Value Investing in Sears: Avoid Current Perceptions & Look Forward

 

Bill Parcells had a great quote that has always stuck with me. He was asked about his team (that at the time was 2-6 but had lost some close games) whether or not he felt the team was better than its record. His reply, "You are what you are". If you are 2-6 that is what you are, nothing more and nothing less.

Here is a recent article on Sears Holdings (SHLD) that is worth reading.

Why do I bring up Parcells? Well, his quote has a lot to do with current perceptions of Sears.

Sears, is currently a struggling retailer. It should be noted that this is not a  situation currently held only by Sears. Retailers, expect Wal-Mart (WMT) and Target (TGT) all are in the same situation.  Lampert is 100% correct when he says "We’re the $50 billion company that people think doesn’t have any customers or relevance,”. It is true... Sears is by no means anywhere near "in trouble". Cash is great, debt is insignificant and the balance sheet is pristine for a retailer in the current environment.

All that, however does not comfort many shareholders who have watched the stock fall 50% in the past year. Again, a 50% drop is a number held by scores of other retailers (JC Penny (JCP) and Macy's (M) for starters) but again, it is what it is, lousy.

Back to football...

Had you been a person who bet on football in 1995 and watched the Patriots that year (the year Parcells made the quote), you would have seen a team with a strong leader that made some mistakes that had caused it to lose some games it otherwise would have won. The team had a good young quarterback, strong defense ,capable receivers and a good kicker (not to mention great coaching). In short, all the ingredients were there for success. A misstep here and there caused poor results.

One could perhaps see the "value" in the team and recognized that a little tweaking could result in a dramatically different outcome the following year.

Had you gone to Vegas that off-season recognizing all this and bet the Patriots would have made the Playoffs and / or the Super Bowl the next year, the odds you would have got were wonderful. When they actually made both the following season, you would have laughed all the way to the bank. Parcells, recognizing the shortcomings in the team, made some changes but stuck to his core philosophy that worked in the past, resulting in success.

Applying to Sears:
See the similarities? Lampert has acknowledged some mistakes and is trying to take steps to correct them. A new CEO, new structure to maximize brand value and and a new leader for those brands are in the works. What has not changed is the core strategy of patience and disciplined capital expenditures. That strategy has made early shareholders very wealthy, even after the recent stock slide, and is a proven long term one.

Those who think Sears is on the brink of extinction are like the football fans who have a 5-5 team and say they've "been lucky and should be 2-8", well, Sears isn't, it is 5-5. Conversely, the retail environment will not turn anytime soon so the same 5-5 team cannot be said "should be 7-3 because it has been unlucky" (in this case the "bad luck" is the economy), it is 5-5.

What one can do is look forward and see a very smart leader, correcting errors, with a very strong core (balance sheet) and a proven track record. Based on that you could say the current situation is not reflective of the future results one should anticipate.

Hence, value investing in Sears...

Disclosure: Long SHLD, WMT

Comments

[Alaska]

Here in Anchorage, I drive past Sears every day on the main Highway. Very few cars are ever in their parking lot. When there is it is because they rent the parking lot out for "Used Car Sales Extravaganza", or to fairground rides like ferris wheels. North in Wasilla it is even worse. I doubt I have ever seen more than 12 cars in the parking lot at once, and that would include the employee vehicles. Across the Parks Highway is a WalMart, and its parking lot is nearly full. Not much return on what the retail locations are worth. I never understood how combining two losers, K mart and Sears, would make a winner. As for your analogy, it is not rational read.

[fxtrader07]

your analyogy makes perfect sense. however, betting on a success of the patriots back then certainly is something, that probably nobody would classify as 'investing'. So betting on sears ' turnaround might be a bet, a gamble - but investing? too hard for me to do.
and then again - sears is a faltering, aged former behemoth - not comparable to a young, hungry, talented team. No Eddie Lampert in the world can change that. Others see great value - very respected value fund managers among them. I can't. I prefer investments where there is less hope and beliefs involved

[Landpimp]

As both a Sears and Kmart landlord, I see a completely different picture. When dealing with them, they are extremely bureaucratic, cover your butt people who are unwilling to make a decision unless absolutely forced to. They also do not pay their contractors on time, often delaying payment by months based on flimsy excuses. However their rent checks arrive like clockwork.

While I have a tremendous amount of respect for Lampert, he has a huge task in front of him that so far he has been either unwilling or unable to tackle. In my opinion, the whole corporate philosophy of the company needs to change to become more nimble and responsive to changes in the retail environment. He will only be able to ride the cash flow off aging, unattractive, understocked stores for so long, before losing what remaining market share they have left.

