It's a blue-light special, with Kmart(Nasdaq: KMRT) today announcing it was buying Sears(NYSE: S) for $11 billion. The merged company will have 3,500 total stores, and, with $56 billion in sales, it joins Wal-Mart(NYSE: WMT), Home Depot(NYSE: HD), and Target(NYSE: TGT) as one of the biggest four retailers in the country.

In today's Motley Fool Take:

Kmart, Sears Join Forces


Rich Duprey

When resurgent discount retailer Kmart(Nasdaq: KMRT)branded a new CEO, it was rumored that chairman Edward Lampert might have designs on merging the company with Sears(NYSE: S), another retailer in which he has a majority stake. ESL Investments owns more than 52% of Kmart and is Sears' largest shareholder at 15%. Both retailers have faced the twin dilemma of declining shopping malls and increased competition from the likes of discounters Target(NYSE: TGT) and Wal-Mart(NYSE: WMT).

Now, in an $11 billion cash and stock deal, the two will merge to become the third-largest retailer, with combined sales of $55 billion and more than 3,400 stores. Sears Holding Corp. will become the holding company for both enterprises, but they will continue to operate their brands separately. It is expected the merger will save some $550 million through procurement, marketing information technology, and supply chain management.

Kmart shareholders will receive one new share in the new holding company for each share they own, while Sears shareholders have the option of receiving $50 per share in cash or getting a half share in the holding company for each share of Sears stock they own. The board of directors of both companies unanimously approved the merger, which still needs shareholder and regulatory approval.

Kmart has been selling off its stores, which tend to be in prime locations. It sold 50 to Sears for $575 million earlier this year and 18 to Home Depot(NYSE: HD) for $271 million. Sears stores are also in demographically prime areas and in shopping malls, even if the malls are no longer a growing segment. Together they have some of the best real estate in the industry. New Jersey-based Vornado Realty(NYSE: VNO) took a 4% stake in Sears just this month, with hopes of cashing in on the retailer's land holdings. Sears shares have gone up 22% since the purchase was announced.

While one analyst has likened the merger to tying two drunks together in hopes they'll be able to walk a straight line, the general view is that the new company will be a stronger competitor to take on the likes of Target and Wal-Mart.

Still Kmart continues to have falling sales. It also reported today that while it has achieved a third-quarter profit of $553 million, it was realized solely through cost-cutting measures. Revenues fell another 14% and same-store sales declined more than 12%. The company expects to end the year with more than $3 billion in cash.

Kmart filed for bankruptcy in early 2002, closed nearly 600 stores and fired 57,000 employees. When it reemerged last year, it surprised analysts with its quick return to profitability, though as noted above, it was built less on the back of sales than on other maneuvers. Sears, too, has long been mired in a morass of sluggish sales. It is trying to reinvent itself through the introduction of the Sears Grand concept, a traditional retail store of clothing, appliances, and tools, which also offers grocery and convenience items.

How long now before Sears starts running "blue light specials?"

Motley Fool contributor Rich Duprey has often resembled two drunks tied together. He does not own any of the stocks mentioned in this article.

Discussion Board of the Day: Single Fools

Single and looking? Single and not looking? Single Fools talk about issues like online dating on -- you guessed it -- the Single Fools board. Only on

Hewlett-Packard's Marginal Margins


W.D. Crotty

Last quarter, my concern with Hewlett-Packard(NYSE: HPQ) was its operating margins. Although they are improving, they still lag the margins at competitors Canon(NYSE: CAJ), Motley Fool Stock Advisor recommendation Dell(Nasdaq: DELL), and IBM(NYSE: IBM).

In the latest quarter, there was another welcome increase in operating margins from 5.4% a year ago to 6.0% now. But, consider that the personal systems business, which brought in 30% of total sales, has 1.2% margins and Dell has 8.5%. There is still a lot of work to do on the PC side of the business.

Today's news from HP was certainly upbeat. Revenue increased 8%, helped by record revenues in every business and every region. Net income increased 27%. Helping net income was a $107 million operating profit at the enterprise storage and servers division, which made up 19% of total sales. Heads rolled there last quarter over a $208 million operating loss. But this quarter's margin was still a slim 2.6%.

The wish of every HP shareholder is for the rest of the company to achieve the 16% margins at the imaging and printing division, which contributed 30% to total sales.

The company's 2005 first-half estimates are nothing to cheer about either. Sales are forecast to rise less than 5%. Earnings of $0.72 to $0.74 a share support analyst estimates that the company will earn $1.49 in 2005 -- a forward price-to-earnings (P/E) ratio of 14.

Before shouting, "Wow, look at that low P/E," consider two troubling signs. Bill Mann pointed out in September that HP had a big inventory hair ball. There was a 17% increase in year-over-year inventories reported this quarter -- far outpacing the company's revenue growth. And, remember those high-margin printers? Dell is now in this business, and there was a decline in single-function printer sales and price erosion last quarter.

Despite weak operating margins, HP does have a strong balance sheet. Total debt, at $7.1 billion, is outweighed by $12.7 billion in cash.

