Eddie Lampert's Sears Ponders Spin-Offs
In recent years Sears Holdings (SHLD) has been among the more controversial companies on Wall Street. Yet there is little disagreement between the stock's backers and detractors about the quality of the core Sears and Kmart retail operations: All think it stinks. Both chains are considered also-rans, with too many tired stores in disadvantaged locations, subject to a slow bleed in sales.
Move beyond an assessment of Sears Holdings' retail operations, however, and the debate gets sharper. Bears on the stock, many responsible for a large and enduring short position that now amounts to about a quarter of the publicly traded shares, believe the sales erosion, coupled with a big slug of debt and a hefty pension obligation, will make it hard for Sears to avoid a bankruptcy filing or some other equity-decimating restructuring. But a growing bullish contingent focuses on the value of Sears' disparate assets, including its respected Kenmore and Craftsman brands, and its owned and leased real-estate holdings, which could be turned into cash.
Most of all, Sears' Wall Street fans believe Chairman Edward Lampert—the hedge-fund manager and retail impresario who put Kmart and Sears together in 2005, and who controls 62% through various entities—has structured the company to allow the full value of its assets to be realized, and is motivated to make that happen through some sort of financial engineering or restructuring within the next two years. Sears shares (ticker: SHLD) currently change hands around $51, a lot nearer their January low of $29.20 than their 2007 high of $190. If Lampert succeeds in restructuring the company, the stock could be worth close to $100
Barron's has followed Sears closely since Lampert became involved, and turned bearish on the stock in a 2009 cover story ("Washed Out," Aug. 24, 2009). Now it is time for a reappraisal.
Last December Sears preannounced a dreadful holiday season, prompting credit-rating agencies to downgrade its debt several notches, putting it well into "junk" territory. The company eventually booked a fiscal fourth-quarter loss of $2.4 billion, or $22.63 a share, equal to 30% of its current enterprise value of $8 billion, composed of $5.5 billion of market value and about $2.5 billion of net debt. Nearly all the loss reflected non-cash impairment charges, merely confirming the market's dim view.