By Jack Hough
Sears is running an after-Christmas special you won’t see in sales flyers: Its shares got marked down by more than one-quarter Tuesday after the troubled retailer announced it will close 100 or more stores. Investors who are thinking about buying, however, should consider carefully the possibility that shares have further to fall.
Put aside all thoughts that Sears will endure simply because of its status as a storied retailer. That company no longer exists. Sears, Roebuck & Company was bought in 2005 by discount retailer Kmart, which was fresh out of bankruptcy and under the control of activist investor Eddie Lampert.
Today the company is called Sears Holding (SHLD). Although the name may bring to customers’ minds a Chicago-born merchant that supplied America’s appliances for more than a century, investors should regard the company as a collection of brands, real estate, retail operations and debt controlled by a Greenwich, Conn.-based hedge fund.
Kmart sold real estate and bolstered its stock price before buying Sears, and analysts speculate that Lampert’s intention with Sears was much the same: to turn its valuable real estate into cash flow with which to buy other investments. If that was the plan, two things have gone wrong. First, a real estate crash over the past five years has reduced store property values. Second, a recession has produced winners and losers among stores, and Sears Holdings seems firmly in the latter camp. Its sales have steadily slid in recent years and its profits have evaporated.
Also, Sears has spent an average of around $1 billion a year to repurchase its shares over the past six years. Share repurchases reduce the number of outstanding shares and theoretically make remaining shares more valuable. For that reason, investors generally view them as a promising sign. But repurchases can backfire when companies spend richly on shares that later fall. Sears paid an average of about triple today’s stock price.
The announced closure of 100 to 120 stores should generate $140 million to $170 million in cash as inventory is sold off, the Wall Street Journal reports. But Sears has debt of more than $4 billion. And it has pension and other retirement liabilities of more than $1.6 billion, according to investment bank Imperial Capital.
The valuation math can get ugly. On Dec. 9, Imperial Capital analyst Mary Ross-Gilbert issued an “underperform” rating on Sears Holding, writing that her sum of the parts, adjusted for assets and debt, came to just $6 a share. Shares were $58 at the time. They’re about $34 now.
Perhaps a downsized Sears can turn its store operations around. But for investors, the risks weem to outweigh the rewards at the moment. Mass retail brings lean profit margins to even the ablest players. Wal-mart (WMT) and Target (TGT) have respectively turned about six cents and eight cents of each sales dollar into operating profit over the past year, versus 15 cents for the median S&P 500 company.
All told, Sears has heaps of momentum, and little of it seems good for stockholders. Those looking for a long-term value investment should probably look elsewhere for now.