Sears Holdings CorporationSHLD

Morningstar Rating

Stock Research and Analysis

by Paul Swinand

Despite its size (more than 2,000 total stores across the North American market) and a history that dates back more than a century, Sears Holdings has not produced top-line growth for six consecutive years after merging with Kmart in 2005. Accordingly, Read more

Bulls Say

Sears Holdings still has the potential to generate significant cash flow, which in recent years has been used to buy back shares and pay down debt. The company's normalized earnings power can be meaningfully higher as the home appliance and hardware markets improve.

The company has significant assets in real estate. Those assets can be leveraged through sale lease-backs, retail partnerships, and as distribution and service centers in conjunction with Internet sales.

With an ownership stake already greater than 60% and recent open market purchasing activity, we cannot rule out a scenario where Eddie Lampert would take Sears private in an effort to improve its cost structure, alleviate the underfunded pension, reinvest in stores, and reinvigorate appliances sales.

In Canada, Sears' brand is positioned higher in consumers' minds than in the U.S., and in the long run is well positioned to generate stable cash flows from this segment. In 2010 Sears Canada's equity value was over $3 billion, nearly the equity value of the full company today.

Sears' brands--Craftsman, Kenmore, Diehard and the acquired Lands' End--have significant value with or without distribution in Sears and Kmart. Efforts to make those businesses run on their own merits should eventually be successful, creating significant value. Internet growth is also a way for Sears to expand its brands to a wider audience than just its stores. Read more

Bears Say

Sears can't shrink its way to profitability. Sales keep declining as fast or faster than management can cut costs and reduce inventory. Store closings will not be enough.

Competition is intense and will continue to affect the hardgoods business. Home Depot and Lowe's will continue to take share in hardware and appliances, Target and Wal-Mart will continue to take share in electronics and home, and specialists such as Best Buy and HHGregg will fill in where more service and selection is needed.

The company will continue to struggle in softgoods, despite attempts to the contrary. Softgoods are even more competitively intense and financial results tend to be volatile. Retailers that have traditionally been strong in hardgoods rarely succeed when launching grand softgoods strategies.

Principal shareholder Lampert's share buybacks and use of the company's excess cash for investments increases risk and also diverts cash from reinvesting in stores. Lampert may have underestimated the competitive risks of broadlines retailing, having previously turned around Auto Nation.

If losses continue to pile up along with debt, vendors may become nervous of the exposure to Sears' receivables. Even if merchandise quality and timeliness does not decline, some vendors may seek to bolster business with competitors as a way of diversifying long-term risk. Read more

Management

Management changes at Sears are hard to keep up with, including another lost CEO despite a stabilization of the business in 2012, and the departure of the CFO just a year before. It is clear that with roughly 60% equity ownership and additional participation Read more

Profile

Formed in 2005 after merging with Kmart following that company's Chapter 11 reorganization, Sears Holdings Corporation is parent to Sears, Sears Canada, and Kmart stores Read more