Tickers in this Article: SHLD, JCP, M, DDS
Some investors may want to jump into retail stocks, figuring the worst is over and all the bad news is in. One stock that has drawn interest is department store-discounter Sears Holdings (Nasdaq:SHLD). With a recent upsurge in the stock price, investors might be wondering if it's worth getting in now. The question you need to ask is whether there is value in this stock and at what time horizon? Let's take a look.

Sears By the Numbers
The current Sears company is an amalgamation of Sears and the post-bankruptcy K-Mart, a K-Mart which investment-fund owner Ed Lampert used as a platform from which to buy Sears in 2005.

The new company, which was supposed to be a further platform to acquire other companies, has shown annual earnings per share (EPS) of $12.39 (2005), $6.21 (2006), $9.59 (2007) and a final EPs of $5.71 expected for 2008. These are profitable but uneven numbers, even before the economy fell through the floor last year. The estimates for '09 are $1.35 with $0.51 expected in '10. Alternate sets of estimates project a bit lower. The quarter ending January 2009 is looking for $2.68 EPS, down from $3.04, last year's same quarter. Sales, which have produced annual revenues of $50 billion for 2008, are projected to be $47 billion in '09, and $44 billion in '10. A trend that doesn't look too enticing.

Can Sears Pull Itself Up?
Sears has a $5.5 billion market cap with $1.27 billion in cash, which works out to more than $10 per share, generates a cash flow of more than $850 million, and has $4.47 billion in debt. Trading between $28 and $114 per share in the last year, the stock has recently risen to $45. A trading note, which uses technical analysis, highlights this as a short-term move - showing that somebody likes the stock, even if only for the moment. (Find out how you can combine the best of both strategies to better understand the markets, in Blending Technical And Fundamental Analysis.)

Business Outlook
Not only has retail been slammed in 2008, as the consumer economy fell off dramatically (two-thirds of the gross domestic product (GDP) is traditionally made up of consumer spending), but retail was an indirect victim of the credit crisis as well. While 2008 was bad for retail sales overall, 2009 has yet to look up. December retail sales were off 2.7%, while Sears' same store sales were off 7%. This is a fundamental measure of the business, and when you compare that to the general retail decline of 2.7%, as bad as that is, it makes Sears' performance look that much worse.

Which Trend is Your Friend?
Traders have a well-known saying that "the trend is your friend". And while technical traders recently lifted Sears' stock price long-term investors need to look at the fundamentals, and since both these trade on different criteria, they often come to the opposite conclusions. This can create some confusion even for fairly experienced investors, who sometimes read trading notes or recommendations as investing notes.

So, while the short-term trading trend for Sears might look promising, what of the long-term investing trend? The business fundamentals that underlie the stock have not been good for several years. And, even though Sears has shown bursts of profitability and some promise, there has not been follow-through on consistent growth. Prior to 2005, the company still had these issues, with many shifts and changes in its approach and being unable to deliver a consistent identity to consumers. Consumers didn't know if the company was a discounter with K-Mart, a department store, what it specialized in or if it was a high- or mid-level operation.

Unfortunately for Sears, unlike competitors JC Penney (NYSE:JCP) and Macy's (NYSE:M), or even poorly-run Dillard's (NYSE:DDS), it still hasn't really figured out the best way to market its own self.

No Shield Against Loses
The fundamental trend for Sears doesn't look promising. It had mixed results, at best, prior to the economic woes in the consumer sector in 2008, and its current numbers are getting hammered by the recession. That said, two things can happen to make Sears a viable investment: 1) the economy has to improve, and 2) Sears has to manage itself far better than it has, and far better than it has shown it can.

To learn more about investing in stocks from this sector, be sure to read Analyzing Retail Stocks.

comments powered by Disqus

Trading Center