Sears Holdings Corp (SHLD): Why The Stock Won’t Make A Comeback

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May 23, 2014 10:20am NYSE:XRT

investTara Clarke: Sears Holdings Corp (NASDAQ:SHLD) slumped 4% in premarket trading this morning (Thursday) before announcing financial results for its first quarter, which ended May 3. 

Overall, Sears posted a loss of $2.24 per share, vastly widening from Q1 2013’s loss of $1.29 per share. The numbers were way off from analysts’ more optimistic expectations of a projected loss of $1.91 per share. Revenue fell 6.8% to $7.88 billion.

“Sears is undergoing a significant transformation, and we fundamentally are changing the way we do business,” Sears Holdings Corp. Chairman and Chief Executive Officer Edward S. Lampert said in a press release this morning. “Our performance in the first quarter highlights the challenges we are facing as well as the progress we are making in this transformation. We are moving away from a company that was heavily based on selling products solely through a store-based network to a member-centric business model focused on providing benefits to our members anytime and anyplace.”

Despite Lampert’s careful, positive spin on his company’s Q1 results, the market reacted negatively to the news.

Sears stock traded at $35.21, a 3.69% loss as of 11:15 a.m. EDT on Thursday. Shares are down 39.52% over the last 12 months, 28.02% year to date, and 19.42% so far in May.

Not much has changed in recent years for the retailer, which merged with Kmart in 2005.

In January 2012, Money Morning Chief Investment Strategist Keith Fitz-Gerald placed Sears stock on a “death watch” in an interview with FOX Business’ Stuart Varney.

“The bet about Sears has never been about retailing. The play here for years has been Sears as a land bank,” Fitz-Gerald said. “But real estate is in the toilet and no amount of new merchandising can help offset [Sears’ losses].”

In November 2013, we reported on slipping Sears stock value and volatile trading when it reported a third-quarter revenue of $8.27 billion, down from $8.85 billion the year prior and short of analyst expectations.

Earlier this month on May 13, we watched Sears stock drop 3% on news that the company would sell 51% of its Canadian subsidiary.
You see, today’s earnings are just another “nail in the coffin” in a long line of hits to SHLD stock – in fact, they mark 28 straight quarters of revenue drops for the retailer.

Here’s why investors should continue to steer clear of this “death watch” stock…

Why Sears Stock Won’t Make a Comeback

Store layouts and merchandise are driving customers away from Sears, once the largest retailer by revenue in the United States (Wal-Mart [NYSE: WMT] took that honor away in 1990).

“The customer experience at Sears and Kmart is basically horrific,” Belus Capital Advisors chief executive Brian Sozzi said to Reuters today.

He also remarked that Sears is making a mistake by offering discounts on already low-margin items.
“(Sears is) not driving high quality sales and they’re limiting the ability to charge a full price. In a way, they’re begging for customers by giving away their products,” he told Reuters.

And rivals WMT and Target (NYSE: TGT) continue to put pressure on Sears and Kmart. Poor sales have forced Sears to close more than 250 Kmart stores since they merged in 2005.

Even though Credit Suisse analysts Gary Balter and Andrew Kinder tried to drum up a little optimism on Sears in an interview this morning with Barron’s, we remain unconvinced.

“Some investors…believe that we are too negative on Sears Holdings’ outlook…So let’s accept their math and take the low end of their assumed improvements. Based on that, we would add $1 billion to EBITDA from initiatives, which adding to trailing twelve months would give them positive EBITDA (yes you read that right) of $300 million. Here is the problem. The bulls on Sears argue for the most part that the value is in the real estate and brand names. If Mr. Lampert is trying to make it as an operator we should value them as such, but that’s a bigger problem. Using a positive $300 million EBITDA, that would imply a multiple of 29.5x let’s say in 2017 to give them time for the turnaround. That would place their multiple well above anything we cover, including our best growth names such as The Container Store (TCS), Tractor Supply(TSCO)… Lumber Liquidators (LL), and CarMax (KMX). So if one accepts the turnaround and we give them an eight multiple of EBITDA three years out, a somewhat generous multiple for a non-top-line grower, then the value of the equity would be negative…Maybe the company should explore the asset sale. Said another way, this remains a significantly overvalued stock and while we are not moving to a negative target price, we maintain our $20 price target.”

Credit Suisse’s final determination that Sears stock “remains significantly overvalued” is in line with Morningstar’s, which discontinued coverage of SHLD on March 18.

“We provide broad coverage of more than 1,700 companies across more than 140 industries and adjust our coverage as necessary based on client demand and investor interest,” Morningstar said in an accompanying note. Before dropping coverage, the firm had rated Sears the lowest of three rankings that reflect a company’s ability to best its competitors.

Money MorningWritten By Tara Clarke From Money Morning

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