Fool Buys Sears
August 10, 1995

Sears, Roebuck & Co. (60 more shares)
TYPE: Beating the Dow
Phone: (312) 875-1468
Closing prices, August 10th, 1995: Bid $32 5/8, Ask $32 3/4

Trailing 12-month revenues: $49.9 billion
Trailing 12-month EPS: $2.21
Last quarter reported: June 1995 (FY: Dec)
Next quarter reported date: October 21, 1995
Consensus EPS estimates for quarter: $0.70e vs. $0.47

FOOL ratio: N/A

-----> TRADE: Buying 60 more shares, August 11th

"ON THIS STONE, WE BUILD OUR FOUNDATION...." It was with these fateful words that The Fool closed its Buy report on Sears a little more than one year ago. Since that purchase, Sears, Roebuck & Co. has moved on to become a much different company, taking a gigantic stride away from "di-worsified" conglomerate to reformulated retailer, slashing debt even as it focused once again on its core business.

Last year, The Fool called the 1993 turnaround for Sears "what may have been the most massive one-year restructuring in the history of American business." The highlights of 1993 included the closing down of a 100-year-old catalogue operation, the spinning off of Dean Witter/Discover entirely, as well 20% of The Allstate Corporation, the selling of Coldwell Banker in October, and a ditching of Sears Mortgage Banking. The total from all of this selling? $4.2 billion.

TWELVE MONTHS MORE OF HECTIC CHANGE. In 1994-95, Sears continued to reposition itself going forward as the king of retailers, shedding debt in order to achieve greater profitability. The reason for the frenetic pace? Chairman and CEO Edward Brennan wanted to hand a leaner, meaner Sears over to his successor before retiring from the company, leaving something more reminiscent in 1995 of what the company was in 1906, when it was incorporated.

Take a look at these moves:

In late November of 1994, Sears transferred ownership of its Sears Tower and the related mortgages to a trust, eliminating $850 million of debt, and resulting in a $195-million after-tax gain for the company in its fourth quarter. Sears continues to occupy the tower, but freed itself from the restrictions imposed by holding such a massive mortgage.

The 360.5 million Allstate shares it spun off in July of 1995 raised $11.1 billion, further extinguishing debt remaining on its balance sheets. Allstate was the largest company to be spun off in U.S. history.

Soon after, S completed a deal worth $2.3 billion for the sale of its shopping mall and office development arm, Homart Development Co.

DAY OF REST. Edward Brennan left shortly after the Homart deal, stating his belief that the company was now growth-oriented. Helped by the Allstate spinoff and the sale of Sears Tower, the only debt Sears carries forward now is $18 billion of credit-card receivables, from which it derives proceeds by charging those nasty credit card fees.

OK. . . NOW WHAT'S LEFT? Simple. The Sears Merchandising Group. . . with a new game plan.

Department stores remain the Merchandising Group's base business. And with the modernization of 240 stores between 1993 and 1994, our company now has added an extra 4.4 million square feet of selling space for electronics and soft goods (clothing and linens) that had previously been taken up by offices, storage rooms, furniture, and hardware operations. With its recent decision to sell brand-name consumer electronics, AND accept Mastercard and Visa for those sales, the "Sears Brand Central" concept has returned alienated customers to Sears. The company's decision to give customers a six-month break on interest if they used a Sears ChargeCard has added some push as well.

LET'S BEAT THE DOW. All right, the core business may be great but why are we really buying the stock? Simple: Beating the Dow. Sears, with its recent spinoff and 2.81% dividend, currently occupies the magical Ultimate Profit Potential (UPP) position, as defined by Michael O'Higgins. That means that of the ten highest-yield Dow stocks, it happens to be that very one with the LOWEST share price. Now, granted, the "UPP" has not been a sterling performer in the past, but that has often been because the unenviable company was indeed a seriously troubled financial enterprise. With Sears's remarkable self-recreation, this is quite the opposite case. And as we already own some of this baby, we will purchase some more shares to bring the amount of the holding in line with our two other Dow purchases tomorrow. (That will make two full years of Sears appearing in the Fool Pantheon. We're already getting nostalgic.)

Tomorrow, we will once again pick up some of these shares, then file them under "G" for "Gibraltar."