Is it too late to be bearish on retail?

You could argue that most of the problematic chains have already been pounded, but I disagree. Weaker chains will continue to get pummeled. And now that the holidays are gone, it will take several quarters before investors even begin to consider owning the industry's laggards.

Every week, I single out a stock that seems headed for trouble, then suggest three stocks that might replace it if disaster strikes. Who gets tossed out this week? Come on down, Sears Holdings (NASDAQ:SHLD).

Shears for Sears
I have a soft spot for the country's fourth-largest major retailer. My first real job was with Sears, selling maintenance agreements for the retailer's appliances during a chunk of my junior year in high school. If only I could sell maintenance agreements for Sears Holdings itself these days.

The retailer is failing on so many different levels. Remember when its acquisition of Kmart was hailed as a real estate play? I guess we all know how swell the commercial real estate market is these days. Big-box chains are scaling back, if not liquidating entirely, a la Circuit City. 

Things get even uglier when you consider Sears Holdings' financial performance. How did the company do over the telltale holidays? Don't ask. Same-store sales at domestic Sears locations fell a sharp 12.8% in December. Comps held up better at Kmart, but the chain also posted negative sales at the store level, unlike its rival discounters.

Analysts foresee the company posting a profit of just $1.35 a share for the fiscal year that ended last month, and earning just $0.44 a share for the current fiscal year. Naturally, these are really depressed net income levels, but the rock-bottom projections ultimately suggest that no one will warm up to Sears Holdings as an earnings-based value play for some time.

Sears Holdings can't do anything right these days. Even when it decides to draw the line and buy back stock, it still gets burned. It's been paying as much as $150 a share to repurchase its stock in recent years, squandering most of its cash along the way. Anyone who followed the company's lead then probably regrets it now.

Good news
But I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave-ho. Let's go over the three fill-ins.

  • Target: I'll resist naming the obvious discounter -- Wal-Mart (NYSE:WMT) -- because I believe the Target's "cheap chic" image will help it land the department-store masses who start trading down this year. The stock is trading at nearly half of last year's high, it fetches just 10 times trailing earnings, and it's beaten Wall Street's profit estimates in four consecutive quarters.
  • VF (NYSE:VFC): How many retailers earn analysts' confidence for improving profitability this year? There are a few turnaround plays -- like goth hub Hot Topic (NASDAQ:HOTT) and its Twilight-inspired renaissance -- but few that have been consistently growing like VF. As a supplier of hot brands like Lee jeans and Vans footwear, the company is less sensitive to chain-specific weakness. Sure, it also runs a few of its own stores, but the company has perfected that balance. Back in October, VF raised its dividend for the 36th year in a row. 
  • Amazon.com (NASDAQ:AMZN): Why fix what isn't broken? Amazon.com bucked the holiday malaise, becoming one of the few retailers -- or e-tailers -- to deliver refreshing growth in a tightening market. Net sales and income climbed 18% and 9%, respectively. A penny-pinching climate may also benefit online closeout specialists such as Overstock.com (NASDAQ:OSTK), but you may as well go with the market leader until Amazon leads investors astray.

Other headlines from the weekly trash bin:

Do you like my substitutions? Would you rather stick it out with the tossed company? Are there other stocks I should look at in future editions of this column? Let me have it in the comment box below.

VF is a Motley Fool Income Investor recommendation. Wal-Mart Stores and Sears Holdings are Motley Fool Inside Value picks. Amazon.com is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletters today, free for 30 days.

Longtime Fool contributor Rick Munarriz hates being hard on the softer side of Sears, however deserved the criticism may be. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.