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Sears Plays Hedge Fund

Sears Holdings (Nasdaq: SHLD  ) can be a frustrating company to follow, for both shareholders and Wall Street analysts. Case in point: Thursday's earnings report included $101 million in gains from a derivatives investment that paid off handsomely during the quarter. It is doubtful that any analysts included this in their earnings estimates, and we don't know if the $0.42 gain on the swap was high or low relative to any expectations. Since the company no longer holds quarterly conference calls (nor does Chairman Eddie Lampert provide quarterly letters), analysts and shareholders are left in the dark regarding future investments gains or acquisitions, or further insight into the retail turnaround story.

However, we do have some good information to ponder. Third-quarter revenues declined $0.3 billion to $11.9 billion, largely driven by higher competition and lower transaction volumes. Profits were up to $196 million versus $58 million last year, helped considerably by the aforementioned $101 million swaps deal. Particular areas of softness were home goods and food and consumables at Kmart, and lawn and garden at Sears. Of course, Home Depot (NYSE: HD  ) and Lowe's (NYSE: LOW  ) are also struggling in the home supplies department, so not all of the blame here is Sears-specific. It is also important to note that $1.1 billion of cash was used to shore up inventories for the all-important holiday season, and share repurchases dropped to $289 million from $413 million in the first quarter -- perhaps further freeing up cash for investment purposes.

I think it is safe to say that the retail side of Sears continued to underperform, but frankly, this has to be one of the largest turnarounds in retail ever attempted, with massive cultural and operational issues to resolve. I'm willing to give the company a few years to right the ship.

Perhaps most entertaining for Wall Street and shareholders is the guessing game about what Eddie Lampert will do next. Will he purchase a stake in Anheuser-Busch (NYSE: BUD  ) ? RadioShack (NYSE: RSH  ) ? Home Depot? It is clear that many shareholders and analysts are expecting Lampert to rewrite the Sears story yet again, with another game-changing deal. I don't think Lampert is going to do as big a deal as Wall Street is hoping for, as he has been withdrawing from responsibilities by recently stepping down from AutoZone's (NYSE: AZO  ) board, presumably to focus on Sears' operations, not away from them.

With that in mind, I wouldn't be surprised to see more investment-related gains (or losses) pop up more consistently quarter after quarter, as it has been some time since his last swaps trade in mid-2005, which resulted in a $60 million gain. Would this benefit shareholders? Most assuredly.

For more Lampert Foolishness:

Home Depot, Anheuser-Busch, and AutoZone are allMotley Fool Inside Valuerecommendations. To find more top-shelf stocks at bargain-bin prices, sign up today for a free30-day guest pass.

Fool contributorStephen Ellisdoes not own shares in any companies mentioned. You canview the stocks he owns and check out his99th-percentile ranking in Motley FoolCAPS, the Fool's new stock-rating community. The Motley Fool has adisclosure policy.

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10/21/2016 4:00 PM
SHLD $11.60 Down -0.29 -2.44%
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