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Eddie Lampert's Sears Sees Q4 Revenue Decline

February 28, 2013 | About:
Holly LaFon

Holly LaFon

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Hedge fund manager and investing savant Edward Lampert formed Sears Holdings (SHLD) out of Sears and a Kmart emerging from bankruptcy in 2005. While several respected investors also poured money into the company, over the years, performance has been lumpy even as he as chairman has increased his control of the company, culminating in the installment of Lampert as CEO in January and fourth quarter results released today.

For the fourth quarter of 2013, Sears Holdings reported mixed results compared to the prior-year quarter. Adjusted EBITDA was up for the fourth consecutive quarter, to $429 million, in line with its guidance of Jan. 7, 2013, and up from $351 million in the prior-year quarter. Sears Domestic's comparable store sales improved 0.8%, and its gross margin rate increased 130 basis points.

Its net loss from continuing operations narrowed slightly to $489 million and $4.61 per diluted share, from $498 million and $4.70 loss per diluted share in the third quarter.

Revenues decreased to $12.3 billion from $12.5 billion in the prior-year quarter. The decrease resulted primarily from the separation of its Sears Hometown and Outlet businesses, the effect of having fewer Kmart and Sears full-line stores and lower comparable store sales, the company said.

Sears’ shares fell a further 5.2% on Thursday, to a market price of $45 per share in afternoon trading, bringing its total drop over the past 12 months to almost 35%.

"Sears Holdings made progress in 2012 improving the profitability of our business, but we know there's more work to be done in 2013," Lampert said in a statement. "Our focus continues to be on our core customers, our Members, and finding ways to provide them value and convenience through Integrated Retail and our SHOP YOUR WAY Membership platform. We have invested significantly in our online ecommerce platforms, our Membership rewards program and the technology needed to support these initiatives."

Sears announced on Jan. 7 both its fourth quarter financial update and that Edward Lampert would take over as the company’s fifth CEO since he became chairman, replacing Lou D’Ambrosio, who would retire.

Lampert thanked D’Ambrosio in a memo for "[guiding] Sears Holdings during a time of rapid industry change to become a more customer and Member-focused company and [positioning] us to lead in Integrated Retail.”

Although he has not served in a CEO capacity in retail before, Lampert served as director for both AutoNation (AN) until 2007, and AutoZone (AZO) from 1999 through, during which time the company’s market price increased approximately 338%.

In addition to a more hands-on role, Lampert increased his share count recently by 0.79% on Jan. 10, three days after announcing his new role as CEO. With approximately 46.6 million shares, he owns just over 40% of the company.

Another well-known investor who is bullish on Sears is the Fairholme Fund (FAIRX)’s Bruce Berkowitz. He owns over 18 million shares after increasing his stake by 1,212,493 shares in the fourth quarter. It was his largest purchase of the company since the first quarter of 2011.

Berkowitz is also planning to reap great returns from Sears debt. “We expect 2013 to be a watershed year given our current focus on the debt of two companies, MBIA (MBI) and Sears (SHLD), which comprise 55.1% of the Fund's assets. MBIA parent company debt is 33.9% of the Fund. Sears Holdings debt represents 16.7% and the surplus notes of MBIA's subsidiary comprise 4.5%,” he said in his Fairholme Focused Income Fund fourth quarter letter.

“We believe that Sears will continue to pay all scheduled interest and principal on its debt obligations. If all bonds were to trade to par, the Fund's NAV would be much higher even with 39.6% cash and equivalents — a ‘barbell’ strategy,” he added. (See Berkowitz’s case study on Sears here.)

Berkowitz has recently seen much-questioned bets on troubled financials such as Bank of America (BAC) and AIG (AIG) pay off.

Other Gurus interested in Sears include Whitney Tilson, who initiated a position in the company in the fourth quarter, and Jeremy Grantham, who increase his. Francis Chou and Chuck Akre own smaller holdings of Sears, which remained unchanged in the fourth quarter.

Looking ahead, Lampert as leader of the company is counting on driving growth primarily through investing in its integrated retail and membership program, leveraging its social and ecommerce online platforms, its supply chain capabilities and stores, he said in his 2013 annual letter.

As a hedge fund manager of his $9 billion ESL Investments, Lampert delivered returns of 25% on average annually through the first 14 years since inception in 1989.

See the other stocks in Lampert’s portfolio here. Also check out the Undervalued Stocks, Top Growth Companies, and High Yield stocks of Edward Lampert.


Rating: 3.3/5 (3 votes)

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