Is Sears the Next Circuit City?

Circuit City, once a well-known retail fixture, is no more. Last week, I asked whether Blockbuster (NYSE: BBI  ) was the next Circuit City. (According to 67% of Foolish readers who answered our poll, the answer's an emphatic "yes.") This week, let's look at another possible contender for such a woeful demise: anachronistic discounter Sears Holdings (Nasdaq: SHLD  ) . (Thanks for the suggestion to Foolish commenter mikehadad.)

In case you haven't noticed, discounters like Wal-Mart Stores (NYSE: WMT  ) , Target, and Costco (Nasdaq: COST  ) have eaten Sears' (and Kmart's) lunch. When was the last time you set foot in Sears or Kmart? Neither chain remains top of mind for bargain-hunter shoppers.

Many investors have seemed fairly enamored of Sears chairman and renowned hedge fund manager Eddie Lampert's abilities. Some have even compared him to Berkshire Hathaway's (NYSE: BRK-A  ) (NYSE: BRK-B  ) Warren Buffett. However, Buffett and Berkshire are known for pursuing high-quality, well-run companies. Sears is arguably Berkshire's dorky twin, a catch-all for much poorer businesses -- and many critics argue that Sears isn't really being run like a retailer in the first place. No wonder shoppers go elsewhere. Maybe investors should, too.

Let's compare some of Sears' financial metrics to those of several high-profile rivals:

Company Name

TTM Revenue Growth/(Loss)

TTM Profit/(Loss) per share

Debt/Equity Ratio

Quick Ratio

Sears Holdings

(9.2%)

($0.04)

40.8%

0.2

Wal-Mart

0.3%

$3.46

70%

0.2

Target

(0.8%)

$2.87

117.1%

0.6

Costco

(1.5%)

$2.47

23%

0.5

*All data from Capital IQ, a unit of Standard & Poor's. TTM = trailing 12 months.

One positive element in this exercise in retail gloom and doom: Sears doesn't have the same formidable, frightening levels of debt as our previous pair of precarious retailers, Blockbuster and Borders (NYSE: BGP  ) . That must be a comfort for its shareholders. However, Sears' three rivals here all are solidly profitable, and their revenues haven't taken the kind of nosedive that Sears' has over the last 12 months.

Sears' quick ratio probably shouldn't be underestimated. A quick ratio below 1.0 can be a red flag, particularly if a company's sales and profit margins are suffering mightily, and especially if it may have to deeply discount prices to clear out its inventories. For a very strong retailer like Wal-Mart, with a laser-focused supply chain, a low quick ratio is no problem. For Sears, it could be serious trouble.

Meanwhile, don't forget that Sears' revenue has been doing poorly for several years now. Even more distressingly, comps have been plunging since at least 2005. In the last 12 months, comps fell 8%. A retailer with plenty of smart, savvy competition, and dwindling customer traffic and sales growth, looks mighty risky for long-term investors.

Among the stocks in the above chart, I'm far more enamored of Costco. It's exceptionally well-run, and as you can see, it doesn't have an onerous amount of debt. True, its price-to-earnings ratio of 25 looks high compared to Wal-Mart's P/E of 16 and Target's 17. But Costco's a high-class discount retailer that won't go away anytime soon, and that may be worth the premium. At the very least, it might score Costco a spot on your watch list as you wait for a cheaper entry point.

Can we say the same of Sears' long-term staying power? Probably not.

Sears Holdings, Berkshire Hathaway, Costco, and Wal-Mart are Motley Fool Inside Value recommendations. Berkshire Hathaway and Costco are Stock Advisor selections. The Fool owns shares of Berkshire Hathaway and Costco. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.


Read/Post Comments (11) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 25, 2009, at 11:51 AM, TMFTwitty wrote:

    Anecdotal grumblings do not substitute for due diligence and fundamental research, but here's how I feel about Sears: http://caps.fool.com/Blogs/ViewPost.aspx?bpid=221619

  • Report this Comment On November 25, 2009, at 12:18 PM, weiwentg wrote:

    The choice of wording in the poll was interesting. I think that Sears as a retailer is dead. Eddie Lampert does not seem to know how to run a retail operation - in any case, he is chairman, not CEO. Some folks are waiting for him to do a Buffet and turn Sears into an investing company - if Sears survives, I think it will more likely be in that incarnation. Alternatively, Lampert may be waiting to liquidate Sears.

