Sears Holdings (SHLD, Financial) today reported its 19th consecutive quarter of declining sales. But chairman Eddie Lampert’s transparent investor letter and a conference call instilled confidence that pushed the stock up nearly 23 percent, making a year-to-date gain of more than 93 percent. The sudden increase has cut losses, but still not generated a gain for Lampert, who recently added even more shares, or another major shareholder, Bruce Berkowitz.
Eddie Lampert owned more than 45 percent of Sears at the end of the fourth quarter. In January, he transferred roughly $159 million in Sears stock to his personal wealth from his hedge fund, ESL Investments. He also bought roughly $12 million in stock on the open market that month. After those purchases, he and his hedge fund together own about 59 percent of Sears.
Lampert purchased the shares after the stock had a steep decline from as high as $78 per share in November 2011 to roughly $30 in January 2012. The dip was primarily due to a profit warning the company released which said operating results were being significantly affected by a weak economy.
If Lampert purchased 12,000 shares at $30 in January, a total value of $360,000, he made approximately $720,000 at today’s stock price on that small investment alone. The recent increase has created little other profit, however. In the last five years, his average purchase price for shares was $96.7, meaning the stock would have to go much higher yet for him to gain.
Bruce Berkowitz of the Fairholme Fund, who owns 15.07 percent of Sears, is in a similar situation, but is closer to a profit. He has 16,208,492 shares, which he bought at an average price of $64.50 per share. The stock, which today trades at about $62 per share, has only to go slightly higher for him to receive a positive return on the investment. It has already significantly helped his fund, which lost 32.42 percent in 2011, compared to a gain of 2.11 percent for the S&P 500.
Whether they will ever see a gain remains in question. Eddie Lampert’s letter outlined plans to turn the company around, which may have recast it from a sinking ship to a promising turnaround story in the perception of many. Lampert also emphasized that Sears’ problem was making money, not liquidity, and it had multiple options for meeting its financial obligations while it took measures to revive business. Presently Sears’ $3.2 billion of liquidity consists of nearly $2.5 billion in domestic and Canadian revolving credit facilities and just $754 million cash.
To free up more cash, it plans to reduce expenses by close to $200 million, reduce peak inventory, separate Sears Hometown and Outlet businesses and hardware stores by transferring them to shareholders, which would raise $400 million to $500 million, and selling real estate for 11 stores to General Growth Properties (GGP, Financial) for $270 million. At the end of December, it said it would close as many as 120 stores.
Sales at Sears have declined every year since Lampert created it through the $11 billion merger of Sears and Kmart, then in bankruptcy, in 2005. In Sears Domestic’s comparable store fourth quarter sales declined 4.1 percent, and 3 percent for fiscal 2011. Kmart’s comparable store sales declined 2.7 percent in the fourth quarter and 1.4 percent for fiscal 2011. Sears Canada’s comparable store sales fell 7.5 percent in the fourth quarter and 7.7 percent for the fiscal year. Its adjusted earnings per diluted share from continuing operations for the fourth quarter were $0.54 in 2011 and $3.67 in 2010, and adjusted loss per diluted share from continuing operations for the full year were $4.52 in 2011 and $1.97 in 2010.
On its conference call, CEO Lou D’Ambrosio said Sears’ biggest problem in the quarter was margin rates. “The largest margin decline was in apparel and related categories… several factors contributed to the decline in these categories. We saw significant increase in commodity costs, particularly cotton, high inventory levels led to increased mark downs and clearance, and unseasonably warm weather impacted several categories, such as Land’s End typically strong outerwear business.”
He added, “There are actions we could have taken to mitigate the margin decline. Our five could have been executed better, in terms of quantity and assortment. Our promotional cadence should have been more surgical, and cost actions could have been taken earlier.”
With all of the challenges, much of the confidence about Sears lies in the abilities of Lampert himself. He has achieved an average return of 29 percent a year since 1988 on a string of successful endeavors and is often called “the next Warren Buffett,” making it difficult to doubt his leadership. He is one of Bruce Berkowitz’s primary reasons for remaining planted in the stock. “Investors fled with this New Year’s greeting before Chairman Lampert purchased over $150 million of common for his personal account,” he said in his fourth-quarter letter. “For many reasons, including management, we continue to believe the assets of this iconic brand to be a multiple of values implied by its current stock market price and continue to see the beginning of a new Berkshire Hathaway.”
