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May 17, 2006

Sears Holdings 1Q06 Earnings Preview

Sears Holdings (SHLD) will have reported earnings by the time you read this. Since I get a lot out of writing previews by setting my own expectations and understanding the setup in the shares, I am posting a preview anyhow. Hopefully, this note will help you put the reported figures in perspective.

SHLD accelerated its earnings report from early June but noted that no 10_q would be filed in conjunction with the press release. This might mean limited or no comments from Eddie Lampert and/or lack of detail in the press release. The company is very tight lipped and analyst coverage is sparse so there is no way to know why the earnings report was pushed forward.

Consensus calls for 64 cents on sales of over $12 billion. Beware that consensus is composed of just five analysts and there is wide dispersion in the estimates which range from 48 cents to 82 cents. Comp store sales will also be closely watched. Both Sears and Kmart face year ago store sales of -3% to -4%. In 4Q05, Sears had a -12% comp, while Kmart eked out a small positive gain. As far as I can tell, analysts are expecting comps at Sears of -10% with Kmart coming in around flat. Margins are expected to rise due to cost savings and gross margin expansion due to fewer promotions at Sears. With the lack of asset sales so far, the key to the SHLD story is operating leverage, so some combination of good expense control and in line or better than expected sales is what the bulls need. My 2 cents on the company's 4Q04 report discusses this in some detail and is worth a read as you analyze this morning's numbers.

There have been a couple of hints that have supported the shares. First, Whirlpool (WHR) noted in its earnings report that appliance sales at Sears were up in 1Q. According to Gary Balter of Credit Suisse, appliances were 17% of sales at Sears in 2005 and WHR represented 25% of the total. Second, Martha Stewart Omnimedia (MSO) noted on its conference call that sales at Kmart were up 4.4% in the first quarter. Finally, Bear Stearns found the 1Q06 earnings from Sears Canada to be better than expected.

A last thing to look at is the state of share repurchases. The company has bumped up its authorization and is buying back stock. This provides good support for the shares in a supply-demand sense but it also steadily increases the ownership stake of a well respected insider.

SHLD shares soared in March following better than expected 4Q05 results. The shares have added another 3-5% since then ahead of today's earnings report. The shares are bound to volatile today given the usual activity surrounding this stock and the added market volatility. I am optimistic that the street will like the numbers. We shall see.

Posted by Steve Birenberg at May 17, 2006 05:01 PM in SHLD