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January 11, 2006

Sears Holding: It's The Stock, Stupid!

"Sears Sees Stingier the Side of Holiday Sales"

"Dismal Christmas Puts Heat on Sears Chairman"

"Retail Experts Doubt Lampert's Strategies"

The headlines in a front page story from last Friday in the Chicago Tribune scream of the demise of Sears Holdings (SHLD). And the Trib is not alone. Virtually every retail expert quoted anywhere thinks SHLD is doomed.

I guess the journalists at the Trib forgot to read that press release the company issued before the open last Thursday. OK, sales in the Sears division were awful, declining 11.9% in December on a same store basis. Worse than expected? Barely. But wait a minute, Kmart had a positive comp of 1%. Losing market share? Sure. A decent performance compared to the 2% comp put by WalMart (WMT)? Definitely. Better than expected? Certainly.

And look at that EPS guidance…$3.55 to $3.95 against a current consensus of $3.52. And how about that cash balance? $3.5 billion, a full $500 million ahead of expectations. Share buybacks? 826,000 shares at an average price of $115.43.

I wonder if the Trib writers and all those retailing experts have checked the stock price lately. SHLD closed at $116.01 the night before the press release was issued. Yesterday, the stock closed at $122.70 for a gain 5.8% in three days. Read through the Trib article and it takes until well past halfway before they note that the stock might not care about the holiday sales. As I noted back in September, the obsession with sales is totally missing the story at SHLD. Quoting Gary Balter of CSFB, " The Sears story is one of negative comps, 500 basis points of margin expansion over three years and asset sales. This done right, and Sears would be currently trading at 3 times our 2007 EBITDA."

It seems to me that Jim Cramer and a couple of Wall Street analysts are the only ones who get what it is going on: SHLD the stock is a far different animal than SHLD the retailer. And guess what, Eddie Lampert's primary interest in and fiduciary responsibility to is SHLD the stock. As for the recent action in the stock, I think Cramer nailed it when he said yesterday on Real Money, "Now that Christmas is over and Sears didn't blow up – and Kmart accelerated – I would have to cover if I were short because there are no more data points for months to come that could knock it back down again."

I added SHLD to two new Northlake accounts last Friday morning because I figured we got the all clear with the press release. Think about the setup now. No news we know of for certain until the earnings release in early March. We already know the numbers will be OK. This means the news we are uncertain if we will hear takes center stage. And that news is far more likely to be good for SHLD the stock: closure of the Sears Canada deal, more share buybacks under the current authorization (providing downside support since we know the company was a buyer at $115), a larger share buyback announcement, maybe a few store sales, maybe those rumors of a leveraged buyout are true, though I am not counting on it. And I'm no technician, but the base on the stock since mid mid-September looks pretty powerful if it can break out to the upside.

If your time horizon is long enough that you are worried whether or not Sears and Kmart will survive the brutal competitive environment this stock is not for you. If your time horizon is 2006, then the sales don’t matter and this stock is for you. Northlake's time horizon is 2006.

Posted by Steve Birenberg at January 11, 2006 09:03 AM in SHLD