[MSF]

Doea anyone know what Lampert is doing with the surplus of cash but buying back Sears stock.

Also what are the holdings in Sears.

[MSF]

The annual report i received when I was a shareholder did not show any of their holdings and investments.

There were just numbers but not itemised on the investments.

This was one of many reasons why I sold the stock, no idea on what the company was doing with the cash except the buying back of the stock.

[weiwentg]

gotta agree with Landpimp and Alaska. although I am long Sears because I own Fairholme, I do not think Lampert will make them succeed as a retailer - which he seems to be trying to do.

Lampert is a financier and a hedge fund manager. he either did not manage to hire a competent retail team, or perhaps it's just too hard to compete with Wal Mart, Costco and Target. sure, Sears' balance sheet looks nice, and that will certainly help them in a recession.

but, if Lampert is really serious about having Sears make it as a retailer, then he doing things wrong. earlier on, I would have said I have no choice but to believe that Lampert was serious about Sears the retailer, as he hadn't made any moves to monetize the brands or the real estate. now, he might be moving in that direction, at least with the brands. but I think there are a lot of better investment opportunities than Sears.

[MSF]

It seems to me Lampert is using Sears to prove to himself to say look what I have done,if it becomes successful.

He makes his money and fees with ESL,over a billion dollars one year.It is there where he is focused on investing not Sears.

He is buying AutoNation in ESL not in Sears.etc.

As far as a realestate at least reits pay a dividend while you wait.

[bishk1301]

A real bad retailer just being talked up by Morningstar inspired Tod. I wish there was a second Warren Buffet I could piggyback for the next decade but it does not seem to be Lambert. Wasted the precious cash buybacks of going to burn a lot of cash operator.The value of commercial real estate which is supposedly 300$ a share is going to come down to Earth sooner or later and what do you have then? Cash burning machine and Dzen investor Eddie Lambert who bought Citigroup for 50$ a share when every school boy knew there was a financial bubble going on!!! If he did that how do I know he has any idea about what Sears is really worth? I could buy some Costco stockwhich looks a little pricey but I would be buying there as well so in couple of yeas their shareprice could look pretty reasonable. Who is buying at Sears? Aliens? Skulls & Bones members?
Must be some elite for sure cause I know no one going there.

[MSF]

Bish good point and I especially like the fact on that Citi group purchase.By the way GS has it on its convicted sell list today,6.26.08.

Again Lampert was making money in the market when everyone was making money in the market now that it is more difficult he is not.
As far as the returns well obviously, if you were up one year 100 percent and do nothing for the next four years your return is 25 percent this is good in a bad market and it makes makes you look great.

Finally that return on Sears when they merged was from the speculation of Lampert using Sears as an investment vihicle and investors were able to get in without an enourmous investment and being part of Lampert's hedge fund.
That blew over and the shares tanked.Investors realizing Lampert wants to prove somethng to himseld that he is a retail guru.

Listen look at the facts,he screwed up and not putting out a plan is because he is scared of failure which is in process now.

[MSF]

Forgot to mention he is able to invest that surplus of cash any way he wants to........where are the returns.

In other words ROI.

Please facts not day dreaming and hoping because it's Lampert, he is a billionaire he sleeps well at night.

The love bird Cramer even says to sell and he is not confident with his buddy pal.

"LOSE MONEY" WITH JIM CRAMER

[bk3558]

WOW ! Now thats a stretch, comparing Sears to the Patriots. I would call Sears an " over the hill " retailer who wishes they were in the struggle. I am afraid the comparison would be more like S.S. Kresge. My local K-Mart is so much like a disfunctional trailer park family I like to go there just to watch the show !

[MSF]

Todd are you hiding again,,,anwer the questions.

LOL

[bulrun100]

CCCCCCCCCLOWNS!!!!!!!!...

[unimpressedpragmatist]

If Sears Holdings is in such great shape, financially, why doesn't it pay a healthy dividend to its long-suffering stockholders? Or is Lampert like most of the other Wall Street Big Players, all for me and the hell with you?

As for football analogies, give it a rest! There is nothing in this country more self indulgent and focused than professional sports. I stopped watching and going to pro sports events, years ago. They are nothing more than a bunch of spoiled and overgrown kids being exploited by avaricious franchise owners, greedy coaches, classless advertisers, intellectually challenged TV and Cable networks, and very poor representation of American sports. They spoil every thing they touch.

