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February 15, 2006

Sears Holdings: Recent News Articles Provide Insights

The Chicago Tribune took another shot at Sears Holdings (SHLD) this weekend with an article (free registration required) recapping a contractual dispute between the retailer and long-time Sears spokesperson Bob Vila. Noting that SHLD is in "demolition mode," the article recaps CEO Eddie Lampert's strategy to de-emphasize celebrity endorsers, focusing on the company's attempt to terminate its contract with Vila. Of course, given the Tribune's consistently negative reporting on SHLD over the past year, referring to Lampert the headline notes that "the moves may cost him."

I noted in a piece in a January that much of the analysis from journalists and retailing experts was failing to distinguish between SHLD the stock and Sears and Kmart the retailers. I suppose this is understandable given their differing perspective from Wall Street analysts and portfolio managers. In the case of the Tribune, there is a focus on the job loss and decline of a long-time Chicago icon. Retailing experts are more concerned with the shopping experience and the long-term competitive positioning of the stores....

Wall Street, of course, is interested in short-term results and focused on profits, cash generation, and asset value. On these fronts, I remain optimistic that SHLD will produce the goods and the stock will rally. SHLD shares have traded in a tight range between $115 and $125 since culminating a sharp and steady two-month decline from July high's over $160. The company is reporting in mid-March and after pre-announcing a good quarter from a profit and cash generation perspective, I don’t see much downside risk in the shares. Gary Balter of CSFB, the ax in the stock, was out last week with a brief comment noting a positive profile on Lampert that appeared in Fortune. Balter re-iterated his buy and noted the shares are cheap if they hit his 2006 estimates at under 5 times EBITDA and around a 10% cash flow yield. I agree and I remain long. I continue to add shares to new client accounts.

Two quotes from the Fortune give me comfort. The first is from Bill Crowley, CFO and Chief Administrative Officer of Sears.

"We don't use discounted cash flows out five years and weigh it against the cost of capital. We talk about how much money we are making right now, and how that can change."

The second is from Lampert. "The notion of spending money on the business--I'm not opposed to it. I just want a return for it."

These quotes tell me that decision-making at SHLD is being done with shareholders in mind. As I shareholder I can exit my position at any time, even if those decisions might hurt Sears and Kmart in its long run battle to remain competitive as retailers.

Posted by Steve Birenberg at February 15, 2006 09:46 AM in SHLD