shelling out roughly $270 million for them. This transaction is expected to be complete in the next 60 days.

Finally, Sears plans to cut expenses at the “high end” of its previously projected range of $100 million to $200 million. All told, between the cost-cutting measures, the sold stores and the rights offering, the retailer’s bottom line should see an improvement in the neighborhood of $1 billion.

Sears shareholders are no strangers to grand gestures and focus changes. Just two months ago, on Dec. 27, Sears execs announced plans[4] to close more than 100 Sears and Kmart locations. Company officials noted today that 81 store closings[5] are already underway, and an additional 40 are planned.

The stock responded positively to the spin-off news on Thursday, and as a result shook off the fourth-quarter earnings woes[6]. On a per-share basis, the retailer lost $22.47, following per-share gains of $3.43 just one year ago. Adjusted for items, earnings came in at 54 cents per share, well below analysts’ consensus estimates. Sales were down about 4% during the period to $12.5 billion.

Investors opted to look forward instead of behind, however, concentrating on the retailer’s planned changes to keep the venerable company afloat. SHLD traded more than 10% higher in pre-market activity Thursday morning and closed 18.6% higher for the session. Year-to-date, SHLD has rocketed almost 100% higher.

Today’s surge could light a fire under bearish investors who have shorted the shares[7] and ignite a short-covering rally as they head for the exits. This phenomenon could keep the stock chugging higher over the short term.

Beth Moon doesn’t own any shares mentioned here.

  1. SHLD:
  2. fresh new plan:
  3. GGP:
  4. announced plans:
  5. 81 store closings:
  6. fourth-quarter earnings woes:
  7. shorted the shares:

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