Sears Store


Commentary below on Sears Holdings Corporation (NASDAQ:SHLD) , first the news:

HOFFMAN ESTATES, IL – In advance of its annual meeting of shareholders to be held on May 2, 2012, Sears Holdings Corporation (Nasdaq:SHLD) today announced its expected first quarter 2012 results as follows:

• Net income from continuing operations attributable to Holdings’ shareholders for the first quarter of 2012 of between $155 million and $195 million (between $1.46 and $1.84 per diluted share from continuing operations) versus a net loss from continuing operations attributable to Holdings’ shareholders of $165 million ($1.53 loss per diluted share from continuing operations), for the first quarter in 2011. The above range includes approximately $235 million, after tax and minority interest, of gains from the sale of certain U.S. and Canadian stores. These transaction generated $440 million of cash proceeds.
• Adjusted EBITDA of $135 million to $195 million for the first quarter of 2012 versus $58 million for fiscal 2011. The increase in Adjusted EBITDA reflects an improved margin rate, particularly in appliances, and reduced expenses.

While Sears Domestic experienced an overall sales decrease, Sears achieved double-digit increases in its apparel and footwear categories. These increases were offset by declines in the appliances and consumer electronics categories. Kmart’s comparable store sales decrease reflects increases in the apparel and footwear categories, offset by declines in the consumer electronics category.

Sears Canada expects to report a comparable store sales decline of 6.2% for the quarter. The decline is primarily due to sales decreases in electronics, home décor, hardware and apparel, partially offset by increases in major appliances and mattresses.

We currently expect to end the first quarter with approximately $8.9 billion in merchandise inventories (domestic of $8.1 billion and $0.8 billion at Sears Canada) as compared to $9.7 billion of inventory last year.

Adjusted EBITDA

The Company expects to report total Adjusted EBITDA of $135 million to $195 million in the first quarter (domestic of $165 million to $195 million and Sears Canada of $(30) million to $0 million), which is computed as follows:

• expected net income from continuing operations attributable to Holdings’ shareholders of $155 million to $195 million;
• plus income statement line items not included in EBITDA consisting of income attributable to noncontrolling interest, loss from discontinued operations, income taxes, other income (loss), interest and investment income, interest expense, depreciation and amortization expense and gains on sales of assets of $(80) million to $(100) million;
• plus pension expense and closed store / severance costs of approximately $80 million, which we do not include in Adjusted EBITDA.

In the first quarter of 2011, we reported Adjusted EBITDA of $58 million (domestic of $73 million and Sears Canada of $(15) million). For further discussion of the reconciling items, see the Company’s press release on fourth quarter and full year 2011 results issued on February 21, 2012.

Transaction Updates

On April 17, 2012, the company closed the previously announced transaction with General Growth Properties to sell 11 properties (six owned and five leased) for $270 million in net cash proceeds. In addition, Sears Canada, a consolidated, 95%-owned subsidiary of Sears, completed its transaction with The Cadillac Fairview Corporation Limited to surrender and early terminate the leases on three properties for $170 million Canadian in cash proceeds on April 20, 2012.

The Company issued a press release on April 30, 2012 related to our previously announced plan to separate its Sears Hometown and Hardware and Sears Outlet businesses.

Share Repurchase Activity

During the first quarter of 2012, we had no share repurchase activity. At April 28, 2012, we had $504 million of remaining authorization under our common share repurchase program.

What do we have? The bears will say the retail side still sucks and the bulls will say that it is improving. They will also say that the upcoming divestitures will enable Lampert to further shrink the float.

I say they are both right. The question then begs, “why do you own shares”? Simple. There are some fantastic assets here that are only now being monetized.

$SHLD has a current cap of ~$6.5B. What do we have there? We have the largest chain of auto repair shops in the country, the #1 appliance brand in Kenmore (~50% higher than #2), 30% of the US hand tool market in Craftsmen, the #1 home appliance repair operation and the #1 customer rated car battery in Diehard. THAT has tremendous value and IMO it is well above the current market cap of the company.

Most people do not go to Sears Holdings Corporation (NASDAQ:SHLD) for clothing, they go there for the other items and while there pick up clothes. Because of that the housing crash hit Sears harder than other retailers and continues to do so. Now that housing has bottomed (or is in the process of it) demand for Sears’ major items will pick up also. Remember, a housing bottom is a process, not an event but in many areas, it clearly has turned. What is amazing is that the above brands have the market share they have despite essentially being held hostage inside Sears locations.

But, now that Sears has begun the process of franchising some of its 850 auto locations and will begin to license its three major brands above I expect the share and profitability of them to rise. How many more tools, washers/dryers and batteries will be sold if they start appearing in $HD and $LOW? No, I’m not sure why this took so long either, I have been calling for it for years now.

The counter argument is that licensing will cannibalize the current Sears store and damage them even more. So what? Look at the sales figures, people aren’t going there anyway. Plus there isn’t anything that says Sears can’t run “only at Sears” models as the brands become even more popular than they are now as a store draw.

What happens then? Does Sears even need retail locations? Was there ever a Black and Decker or Maytag store? No, but those brands were sold for a combined $6.2B which is the equivalent of Sears current market cap. The argument could be made Sears brands are worth more as Craftsmen is a close #2 to Black and Decker and Kenmore blows away Maytag’s share again, despite being sold “exclusively at Sears”. Craftsmen started being sold at some Ace Hardware in ’10 and Costco location but in limited availability in ’11 and gained overall market share . Further, Kenmore is ranked #1 or #2 in every major appliance category.

To put some numbers on it Hardlines, which consists of appliances, consumer electronics, lawn and garden, tools and hardware, automotive parts, household goods, toys, housewares and sporting goods is an >$20B business for Sears

Now you also have to consider that there is value in the auto/home appliance parts/repair ($3.5B in revenues in ’11), Lands End and yes, even Kmart has some value in it.

What then? Maybe sell Lands End for $3B-$4B, add that to the $400M-$500M proceeds from the Hardware IPO and buy back a boat load of shares. What about the stores? Convert them to a REIT?

The reality is Eddie Lampert only need to repurchase ~29 million shares for $1.8B (at today’s price) and then essentially he and Bruce Berkowitz own the whole company (and whoever else holds onto their

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