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A Race Between Cost Cutting and Sales Declines – Edward Lampert Reduces Sears Holdings

December 10, 2013 | About:
According to GuruFocus Real Time Picks, Edward Lampert made a reduction to Sears Holdings Corporation (SHLD). So, two questions arise for investors: (1) What does Lampert see to reduce that position? and (2) can we see it too?

Sears operates a network of stores with thousands of full-line and 54 specialty retail stores operating through Kmart and Sears and 475 full-line and specialty retail stores in Canada. It operates in three reportable segments: Kmart, Sears Domestic and Sears Canada.

Keeping Away from Unprofitable Stores

The firm had seven years of declining sales, which we think is a major problem because it is not generating genuine cash and worst of all, time to have nothing left to sell off is getting closer.

Sears announced shutdowns in 21 states, including California, Alabama, Colorado, North Carolina and Virginia. Of a total of 80 stores, 41 are under the Sears brand and 39 are Kmart stores. Then the announcement was extended to 100-120 stores closes.

Moreover, in Toronto the firm plans to close five stores, and companies such as Target (TGT) and Macy´s (M) could take advantage of this situation.

Despite a great “downsizing effort”, the strategy of selling or spinning off assets and closing stores will have a dark end sooner or later and bearish activity on Sears will continue.

Financial Weaknesses

Going forward, we are going to see useful measures in investment analysis. Unfortunately, all of them (probably) show poor management decisions.

1) Revenues dropped by 6.6% and Net Income has decreased by 7.2% when compared to the same quarter one year prior.

2) Cash generation is significantly lower than it peers, which possibly demonstrates the inability to cover short-term cash needs.

3) Price-to-book ratio is lower than 51% of the department stores industry median.

4) Earnings per share declined by 7% in the most recent quarter compared to the same quarter a year ago.

5) Stock price trend is erratic for the last four years.

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Finally, I always like to see of one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has decreased when compared to the same quarter one year ago. I have to emphasize this because is a signal of major weakness within the company.

Final Comment

Although the company reduced fixed asset and planned reducing strategies for inventories, every quarter through all of fiscal 2013 it had the same result: a loss. Sadly we think that there is no sign that profitability will rebound in the future. Additionally, the retailer predicts fourth-quarter adjusted earnings will be less than half the ones reported for the same quarter last year.

Hedge fund guru Edward Lampert has reduced the stock and others like Jim Simons and Steven Cohen sold out shares in last June. Taking this into consideration I would recommend staying away from Sears at the time.

Disclosure: Damian Illia holds no position in any stocks mentioned.

About the author:

Damian Illia
A fundamental analyst at Lonetreeanalytics.com constantly looking for value and income investments.

Visit Damian Illia's Website


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