Sears: It's Not Just the Economy, Stupid!

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

U.S. stocks opened higher this morning, with the S&P 500 (SNPINDEX: ^GSPC  ) and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) up 0.53% and 0.2%, respectively, as of 10 a.m. EDT.

Retail: The final chapter
Last Friday, I called general-merchandise retailers' poor quarterly results the most important trend of last week for what it revealed about consumer spending. Yesterday's earnings report from the nation's No. 2 retailer, Target, did nothing to alleviate that concern.

This morning, Sears Holdings (NASDAQ: SHLD  ) reported its fiscal second-quarter results, and the news was no better. The company posted a loss of $1.70 per share (ex-items) versus Wall Street's expectations of a $1.10 loss. Sales, which fell 6.3% year on year to $8.9 billion, fell short of the consensus estimate of $9.5 billion. Same-store sales in the U.S. fell 1.5%, split between declines of 2.1% for Kmart and 0.8% at Sears Domestic.

Let me be clear, however, that these numbers reflect more than weak consumer demand. For example, Sears stores posted weak sales in appliances, a category in which major competitors Home Depot and Lowe's put up good numbers over the same period. Sears Holdings is controlled by hedge fund manager Edward Lampert, who now runs the company, too, after previous CEO Louis d'Ambrosio left earlier this year due to a family medical problem.

Between Bill Ackman at J.C. Penney (NYSE: JCP  ) and Eddie Lampert at Sears, the recent record of hedge fund managers trying to revive once-prominent retailers serves as a cautionary tale. Lampert may have modeled his investing style on that of Berkshire Hathaway CEO Warren Buffett, but you won't catch Mr. Buffett trying to run the Nebraska Furniture Mart (one of Berkshire's businesses).

And speaking of J.C. Penney, its Ackman experience was so traumatic that, only this morning, the company announced it had adopted a one-year "poison pill" that prevents any single investor from owning more than 10% of its shares. No excuses for Penney, then -- they will no longer be able to say, "And we would have succeeded if it wasn't for those meddling hedgies!"

In any case, both J.C. Penney and Sears will have their work cut out for them. The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only the most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the "3 Companies Ready to Rule Retail" in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.


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  • Report this Comment On August 22, 2013, at 11:03 AM, mr091468 wrote:

    Poison pill? Who in their right mind would want to take this BK company over? Sears may as well liquidate, too. Remember buggy whip factories? The fat lady tunes up and is ready to sing.

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