While it's true that analysts and investors shouldn't focus too closely on same-store sales as a key metric for retailers, it's funny that the biggest complainers about this trend are retailers with declining comps.
Sears Holdings (Nasdaq: SHLD ) CEO Eddie Lampert has been one such critic, using his annual letter to rail that his operations should not be judged by comps alone. It's also true that Sears' comps have steadily eroded since it emerged from bankruptcy, and this past quarter was no different. Same-store sales dropped 3.1% overall, highlighting the once-venerated retailer's apparently dwindling number of prospective shoppers.
Yet Lampert's also right: If you just focus on the comps, you'll miss much more of the story unfolding at Sears. At $16.3 billion, revenue exceeded analysts' expectations of just $15.95 billion. Aided by an extra week in the fiscal year, Sears earned $820 million, or $5.33 a share, also ahead of forecasts. But there was a laundry list of one-time items, both gains and losses, that impacted results, and I believe that is where more of the Sears story is developing.
Let's start with the $50 million pre-tax gain from the sale of assets. Lampert continues to sell off assets, diminishing the base from which the retailer operates, yet he also claims that critics are wrong to charge that he's trying to shrink Sears. "No great company would aspire to become smaller, and we certainly do not," he said. "Our objective is disciplined growth."
Though it's sometimes lost in the usual swirl of news that surrounds Wal-Mart (NYSE: WMT ) and Target (NYSE: TGT ) , Sears remains the third-largest discount retailer in the country. Given the company's huge cash hoard -- $3.3 billion by year's end, or around $4 billion if you include Sears Canada -- some have suggested that Lampert is preparing to make acquisitions. Although that cash figure lags Lampert's own forecasts, Sears was hurt by lower-than-anticipated sales in January. His board has authorized Lampert to use that cash at his discretion in investments unrelated to the retail business.
That's where one of the other one-time items comes in. Sears lost $27 million pre-tax in a total return swap, an investment that's become more common among hedge funds. It requires parties to pay each other based on an asset's appreciation (or depreciation), with a payment rate predetermined by some formula. Sears' swap this time took $0.11 from earnings in the quarter, though on the year, it added $0.29 per share.
Sears' retail operations have been hit or miss. Sears Grand still hasn't found its footing, and appliances also lagged expectations. But women's apparel, particularly from the Land's End selection in stores, was the one bright spot, perhaps signaling the retailer's future direction.
Lampert says he wants to grow the company, but first he needs to ensure that he has a profitable base. Part of that strategy, though, has to include making sure that customers want to return to his stores.
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