When investors hear the word "Sears," most immediately think of Sears Holdings (NASDAQ: SHLD ) , the Eddie Lampert-controlled real estate play that has polarized investors and analysts for years. In the value neck of the woods, much attention has lately found its way toward Sears Hometown and Outlets (NASDAQ: SHOS ) , a business I relentlessly tout as a top retail pick. But there's yet another Sears that attracts even fewer investigators, probably because it resides north of our borders, in America's big brother, Canada. The company is called Sears Canada (TSX: SCC ) , and it's bouncing off its 52-week lows, trading cheap, cheap, cheap. Let's take a look and see if this is the Sears you should be focusing on.
Sears Canada, 51% owned by its American parent, disappointed investors and analysts with a net loss of US$30.3 million, or $0.31 per share, for the first quarter of 2013. This comes a year after the company's profit of $0.88 in 2012's first quarter. The main culprit was weakness in the company's home goods department -- an issue facing many department stores. Investors should note, however, that last year's results included a $159.3 million lease termination benefit. Same-store sales for established stores fell 2.6%.
The company, like many large retail operations, is in a turnaround effort. Facing increased competition from new Canadian market entrants, such as Target, Sears Canada has laid off 700 workers and poured money into revitalizing stores. Only a year into the effort, though, investors have yet to be impressed, as revenues continue to fall. Similar to U.S.-based Sears Hometown and Outlets, the company is continuing to open Hometown-style stores in Canada. There are currently 248, in addition to 141 corporate stores.
The question is: At its 52-week low and trading at a market cap less than a quarter of 2012's sales, is this a deep value play or a falling knife?
In 2012, the company did $45.58 million in EBITDA. As of mid-February, the company had an enterprise value of approximately $730.8 million (using current exchange rates), implying a trailing EV/EBITDA of about 16 times. That is mighty rich, especially when compared to U.S. department stores and Sears' U.S. counterparts. But again, 2012 was year one of the three-year turnaround plan. Investors can expect this metric to trend down in coming years.
Sears Hometown and Outlets trades at under 10 times EV/EBITDA. Sears Holdings is currently EBITDA negative.
Opening new, better-formatted stores and rehabilitating older stores will increase sales per square foot over time as well as top-line revenues. Management made a wise decision in downsizing employee count to more appropriately reflect the size and state of the company. Apparel and accessories have already posted year-over-year growth, and I believe that more segments will follow suit as the transformation occurs. Management is also initiating a 5% share buyback, which will create shareholder value if the stock price remains at its depressed levels for some time.
Just as in the United States, Sears is synonymous with appliances and hardware. The brand has suffered over the years, but this company has already proved in various ways that it is able to adapt and thrive. At such depressed prices, Sears Canada may be a steal for value-oriented investors who believe in the long-term improvement of the North American economy, as well as company management's ability to steer this ship back upstream.
Other retailers to watch
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