Can Sears Create Value by Cutting the Cord With Canada?

Iconic retailer Sears Holdings (NASDAQ: SHLD  ) continues to struggle to find its way back into the black despite shedding a number of underperforming, non-core businesses over the past few years, including its Orchard Supply Hardware and Sears Hometown & Outlet units in 2011 and 2012, respectively. The company's latest financial update brought another poor data point, as evidenced by a top-line decline and a sizable operating loss.

Of course, with a significant debt load and legacy pension obligations, the company needs to continue doing whatever it can to improve its financial profile and return to profitability, in order to better compete with strong, focused operators like Dillard's (NYSE: DDS  ) and Home Depot (NYSE: HD  ) . Sears' latest gambit is a rumored sale of its stake in Sears Canada, which is worth more than $700 million at current prices. So would the move be good for investors?

What's the value?
Despite an operating history that dates back to the 1950s and a sizable customer footprint that includes 3 million catalog shoppers, Sears Canada hasn't done much for Sears lately; it reported lackluster results in fiscal 2013 that were highlighted by a top-line decline and break-even profitability. Worse, the unit's performance has downshifted further in fiscal 2014 with comparable-store sales down 7.6%, a data point that management blamed on inclement weather and heavy promotions during the period. Combined with selective store closures, the net result for Sears Canada was a double-digit sales drop and a larger operating loss versus the prior-year period.

While Sears Canada and its roughly $3.9 billion in annual sales undoubtedly provide economies of scale for Sears' global purchasing operation, Sears would anecdotally seem to be better off monetizing its Sears Canada stake and redeploying the funds into its domestic growth initiatives, including its growing Shop Your Way loyalty program. In addition, the cash windfall could help the company fund investments in greater inventory selection in key product areas, like apparel and hardware, as it tries to steal customers away from stronger competitors.

An uphill battle against these competitors
In the apparel category, those competitors include Dillard's, a regional department store chain that seems to benefit from the stewardship of its founding family. This influence likely helped the company resist the urge to get big, as instead it has chosen to stay closer to its roots. It currently operates a network of roughly 280 stores that are focused on markets in the Southeast and Midwest U.S. 

Dillard's has also spent time to cultivate a popular assortment of private-label brands that generate approximately 21% of its sales. This strategy has been partially responsible for a huge pickup in its operating profitability over the past five years, even though its store base shrank over that same period. The net result for Dillard's has been strong and growing cash flow, which funds both further product development and the return of capital to shareholders.

In the hardware category, the competition is even tougher, with Home Depot and Lowe's controlling a sizable percentage of the home improvement industry's sales, estimated at more than 40%. Home Depot, in particular, has been using its sizable operating cash flow -- $7.6 billion in its latest fiscal year -- to invest in a greater inventory assortment in key product areas; this includes the appliance category, where the company hopes to eventually unseat Sears as the country's largest appliance seller. Home Depot has also been attempting to improve its value proposition for customers, highlighted by more customer service reps in its stores and more online shopping capabilities, in a bid to give customers one fewer reason to shop at competitors like Sears.

The bottom line
Dumping its weakly performing Canadian operation should be a no-brainer for Sears, given that the unit seems to be currently valued on its potential, or perhaps hidden asset values, rather than its recent profitability. A sale would certainly go a long way toward shoring up Sears' balance sheet and would provide funds to further accelerate the development of its Shop Your Way loyalty program, Sears' current focus and likely its best hope for a return to operating profitability. In the process, this would create shareholder value and could turn Sears into a long-term winner for investors.

Looking for more long-term winners?
The smartest investors know that dividend stocks simply crush their non-dividend-paying counterparts over the long term. That’s beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.

Read/Post Comments (1) | Recommend This Article (0)

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 June 14, 2014, at 1:59 PM, plange01 wrote:

    radio shack,sears,jc penney ,disgraced gm and poorly run hertz are the top five companies that WILL fail...

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: 2989425, ~/Articles/ArticleHandler.aspx, 9/2/2015 11:10:52 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...

Robert Hanley

Today's Market

updated Moments ago Sponsored by:
DOW 16,152.52 94.17 0.59%
S&P 500 1,924.91 11.06 0.58%
NASD 4,663.47 27.36 0.59%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/2/2015 10:53 AM
SHLD $26.47 Up +0.32 +1.22%
Sears Holdings CAPS Rating: *
DDS $90.79 Up +0.82 +0.91%
Dillard's, Inc. CAPS Rating: *
HD $114.60 Up +1.53 +1.35%
Home Depot CAPS Rating: ****