Gee, it sounds like Wall Street and Washington.

[cheygirl]

I find it disheartening to hear that so many places have dilapidated Kmarts. Where I live we have 2 really great ones within 30 miles of each other. One is huge and newly remodeled and has drive thru pharmacy and the other is smaller and very well kept. And lots of people shop there too. I hope Eddie gets it together. I wish he would look at the store sales verses inventory that sits and has to be clearanced. Our buyers send us too much inventory. They should look at what sells before the first or second price markdown so as to bolster profit then employees could have more hours. I think Corporate is very out of touch with customer and they don't go about getting the customer's input the right way. They ought to make up survey, have employee sit with customer and check off answers for customer and give customer $10 Kmart gift card for their trouble. Well good luck and good night.

[lemming]

Yeah your investment theory is sound Todd, what you need to do now is double down and prove everyone wrong.

[jmac68]

1975 - Gas will never be plentiful again
1985 - Japanese investors are buying all the real estate
1998 - The Internet has changed the fundamentals of business
2005 - Do whatever it takes to buy a home now because real estate prices will never drop again
2008 - Gas will never be plentiful again

Isn't it interesting when the economy goes down everyone assumes that discount stores will be the only place anyone will ever shop again?

[MSF]

buy Sears stock today and your grandchilderen's grandchilderen will love you for it.

[Jim Not C]

Until Lampert dismantles the culture, he'll be making excuses and prepping the way for the World's Largest Yard Sale.

[bulrun100]

Clownnnnsssss!

[lemming]

your grandchildrens, grandchildren wont even know what Sears is!
seriously don't buy SHLD if you won it sell. The guy who wrote this article was fired shortly afterwards for even mentioning SHLD

[bulrun100]

MORON!

[MSF]

That post regarding buying Sears stock was a joke.

In other words what good will it do you today or for your future.

"LOSE MONEY" WITH JIM CRAMER

[MSF]

Another executive leaves Sears.

GOOGLE FINANCE 7.2.08

No need to repeat my previous posts.

[MSF]

Sears one of the worst manages companies.

Google Finance

[valueizwhatuget]

you naysayers are great! SHLD has $50B in annual sales. That's $10B less than Macys, Kohls and JC Penney combined. SHLD is not going out of business any time soon. You will say goodbye to those other companies before you say goodbye to SHLD.Too bad the internet wasn't around when Buffett ran the original Berkshire Hathaway into the ground, you guys would have been all over him as well. But, I am sure that you guys are much smarter than Eddie Lampert, Richard Perry, Bill Miller, Bruce Berkowitz, Bill Ackman, David Einhorn, George Soros, and Michael Price.....all of whom presently own shares and have gone on the record as saying that there is substantial value in purchasing SHLD at bv.

[MSF]

Well it seems to me when the market is as difficult as it is now the hedge fund managers get desperate and buy what the so called top hedge fund manager owns,,,,,,,Sears Holdings and hope for the best.

Although Lamperts focus is on ESL in which he recieves the fees and makes his money.

Some of the posts which were detailed in full were removed,,,I wonder why,,is it the truth hurts.

Well if you want to buy because it's Lampert go ahead but obviously there is no plan or a plan that is working.

[MSF]

Tell me what are the positives in owning this stock.

The real estate ok,,,but at leasts reits pay a dividend while you wait.

[MSF]

No comments it figures,,,,,how are the donuts.

LOL

[MSF]

VAL,

What good are the sales when you are posting losses?

[MSF]

Todd,so much for those $80 calls bought by Berkowitz.

You don't talk too much now do you.

[MSF]

LOL,LOL,LOL,LOL,LOL,LO...

[MSF]

Buy GE stock now it is at a bargain and at least it pays a dividend.

Lampert is worring about the footaball.

[MSF]

SEARS AND YOGI BERA.

[bulrun100]

clown!

[MSF]

Bulrun really who is the clown.

[MSF]

Look for massive,massive write downs next quarter at Sears.

Buy GE you won't regret it.
Nice dividend.

[MSF]

Bloggers say,,Avoid the truth and invest in the company,,,,lol

[bulrun100]

That's simple MSF! Finally answer,lockit in MMMMMMsssFFF!

