Sears Retail Side Weakens

By Sham Gad | August 24, 2010 AAA

Sears Holdings (Nasdaq:SHLD) reported 2010 second quarter results which showed a net loss of $39 million, or 35 cents a share. For the same period in 2009, the company lost $94 million or 79 cents per diluted share. On the sales side, total revenues decreased $93 million to $10.5 billion for the 2010 second quarter, as compared to total revenues of $10.6 billion for the quarter ended August 1, 2009.

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A Tough Business
Sears Holding is the conglomerate controlled by investor Eddie Lampert, a brilliant investor often touted as the Warren Buffett of his generation. Prior to Sears, Lampert's track record was phenomenal as he delivered market beating results year in and year out. When he purchased the assets of retailer K-Mart out of bankruptcy and combined it with Sears, many saw that as the next coming of a Berkshire Hathaway (NYSE:BRK.A) type conglomerate.

However, the current reality is that Sears is a retailer and retailing is a tough business - Lampert is brilliant, but he is not a magician. With consumers watching every penny they spend these days, mass merchandise retailing is all about price. Unfortunately for Sears, they are doing battle with the low cost retailer in Wal-Mart (NYSE:WMT), as well as Target (NYSE:TGT), a company that caters to the more affluent, yet price conscious consumer.

Only the Beginning
While Lampert has had control of Sears for several years now, this story is still young. Through the ups and downs of Sears during this economy, he has been buying back shares at a very rapid clip. Since 2007, the share count has dropped from 155 million to under 120 million. These buybacks have given insiders 60% ownership. Today, the shares trade below book value, suggesting no value to Lampert's capital allocation ability. While I'm not sure how long it will take to fix the retailing side, Lampert is a brilliant capital allocator - a skill I find lacking in the vast majority of executives today. (For related reading, see How Buybacks Can Warp The Price-To-Book Ratio)

Time Will Tell
While Mr. Market may not be fond of Sears today, the company's insiders, including Lampert, have pushed ownership up to 60%. Prior to Sears, it has never paid to best against Lampert. It's still too early in the game to see what Lampert has in mind for Sears Holding, but I wouldn't bet against him even now. (For more, see The World's Greatest Investors Tutorial.)

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