  • Report this Comment On November 25, 2009, at 4:20 PM, BTShine wrote:

    Anyone notice how in 2007, when the stock price was around $170 every Fool was green-thumbing the company? http://caps.fool.com/Ticker/SHLD/Scorecard.aspx?pagenum=1&am...

    That now looks like it was a bubble-like phenomenon and a bad idea.

    Does anyone else think, like I do, that all of the recent red-thumbing by Fools could be another bubble?

    http://caps.fool.com/Ticker/SHLD/Scorecard.aspx?pagenum=1&am...

  • Report this Comment On November 25, 2009, at 4:23 PM, mikecart1 wrote:

    Sears needs to go online ASAP in order to survive. Also they should get involved into something new. It isn't 1985 anymore. Sears you Going DOWN!

  • Report this Comment On November 25, 2009, at 4:38 PM, BTShine wrote:

    Take a look at the rise interest for Sears.com on google.

    http://www.google.com/trends?q=sears.com&ctab=0&geo=...

    It looks like Sears' online efforts are paying off.

    I'm a user of their ShipVantage Program and their In Store Pickup option. In most cases I've found their Sears.com prices to be comparable to what I find on Amazon.com.

  • Report this Comment On November 26, 2009, at 11:54 AM, kristm wrote:

    I've had a red thumb on SHLD since I joined CAPS in October 2006, and I still feel strongly that the retailer is doomed. I'm to the point now that I WANT to see them go under just to shame the rabid Eddie Lampert worshippers who continually compare SHLD to BRK.

  • Report this Comment On November 27, 2009, at 10:42 PM, ikkyu2 wrote:

    I tried to buy a washer and dryer from Sears last year.

    No, I mean I really tried. I went into a brick and mortar location, found the models I wanted, and tried to order them. After one hour trying, I was sent away with no order, and instructions to "maybe come back next week."

    So I went online, to Sears.com. I was able to complete my order. I got an online verification email.

    2 weeks later - 2 washerless, dryerless, weeks - I called Sears to find out why they had not scheduled delivery. 90 minutes later - 90 prime-time cellphone minutes, I might add - I learned that the order had been cancelled, for no reason that anyone could figure out, and I had not been notified, again for no reason that anyone could figure out.

    The order was renewed and I was given a verification number.

    One week later, I called to find out why they had not scheduled delivery. I used my verification number. 135 prime-time cellphone minutes later, I discovered that the order had again been cancelled and no one could account for it.

    I gave up and ordered a washer and dryer from Home Depot, which arrived the next day for $100 less.

    You may guess for yourself what I did with my SHLD stock, if you want. If you don't want to guess: I SOLD ALL OF IT. The reason that I sold all of my Sears Holding stock is that I do not believe the above story can happen to a company that is going to stay in business.

    I will never again set foot in a Sears.

  • Report this Comment On November 27, 2009, at 11:03 PM, B0BERT wrote:

    Sears may go out of the retail business, but they certainly won't go bankrupt. They just don't have enough debt. SHLD debt is only about $1 billion, the rest of SHLD debt is short term seasonal revolving debt and capital lease obligations.

    Sears continues to generate cash, and it's truly sad that with as much time as the Motley Fool spends trying to educate members on how to read financial statements, no one here seems to understand how to read a cash flow statement when it comes to Sears. It is nice however that Eddie Lampert isn't out there defending his stock vocally. He's quietly buying every single share he can which is exactly what I want him to be doing.

  • Report this Comment On November 28, 2009, at 1:16 AM, BTShine wrote:

    Well said B0BERT. There will be many Sears and Kmarts that close down (in addition to the many that have already closed), but that doesn't mean SHLD will go out of business. It is very, very likely that the parent corp. will survive and the stock price will likely go much higher.

  • Report this Comment On November 30, 2009, at 8:30 AM, hiyld103 wrote:

    My Sears story is similar. Ordered a dishwasher at brick and mortar, waited a week, the wrong one arrived. Went over to Home Depot, it was delivered next day for $100 less. Sears has nice tools but every time I pick one up to purchase it I have to spend 15 minutes looking for someone to take my money!!!!! This happens consistently. Can you imagine a Walmart customer looking for a cashier to take their money? I see no future for Sears. It's a failure at appliances and a failure at everyday purchases.

  • Report this Comment On February 09, 2010, at 8:09 AM, dkapasi wrote:

    so if u got a new job offer from Sears, the company that once was the ICON of America at shopping, think again...

    ha ha..d

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1052704, ~/Articles/ArticleHandler.aspx, 12/22/2014 5:00:46 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement