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November 17, 2006

Sears Holdings Gives The Bears Some Ammo

Below are two comments I wrote for StreetInsight.com in the hours following Sears Holdings (SHLD) earnings report. Overall, the quarter was OK but left some room for those bearish on the story due to the weak positioning of both Sears and KMart. THe pullback is understandable and reasonable in this context.

Initial Comment, 8:08AM Central

Sears Holdings (SHLD) reported 83 cents against consensus of 98 cents. The stock is down $8 on the news. Revenues were slightly above expectations and same store sales declines moderated to -3.8% with Sears providing all the improvement. The fact that sales are better than expected and EPS fell short implies that margins did not expand as much as expected. The press release lacks a full income statement but states that margins improved at Sears. Thus it appears that Kmart might be the source of the EPS shortfall. If so, this gives the bears something to chew on as they will state that Kmart shows there is a limited life to the ability to drive financial results based solely on margins.

I think this brief comment captures why the stock is trading off but I'd like to learn more and I wouldn't sell my long position or add to it based on what I know so far.

Follow-Up Comment, 8:32 AM Central

I found Sears Holdings' (SHLD) financial statements in the SEC filings. The figures at Sears look fine. Kmart saw a 90-basis-point decline in the gross margin vs. a year ago. Although SG&A leverage improved by 30 basis points, that was not enough to overcome the lower gross margins, and earnings before interest, taxes, depreciation and amortization fell from $85 million to $57 million.

Gary Balter is out with a comment. He says that the quarter was basically in line but notes that Kmart fell short as outlined above. He also says he thinks that investors were expecting slightly better same-store sales performance. He also noted another quarter of inventory investment. While this is to be expected with the holiday season just ahead, the increase was a little higher than he expected.

One positive noted in the press release is that apparel sales at Sears showed progress. This has long been a weak area for the company, offsetting the core strength in home-related hard and soft goods.

The stock has recovered a bit off its lows in pre-market trading. I still haven't decided what, if anything, to do with my long position.

Posted by Steve Birenberg at November 17, 2006 02:36 PM in SHLD