Fool Buys Sears
August 04, 1994

Sears, Roebuck & Co.
TYPE: Dow High-Yielder
Phone: (312) 875-1468
Closing prices, August 4th, 1994: Bid $47 1/4, Ask $47 3/8

Trailing 12-month revenues: $52.7 billion
Trailing 12-month EPS: Now there's a toughie. Make it $3.55.
Last quarter reported: June 1994 (FY: Dec)
Next quarter reported date: October 21, 1994
Consensus EPS estimates for quarter: $1.15e vs. $1.15

FOOL ratio: N/A

Trade: Buying 105 shares, August 5th

Sears, Roebuck & Co., headquartered in Chicago's Sears Tower, is one darn big company. . . with $53 billion in revenues, Sears is KING of the Fool Portfolio. It may have more in revenues than the rest of our portfolio combined, even with all 12 slots eventually filled out. A sobering thought.

After having become horribly bloated (as Dow conglomerates are wont to do), Sears executed in 1993 what may have been the most massive one-year restructuring in the history of American business. It started off by closing down its 100-year-old catalogue operation in January, and then spent the rest of the year "repositioning its financial services businesses," as Chairman and CEO Edward Brennan puts it. That basically means selling anything that didn't have anything to do with hawking TVs and lawnmowers in malls. To wit, Sears spun off 20% of Dean Witter, Discover & Co. in March, spun off 20% of majority-owned Allstate Insurance Co. in June, cashed itself out of the other 80% of Dean Witter later in June, sold Coldwell Banker in October, and ditched Sears Mortgage Banking just past Thanksgiving. The total proceeds raised from all transactions were $4.2 billion.

What would you do with $4.2 billion? Sears used $3 billion of it to pay down a portion of corporate debt, and the rest to improve the balance sheets of Dean Witter (before selling it) and Allstate. You can read about all that right there in the 1993 Sears annual report, which by the way is more visually attractive than many of the catalogues the Fool Postman drops in our poor little mailbox every day.

A NEW COMPANY. So what are we left with? A company that derives 60% of its business from merchandising and virtually all the rest from its Allstate Insurance Group. The Sears report is a lot easier for a shareholder to read this year.

THE NUMBERS. Sears stock had a great run from late 1992 to late 1993, reflecting widespread Market happiness over its restructuring operation. Since late 1993, however, the reality of a mostly stagnant retail market has cooled investors' jets, and S stock has fallen from a November 1993 peak of $60 to today's $47 1/4. The first half of the year shows earnings substantially down from last, with six-month revenues and EPS of $25.3 billion and $1.01 respectively, vs. $23.5 billion and $3.68 for the like period (ended June) in 1993. Fortunately for us, earnings comparisons are supposed to turn favorable by the fourth quarter of this year. And 1995 is really supposed to turn up, with $5.30 per share projected.

We do like the situation from an operational standpoint. Here's this $50 billion merchandise company that finally decided last year to be a merchandising company. (Sears did keep most of Allstate, of course, but you can't expect anything this BIG to go cold turkey.) Same-store sales were ahead 10.6% in the first half of this year, and it's that kind of business momentum that has analysts excited about 1995.

WE'RE MORE INTERESTED IN. . . WHAT ELSE? The dividend yield is attractive on this one, at 3.4%. And as our Merck writeup explains, that not only pays shareholders more than they get from their bank accounts, but it also provides a cushion of support underneath the share price. For every point Sears drops---supposing that a Fool purchase actually COULD drop---the dividend yield kicks up about another tenth of a percent. . . and Wall Street slavers some more.

ONE FACTOR NOT BEARING ON OUR DECISION. That would be Sears's part ownership of Prodigy, the joint cyberspace venture between Sears and IBM. The Fool Portfolio is cornering the market on cyberspace without trying to. Hey, anyone want a Canadian pink-sheet quote?

DON'T BUY AT SEARS, BUT BUY SEARS. We may not spend long summer afternoons in our local Sears, strolling down interminable aisles under fluorescent lights scoping out attractive members of the opposite sex, but we do like this stock. It's backed by a corporate mega-giant (not just a giant, a mega-giant) with strong projected earnings improvement and an attractive dividend yield. And it's a stock that's on the way up from its April low of $42. We're picking up some of these shares and filing them under "G" for Gibraltar.

On this stone, we build our foundation.