Lampert concluded his fourth-quarter letter with his five-pillar business strategy, which has not changed since he began at the company.
Eddie Lampert owned more than 45 percent of Sears at the end of the fourth quarter. In January, he transferred roughly $159 million in Sears stock to his personal wealth from his hedge fund, ESL Investments. He also bought roughly $12 million in stock on the open market that month. After those purchases, he and his hedge fund together own about 59 percent of Sears.
Lampert purchased the shares after the stock had a steep decline from as high as $78 per share in November 2011 to roughly $30 in January 2012. The dip was primarily due to a profit warning the company released which said operating results were being significantly affected by a weak economy.
If Lampert purchased 12,000 shares at $30 in January, a total value of $360,000, he made approximately $720,000 at today’s stock price on that small investment alone. The recent increase has created little other profit, however. In the last five years, his average purchase price for shares was $96.7, meaning the stock would have to go much higher yet for him to gain.
Bruce Berkowitz of the Fairholme Fund, who owns 15.07 percent of Sears, is in a similar situation, but is closer to a profit. He has 16,208,492 shares, which he bought at an average price of $64.50 per share. The stock, which today trades at about $62 per share, has only to go slightly higher for him to receive a positive return on the investment. It has already significantly helped his fund, which lost 32.42 percent in 2011, compared to a gain of 2.11 percent for the S&P 500.
Whether they will ever see a gain remains in question. Eddie Lampert’s letter outlined plans to turn the company around, which may have recast it from a sinking ship to a promising turnaround story in the perception of many. Lampert also emphasized that Sears’ problem was making money, not liquidity, and it had multiple options for meeting its financial obligations while it took measures to revive business. Presently Sears’ $3.2 billion of liquidity consists of nearly $2.5 billion in domestic and Canadian revolving credit facilities and just $754 million cash.
To free up more cash, it plans to reduce expenses by close to $200 million, reduce peak inventory, separate Sears Hometown and Outlet businesses and hardware stores by transferring them to shareholders, which would raise $400 million to $500 million, and selling real estate for 11 stores to General Growth Properties (GGP, Financial) for $270 million. At the end of December, it said it would close as many as 120 stores.
Sales at Sears have declined every year since Lampert created it through the $11 billion merger of Sears and Kmart, then in bankruptcy, in 2005. In Sears Domestic’s comparable store fourth quarter sales declined 4.1 percent, and 3 percent for fiscal 2011. Kmart’s comparable store sales declined 2.7 percent in the fourth quarter and 1.4 percent for fiscal 2011. Sears Canada’s comparable store sales fell 7.5 percent in the fourth quarter and 7.7 percent for the fiscal year. Its adjusted earnings per diluted share from continuing operations for the fourth quarter were $0.54 in 2011 and $3.67 in 2010, and adjusted loss per diluted share from continuing operations for the full year were $4.52 in 2011 and $1.97 in 2010.
On its conference call, CEO Lou D’Ambrosio said Sears’ biggest problem in the quarter was margin rates. “The largest margin decline was in apparel and related categories… several factors contributed to the decline in these categories. We saw significant increase in commodity costs, particularly cotton, high inventory levels led to increased mark downs and clearance, and unseasonably warm weather impacted several categories, such as Land’s End typically strong outerwear business.”
He added, “There are actions we could have taken to mitigate the margin decline. Our five could have been executed better, in terms of quantity and assortment. Our promotional cadence should have been more surgical, and cost actions could have been taken earlier.”
With all of the challenges, much of the confidence about Sears lies in the abilities of Lampert himself. He has achieved an average return of 29 percent a year since 1988 on a string of successful endeavors and is often called “the next Warren Buffett,” making it difficult to doubt his leadership. He is one of Bruce Berkowitz’s primary reasons for remaining planted in the stock. “Investors fled with this New Year’s greeting before Chairman Lampert purchased over $150 million of common for his personal account,” he said in his fourth-quarter letter. “For many reasons, including management, we continue to believe the assets of this iconic brand to be a multiple of values implied by its current stock market price and continue to see the beginning of a new Berkshire Hathaway.”
Lampert concluded his fourth-quarter letter with his five-pillar business strategy, which has not changed since he began at the company.
