Is Sears a Buy?

Penny-pinching shoppers have their eyes peeled for the red-letter "sale" sign these days. That should be a promising environment for a discount retailer -- but not if many consumers have forgotten it exists. That may be the case with Sears Holdings (Nasdaq: SHLD  ) .

The stock has fallen off a cliff since early May, which might make it look like a steal to bargain-hunting investors. But instead, they should follow penny-pinching shoppers' leads, and erase this stock from their go-to lists.

A retail anachronism?
Sears Holdings, which also runs Kmart, long ago lost its luster. Once, it was an important provider of everything from clothes to consumer electronics to tools to appliances. But little by little, savvy, price-slashing competitors have eaten its lunch (and breakfast, and dinner, and midnight snack).

The litany of rivals killing off competitive advantage in Sears' various departments is long and formidable. There's price-slashing Wal-Mart (NYSE: BBY  ) ; Target's (NYSE: TGT  ) touch of class; customer-centric consumer electronics giant Best Buy (NYSE: BBY  ) ; and tool-slinging Home Depot (NYSE: HD  ) . And let's not forget warehouse retailers like Costco (Nasdaq: COST  ) , which offer tons of inexpensive stuff in bulk. They each have a well-established position in the retail market.

Where does Sears fit in? This crowded landscape has left many shoppers little reason to stop at Sears, much less remember its existence. Would anyone miss Sears if it disappeared tomorrow?

Just don't do it
Despite Sears' disadvantages, could it be a bargain stock anyway? Let's compare it to two biggies in the discount retail space, Wal-Mart and Target.

Company

Forward P/E

5-Yr PEG Ratio

Share Appreciation, Last 12 Months

Sears

31

2.8

7.3%

Wal-Mart

12

1.3

6.9%

Target

12

1.14

15.1%

Source: finviz.com.

Sorry, Sears. That's a premium price tag for such anemic growth potential. Both Wal-Mart and Target look like screaming buys in comparison. Sears' PEG ratio is a huge red flag for investors in this case.

Consider Sears' history. It hasn't generated an annual sales increase since the fiscal year ended February 2007. Its same-store sales have been consistently weak, too. For a long while, it's been a risky stock because it lacked operational strength as an actual retailer. Its dwindling sales are testament to this weakness.

Retailers that can't grow sales are dangerous. While they may be able to boost profitability by cutting costs in the short term, the long term looks very risky if it can't get droves of customers in the door.

Hopefully investors have long expected hedge fund manager and Sears Chairman Eddie Lampert to be the company's saving grace. Alas, it shouldn't have been hard to predict that a hedge-fund guy trying to head up an ailing retailer wouldn't be a magic bullet.

When brands go bad
Sears is a retail name, but it sells such lackluster brands that it seriously may never turn things around. The stock doesn't even look like a dirt cheap bargain now, despite its precipitous drop since the spring. In July, I similarly asked whether lululemon (Nasdaq: LULU  ) was a buy. While I was concerned that the yogawear seller's growth might not be sustainable, at least it has experienced torrid growth, justifying investors' belief in its potential. That's not the case with Sears.

Is Sears a dud of a stock, or could some miracle still turn this retailer around? Would you buy it now? Sound off in the comment box below.

Best Buy, Costco, Home Depot, and Wal-Mart are Motley Fool Inside Value selections. Best Buy and Costco are Motley Fool Stock Advisor recommendations. Motley Fool Options has recommended buying calls on Best Buy. The Fool owns shares of Best Buy, Costco, and Wal-Mart. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (9)

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 September 16, 2010, at 7:08 AM, forexnutca wrote:

    Hey check out their book value.......getting big names like Craftsmen and Kenmore under book is unheard of. Look at their property too! When the US changes to IFRS accounting standards (like the rest of the world), all of a sudden Sears can claim their appreciation in property values as a percentage of cash generated by the property. To me, SHLD is very unloved, and would be a buy in my books. You pay a dear price for a cheery consensus.

  • Report this Comment On September 16, 2010, at 3:27 PM, ragman333 wrote:

    this might help...

    when i was a kid back in the 50's in the chicago area my family always bought from SEARS. i think the main reason was it gave firefighter a discount, my dad was a fireman and he bought alot at SEARS as did his friends. move forward to 2010, if mr. lampert would give a discount to all firemen/policemen and even active military personnel it would be a big PR move and a help to the sagging sales picture. lets go mr lampert you can not live off cuts and asset sales.....

  • Report this Comment On September 17, 2010, at 4:02 PM, rantall wrote:

    This company is toast. Look at the competition. Who would rather shop at Sears or K-Mart? Look at the results since Lampert took over. Lampert is a financier, not a retailer. Same store sales down almost every quarter. They have managed to generate some cash due to cost cutting at the expense of reinvestment in marketing, stores, people and infrastructure. This is not a long-term strategy. The real estate is over-valued since the large footprint is obsolete and retail vacacies are through the roof. There are no tangible signs that this business will not continue its long decline into oblivion.

  • Report this Comment On September 20, 2010, at 5:59 PM, karleeram wrote:

    Sears retail division is hurting but their Home Improvement Division (replacement windows, siding, HVAC, roofing, flooring, kitchens) is thriving as is the Home Services Division. As more people are remaining in their homes they update, remodel and repair. I am investing in this company.

  • Report this Comment On October 21, 2010, at 12:00 PM, AmateurAnalyst wrote:

    My assumption has always been that Lampert sees this as a real estate play and doesn't care about the retail business. He and Ackman control a lot of the common now, and as soon as the real estate market recovers, they will either start to unload the least profitable sites or liquidate the company and unload everything (depending on how deep they think the market is). "Barrons" has been on both sides of this analysis at one time or another. I don't know what Lampert's entry price was, but it seems to me that since he and Ackman hold their positions in SHLD common, this places them in the same priority as any other investor who buys common (i.e., they're not going to do anything which wipes out the value of the common if that is how they hold their positions). There should be an opportunity to buy SHLD when it is low (and it bounces around A LOT, so that is not an unreasonable objective) and ride along on their strategy -- writing calls in the meantime to earn some income.

    Still, the performance of the company has been so lousy (there's more than one way to get to a high P/E!), I feel like I am missing something. Any ideas?

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