Beleaguered retailer Sears Holdings Corp. (NASDAQ:SHLD) is enjoying a strong 2015, with SHLD stock up 25% for the year despite experiencing a fairly significant pullback in April.
SHLD’s earnings report on Wednesday will be a source of significant attention on Wall Street. Retail performance has generally disappointed the markets, so SHLD can do itself a whole lot of good by bucking the trend.
Can SHLD pull a shocker from its bag of tricks? Should recent momentum be an indicator, Wall Street may be in for a surprise.
SHLD’s ‘Shop Your Way Program’
In a bid to stifle the chorus of criticism that weighs down the big box retailing sector, Sears CEO Eddie Lampert reiterated the strengths of the company’s loyalty rewards program at its annual shareholders meeting this month.
Entitled “Shop Your Way,” the strategic initiative accounted for 74 percent of 2014 sales and provides insights into consumer shopping trends.
So far, Wall Street has given Sears stock a resounding applause. But the company continues to have serious financial concerns.
SHLD has invested millions into the rewards program, and its inherent structure bleeds profit margins. In the past four years, Sears lost $7 billion in the last four years and revenue trends continue to decline.
Inclusive of the bearish implications of SHLD’s fundamentals — which also dubiously features a growing debt-to-asset ratio — there has also been a substantial uptick in short interest for Sears stock. And with a beta of 2.56, SHLD has historically been exponentially more volatile than its big-box competitors Amazon.com, Inc. (NASDAQ:AMZN), Target Corp. (NYSE:TGT) and Wal-Mart Stores, Inc. (NYSE:WMT).
SHLD’s last two earnings reports exceeded analysts’ consensus estimates, with the fourth quarter of 2014 results producing a dramatic 75% surprise. In addition, the average performance of Sears stock one month after earnings release has notably increased since November 2013.
Over the past 90 days, SHLD’s average performance in the markets is 3.8%, which statistically nets a bullish move over the next three months 62.5% of the time. However, due to Sears stock’s comparatively high beta, the magnitude of potential returns — 13% — is slightly outweighed by the risk at -14%.
In other words, the probability of getting it right favors the bulls but should the markets go awry, SHLD can lay down the pain in a hurry. Given the extra scrutiny on the retail sector, a failure to impress shareholders could get particularly ugly.
The Sears stock opportunity is by no means a perfect investment. Since the global financial crisis of 2008, the markets have generally been unkind to SHLD.
However, the revamping efforts led by chief executive Lampert, as well as broad bullish support for company shares, makes SHLD a dark-horse bet for long-term gains.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
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