“What about Sears? >> What the heck was that? Big surprise of the morning. The Street was looking for a loss, it posted a profit. And also secured a new line of credit, which eases certainly some of the financing concerns there. Sears Holdings is one of the big winners this morning. Up 16%…Now that’s a real surprise.” Squawk on the Street 5/22/2009
Sears Holdings (SHLD) was expected to release earnings next week, but the company had just signed a new credit agreement and the timing seemed appropriate to also reveal the surprising operational results as well. The company had been expected to lose somewhere in the neighborhood of 88 cents per share according to consensus estimates, but instead the holding company responsible for Sears and Kmart reported a profit of $26 million or 21 cents per share. Not only was that far outpacing the most optimistic of analysts, it also beat the companies performance from a year ago when the company lost 43 cents per share.
Interestingly, the better performance can not be attributed to rising sales as the company continued to lose market share to the likes of Walmart (WMT) and Target (TGT) and sales dropped by a total of $1 billion in the quarter from $11.1 billion to $10.1 billion. The company recently unveiled an updated website that it hopes will be a source of sales growth in the coming quarters, especially as same store sales have continued to weaken.
The company has clearly been quite successful in lowering costs, leading to vastly improved margins. The company was able to reduce sales and administrative costs by $168 million. Further improving the company’s financial position, they reduced inventories and debt levels. Their revolving credit line of $4 billion was set to expire in March of 2010, which would have hampered the retailers ability to adequately stock their stores leading into heavier sales cycles. Sears signed a new agreement with Banc of America Securities LLC in which it will have the ability to borrow $4.1 billion through spring 2010 and $2.4 billion through March 2012, with an option for another $1 billion. The statement released by Sears said the reduced borrowing in the future was more in line with its needs.
The strong quarterly performance was unexpected by nearly everyone, and thus the stock is the biggest gainer of Friday morning up 17%. Coming into the day, Ockham’s valuation was our neutral Fairly Valued. The stock currently trades within its historically normal range of price-to-cash flow, and just below that range of price-to-sales but that does not yet account for the most recently reported loss of revenue. It is highly unlikely that we will become more positive on the shares following the major run up in the stock on Friday. The inescapable fact is that the retailer is losing sales, and costs can only be cut so much. It is not hard to understand that sales are what drive retailers and until Sears Holdings can buck the trend of falling sales we will be skeptical of its investment value. Job well done to the management team in this quarter, but if you weren’t in Sears before the run-up then there are likely better places to invest right now.