More Thoughts on Sears' Quarter

28 Aug 9:08am
Posted by ToddSullivan
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Retails is lousy now, we know that and Sears is in the unenviable position of being both a clothing retailer and a housing supplier (appliances, tools etc.). With the expected downturn there, how did we hold up and are the reason we invested in the company still valid??

In a word yes. Here are the key take-away points (more will be available when the 10-Q is filed Friday). Remember, I expected a small loss

- $500m inventory reduction
- Added 65 net stores since last year which consist of Home Appliance Showrooms, dealer stores and outlet stores, and have continued to expand online and multi-channel capabilities. In May they nearly quadrupled the number books, DVDs, music and software available at sears.com.
- CEO Bruce Johnson said, “We expect to generate higher EBITDA in the second half of this year as compared to the corresponding period in 2007 as we benefit from our lower domestic inventory levels and continued vigilant expense management. Given our year-to-date results and the state of the economy, our current full-year EBITDA forecast, which assumes flat to modest comparable store sales declines for the rest of the year, is comparable to, but no longer exceeds, last year’s EBITDA”.
- Repurchased $5.6 million shares in Q2 bringing outstanding count to 126 million as of 8/2 (watch the 10-Q Friday, Lampert is famous for buying shares between the end of the quarter and the 10-Q filing).
- Cash sat at $1.5 billion, down $100m from Q1.
- LT Debt reduced from $2.6b in Q1 to $2.2b in Q2

So, why did we buy Sears? Lampert was producing profits, reducing debt, buying back shares and fixing two bankrupt retailers (Kmart was BK and Sears was days away from it).

All of those items are still happening. Yes, profits are falling (key word being profits) but so are those at JC Penny (JCP), Home Depot (HD), Lowes (LOW), Macy's (M) etc. What we want to know is, if we assume sales and profits are going to fall until the economy and in Sears case, housing stabilizes, what is happening to the financial condition of the company?

In the case of Sears, the balance sheet is in the top echelon of retailers with the exception of Wal-Mart (WMT) and Target (TGT).

Cash is stable, debt is being reduced and shares repurchased. Shorts are going to get squeezed here. Ackman, Lampert and Berkowitz will not dump shares and they hold roughly 65% to 70% of the total and Lampert keeps reducing share count through the buybacks. If you do the math, there are plenty of shorts out there "swimming naked" that will be fighting for shares when they have to cover.

That, will cause a surge in shares, a big one....



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About

ToddSullivan

A Massachusetts based value investor, I look for companies whose current valuation is at a discount to their true value. When I purchase a stock, my typical holding period is several years. I consider buying a stock purchasing a piece of a business. I am confident once I make a decision to buy that eventually the market as a whole will recognize the true value of the business and value it accordingly. It may take 1 month, 6 months or a year, but if I buy it at enough of a discount to its true value my results will be (and have been) superior to the market as a whole. Of all the disparate investing disciplines, value investing has stood the test of time. The great investors of have all been value investors. Warren Buffett, Ben Graham, Bill Ruane (Sequoia Fund), Bill Miller and Wally Weitz, all have consistently outperformed the market for decades by using various forms of value investing. Currently I am a contributing writer to Seeking Alpha, Vinvesting.com, The Stock Masters and Value Investing News. Posts have been reprinted in The Wall St. Journal, Yahoo Finance, Google Alerts, Google Finance, TheStreet.com. 24/7 Wall St. and Topix.net.

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