[bulrun100]

Finally!! A Real Eddie Lampert Interview
Tuesday, January 29th, 2008
From the article: “Speaking by phone from the company’s Hoffman Estates, Ill., headquarters, Mr. Lampert bristled at critics who lost faith in Sears as its share price fell from $195 in April 2007 to about $104 now. Sears Holdings was formed in 2005 when Kmart Corp. merged with Sears, Roebuck & Co. and took the Sears name. The stock’s performance since Kmart emerged from bankruptcy in May 2003 is a healthy 900% gain. “Instead of [the share price] being up 20 times since we took control of Kmart in 2003, it’s up 10 times. The decline from our highs is in line with other department store retailers.”

[bulrun100]

Mr. Lampert is dealing with heavy personal losses from Sears’s recent stumbles. He’s told investors in his ESL Investments Inc. that his entire net wealth is tied up in the hedge fund, except for personal real estate.

We have already mentioned how Sears decline is inline with other retailers regardles of sales performance.

[bulrun100]

Sear Holdings testing online grocery shopping and delivery service
Sunday, June 22nd, 2008
It looks like they want to compete with peapod.com. With $4/gallon gas, more shoppers may look into delivery services. I was unable to find any major media announcements or press releases on the service.

Check out the site: mygofer.com

[bulrun100]

Ackman discusses Sears investment
Friday, June 13th, 2008
From the article: “Find a theme and export it: Ackman says he invested in Sears and Sears Canada because the retailing companies financed their credit-card receivables on its own balance sheet, which wasn’t well-understood by the markets. He used the same kind of thinking to tackle Target, which he believed was strong company with a solid debt profile and also one of the only retailers to still finance its credit cards in-house.In the case of Sears, Ackman evaluated it as its component parts, including Sears Hardware, Home Services, Sears Canada, Land’s End and Sears Mexico, all of that is before you get to the company’s extensive real estate value. “The only thing wrong is the stock price,” he said, a line that drew laughs, because Ackman acknowledged later, it bore a similarity to the old joke about “other than that, how was the show, Mrs. Lincoln.”

[bulrun100]

MSF SAYS HERE ARE THE REAL CLOWNS!!!!!!!?????????... value investors (Fairholme, Pershing Square, Force Capital, Perry, RBS, Legg Mason) and insiders own over 80% of the shares. They are not selling; in fact, Fairholme practically doubled its shares since their last filing. Would Fairholme make an $800M bet on SHLD on the allure of Lampert alone? Would Ackman buy $600M in SHLD if he did not see something? The same guy that reportedly read over 100,000 pages during his analysis of short sale of MBIA and Ambac.

[MSF]

Sears stock performance and price is the proof in the pudding.

Buffet does not own one share of Sears stock as well as many other value fund mangers.

[MSF]

Massive,Massive put buying.

[MSF]

Bulrun, Ackman made a great call on Ambac,,,,,,,what about Lampert why didn't he see it,,oh that's right he bought Citigroup stock.

[MSF]

Piggy back on Meredith Whitney she saw the problems with Citigroup.

Lampert was buying Citigroup as well as Sears stock at its highs.

Whoops.....LOL.

[MSF]

I guess Warren Buffett is too stupid to see the value in Sears.

[bulrun100]

CLOWN!

[bulrun100]

LOL!!!!BUFFETT DOESN'T OWN APPLE,GOOGLE, RIMM,GS,CHK,LUK,FFH,SO DO YOU HAVE A POINT.HE DOES OWN BANKS(USB,AMEX,WELLS FARGO) ETC AND HE'S GETTING WACKED TOO.YOU MUST BE THE MOST STUPID BLOGGER OF ALL TIME.CLOWN!

[bulrun100]

YOUUUUUUU WERE COMPARING EDDIE'S INVESTMENTS TO BUFFETS.................. WATCH CRAMER HE'S A CLOWN ALLLLLLLLLLLLLMOST AS BAD AS YOU!

[MSF]

Hey Todd what's the matter cat got yout tongue.

[MSF]

BURP

[MSF]

We understand you have nothing too say.

Simply speechless.

[MSF]

Will the government bail out Sears Holdings.

[MSF]

LOL,LOL,LOL,LOL,LOL,LO...

[MSF]

Sears is tanking and Buffett still won't touch it.

Well maybe Todd is smarter than him.

[MSF]

Looks like Sears is going below its intial public offering.

Just a reminder Cramer said to buy $180.
"LOSE MONEY" STARRING JIM CRAMER

Todd I was reading an earlier post you wrote in October,,where you were giving an expanation of comparing BRK and Buffett to Sears and Lampert.LOL

You made it sound like it was foolish to sell at around $130.

Need I say more.........LOL