Longtime readers of this blog are familiar with my history with Sears Holdings (SHLD) and its predecessor, Kmart. A brief summary goes something like this.
Hedge fund manager Eddie Lampert loaded up on the debt of Kmart for pennies on the dollar as it fell into bankruptcy (nobody else wanted to come anywhere near the stuff). When the struggling retailer emerged post-restructuring, Lampert owned a majority stake and began cutting costs and reduced the company’s focus on competing with Wal-Mart on price (a losing proposition). The changes worked. Kmart was making money again and the stock soared from $15 to $100 before anyone really knew what had happened. Lampert merged Kmart with Sears in 2005 and investors cheered the move, imagining the magic he could work with strong brands and valuable real estate. Investors assumed he would close money-losing stores, sell off real estate to other retailers, ink deals to sell proprietary products (Kenmore appliances and Craftsman tools) in other chains, and use the cash flow to buyback stock and make acquisitions to diversify the company away from Kmart and Sears, which were clearly dying a slow death. Sears Holdings stock hit a high of $195 in 2007, for a gain of 1,200% in just four years.
Then something strange happened. Those grand ideas never materialized. People close to Lampert were convinced that was the route he would take, based on his experience and philosophy, but he never came out and said it himself. Investors had resorted to blind faith. While Lampart has closed some stores and sold off some real estate, the total store count has actually risen from 3,800 to over 4,000. Lampert cut costs and bought back stock (shares outstanding have fallen from 165 million to 107 million) but he has spent most of his time trying to turn around the retail operations. Couple that flawed strategy with an economy that went bust (the Sears deal closed in the heat of the housing bubble) and profits at Sears Holdings have plummeted. Despite the 35% reduction in shares outstanding, earnings per share dropped like a rock from $9 in 2006 to $1 in 2010. Like many others, upon realizing faith alone was not enough, I sold the last of my Sears stock in 2008 after it had dropped back down to the $100 area. Sure I had a huge profit from the early Kmart days, but the potential for Sears Holdings was just too great to be squandered.
So why rehash the past when readers could get all of that information just be reading all of the posts I penned back then about Sears Holdings? Because it appears Lampert might finally be getting his act together and not putting all of his eggs in the “make Kmart and Sears popular again” basket. It started last year with some subtle moves like splitting up the company into smaller divisions (including one for brands and one for real estate). Then the company reached a deal to sell Craftsman products in Ace Hardware stores (a much better idea than just putting them in Kmart stores). None of these moves were big but maybe they indicated a larger shift in strategy.
This year we have seen further movement in that direction. Sears has announced plans to spin off its Orchard Supply hardware store business into a separate public company. Craftsman tools can now be found in Costco stores and indications are that Kenmore appliances might be next. Diehard batteries are now going to be sold in 129 Meijer stores across the country. Floorspace is now available for other retailers to lease within most of the company’s existing 4,000 Kmart and Sears locations. In Greensboro, North Carolina, for instance, there is a Whole Foods Market store located inside of a Sears. For the first time since the Kmart/Sears merged closed in early 2005 we are seeing signs that Sears Holdings might finally be focused on extracting value from the company’s assets in ways other than trying to turn back the retail industry’s clock several decades. As a result, it makes sense to keep close eyes on the company’s stock once again.
Caution should be advised here, however. Annual revenue at Sears Holdings, while down from $54 billion in 2005, is still formidable at about $43 billion. Selling a few screwdrivers here and leasing some floor space there won’t have a huge impact on their financial results. However, one can certainly see the potential if these efforts prove successful and are adopted in widespread form across not only the company’s 4,000 stores, but within other retailers’ four walls as well. It is too early to predict a turnaround, but the stock price is not factoring in much of this strategy shift, if indeed it is real and sustainable. After dropping from $195 in 2007 to $100 in 2008, Sears Holdings stock has been cut in half again over the last 18 months and now fetches just $55 per share. If we see these moves start to bear fruit on the income statement, the bull market for the stock just may well resume after a five-year hiatus.
Full Disclosure: No position in Sears Holdings at the time of writing but positions may change at any time
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You can contact Chad through Peridot Capital or mirror his trades on Wealthfront
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