So let's add it up. The company's own forecast for revenue growth is anemic. Earnings growth could fall victim to an inventory adjustment or margin slippage in printers (or any other area, for that matter). Although there is lots of cash, the company's low operating margins still need to reach peer levels. At today's stock price, the company offers investors marginal value.

For related Foolish analysis, see:

Fool contributor W.D. Crotty does not stock in any of the companies mentioned.

Quote of Note

"Nostalgia isn't what it used to be." -- Peter De Vries

Yahoo! Courts Singles


Alyce Lomax (TMF Lomax)

Is love in the air for Yahoo!(Nasdaq: YHOO)? The Web giant has taken a little break from the usual sparring withGoogle(Nasdaq: GOOG) to announce the launch of a premium, enhanced personals service. While it may indeed give some people one more reason to frequent Yahoo!, investors might shrug this one off as neither here nor there.

As luck would have it, I examined the online dating phenomenon during the summer, and my own personal suspicion was that it's way too competitive a space for any one player to continuously make a lot of money. Not to mention, it's an evolving industry and therefore subject to rapid change.

Yahoo!'s new premium service involves a $34.95 fee for matching using psychological profiling, the method that eHarmony popularized and one that some rivals such as InterActiveCorp.'s(Nasdaq: IACI) quickly sought to emulate. (Yahoo!'s regular personals service costs $19.95 per month.) Other rivals include True, MatchNet, and Spring Street.

Those are just the fee-based rivals. Free Craigslist serves as a platform for dating for some, and there are always the social networking sites, such as Friendster and, perhaps someday, Google's Orkut.

InterActiveCorp's last couple quarters have illustrated flat revenues over at Yahoo!, on the other hand, doesn't break out the revenues that it derives from personals, although in its last conference call, it did describe personals as one of the segments that contributed to growth.

Most of the other players are privately held, and therefore, the information is not so easy to come by. However, earlier this week eHarmony announced a deal in which it gets prime real estate on Gannett's(NYSE: GCI)USAToday site.

Despite Yahoo!'s apparent luck in the space (comScore taps it as No. 1), signs have shown slowing growth this past year. Recent data from Jupiter Research forecasts that the U.S. market will grow only 19.4% this year, to $473 million, and only 32%, to $623 million, over the next five years. Just a year ago, revenues in the online dating arena were seen skyrocketing by 76%.

It's definitely a moment of respite from the search war and highlights a Yahoo! strength. Namely, the large audience it has established a strong connection with and its ability to offer premium services to subscribers who are willing to pay up, freeing it from the ups and downs of ad sales. Yahoo!'s betting that its audience, momentum, and innovation will woo additional subscriber revenues, but given the slowing growth of the industry, making this a lucrative bet requires that it stave off a ton of competition.

Alyce Lomax does not own shares of any of the companies mentioned.

Hyper Growth Equals One Hot IPO


Dave Mock

In case anyone was wondering whether the heady days of the late 1990s would ever return, just look to the IPO market.

Riding the coattails of the successful public debut of Jamdat Mobile(Nasdaq: JMDT), wireless product and services retailer InPhonic(Nasdaq: INPC) hit the market yesterday and blazed higher on more than 9.7 million shares traded. The company utilizes the Internet to sell wireless devices and services and even offers service through its own MVNO, Liberty Wireless.

The company was originally hoping to offer 7 million shares at somewhere between $15 and $17, but demand allowed them to up the price to $19. Even a higher price and another 500,000 shares couldn't mute investor euphoria, though -- buyers sent the stock to $24 by the end of the day, valuing the company at $793 million. Not bad for a day's work.

Actually, InPhonic's IPO took years of work. The company originally filed its offering in November 2002 but withdrew the offer because of a rocky market. Still, not a bad showing for two years' work.

But for those not fortunate enough to be an accredited investor, does this new issue provide an opportunity? After all, the company's revenues are soaring, making it Inc. Magazine's No. 1 pick for the fastest growing private company in the U.S. in 2003.

Unfortunately, soaring revenues don't help if the costs are soaring along with it. InPhonic is still not profitable, though it is getting closer. Even with $144 million in revenue for the past nine months, InPhonic logged an operating loss of more than $8 million.

And its coverage in Inc. Magazine may actually land them in hot water with the SEC, just as Google(Nasdaq: GOOG) was spanked for its write-up in Playboy(NYSE: PLA) during its quiet period. It looks like the only difference for InPhonic is the hot water doesn't involve Jacuzzis, thin bikinis, and bunny ears.

To keep emotion in check, investors should keep the 10-foot pole handy with InPhonic and stay on the sidelines for a while. The company has a list of preferred share allocations almost as long as Santa's Christmas list that may come into play after the six-month lockup period.

Expect the next quarter to be a blowout, as the Christmas season is always good for wireless retailers. Shortsighted investors may be lured into a short-term profit trend, though. Best to at least wait out the lockup period and check for progress toward a sustainable business model in the following quarters.

Fool contributor Dave Mock understands the lure of Jacuzzis and bikinis, but where and why did bunny ears ever come into the mix? He owns no shares of companies mentioned in this article.

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