Sears Holdings (SHLDQ) reported earnings last week that, as expected, showed continued weakness in the retail operations. Though the numbers were in line with previously issued guidance, shares slid as investors and analysts again contemplated the long-term future of the company. As has become increasingly common for the stock, shares ticked back up as quickly as they fell in the days following the earnings release, with a more than 6% pop in today's trading. Has something materially changed in the Sears story? Not particularly. What appears to be going on here is confusion over which investment thesis reigns supreme: a sliding big-box store with little hope or a special-situation real-estate powerhouse.
Earnings recap
Sears posted a more than $5-per-share loss in its fiscal third quarter on a net income loss of $534 million. In the year-ago quarter, the company posted a loss of $4.70 per share. Top-line sales shrank by more than half a billion dollars to $8.3 billion, with $200 million stemming from store closures of both Sears and Kmart locations. The $170 million came from a decline in same-store sales -- down 3.1%, mainly at Sears Domestic and followed by Kmart.
Nearly all figures represented year-over-year declines, but CEO Eddie Lampert was quick to point out that the company's membership-based Shop Your Way initiative is showing improving traction, with 70% of all sales stemming from the program. Online and multichannel sales are up 17%, and the company continues to bring in new names and brands in an effort to revitalize the retail business.
When judged by the company's operating results, it's not difficult to see why investors wanted out of the stock. Like other struggling big-box retailers, Sears is having a very tough time holding on to customers while it rushes to reinvent itself. The thing is, the smart money that has gotten behind Sears has nothing to do with its operations but rather its incredibly vast portfolio of real estate. The market is simply lost as to which is more important.
Where to wager
Sears is a tough sell because, as long-term-oriented investors, we look for great businesses. A glance at Sears' sales figures over the past several periods suggests it is not a member of this club. At the same time, though, we with a value perspective look for businesses that are trading at a material discount to their intrinsic value. Sears is undoubtedly trading at a discount to its underlying value.
Forget Simon Property Group; Sears Holdings is the biggest commercial-real-estate holder in town. This raw square footage can be sold, transformed, or subleased at a tremendous cash benefit to Sears -- and it's happening.
Investors by now are quite familiar with Baker Street Capital's presentation at the company, which pegged a stock price well over the $100 mark. The thesis is based on huge value in the company's top properties that are increasingly attractive in an undersupplied Class A retail environment.
For investors, you simply have to look at this as a special situation. Sears is not a buy-and-hold-forever company (yet), but it is one with serious upside potential in the medium term as the company executes its plan to monetize the real-estate portfolio. This is not a J.C. Penney story with a ticking time bomb in the stores. Sears has the luxury of time and plenty of liquidity. Who knows, maybe Lampert will surprise us all on the retail front. The bottom line is, at some point, the market will accept the fact that despite its flaws, Sears sits on a gold mine and Eddie Lampert has his pickax swinging.
