Sears Continues To Struggle

By Sham Gad | December 29, 2011 AAA

There are retailers and then there is Sears Holding (Nasdaq:SHLD). This once-iconic retailer continues to struggle, even in the midst of the busiest shopping season of the year. Sears seems have trapped itself in the middle of a very competitive retailing landscape as they struggle to compete with Wal-Mart (NYSE:WMT) for the discount shopper. The reality has been a very rude awakening for Sears.

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A Dose of Reality
This week, Sears announced that it would close over 100 stores due to poor performance. While consumers have been very cautious with their spending habits, Sears' troubles go beyond that. Wal-Mart is starting to see a rise in same-store sales, while Target (NYSE:TGT) continues to deliver quality growth numbers. Furthermore, Sears' domestic comparable sales fell 6% during the quarter and sales for its Kmart unit dropped 4.4%. (For related reading, see The 4 R's Of Investing In Retail.)

An Uncertain Future
Once an investment darling, shares in Sears have been in a painful decline. Two years ago, Sears shares traded for as high as $120. Today, shares trade below $35, after a 20% one-day drop, largely due to news of store closures and poor operating performance overall. Not even Sears chairman and investing luminary, Eddie Lampert, has been able to revive the company. Many investors who recently bought stock in Sears were hoping to benefit from Lampert's acumen, but they have been sorely disappointed thus far. Even Lampert himself, who has been furiously buying back Sears shares for well over a year now, appears to have bought shares way too early.

Sears shares now trade for about $34, valuing the company at less than $4 billion. Because Lampert owns such a significant stake in Sears, there is no hope for an activist investor to get involved, like Bill Ackman recently did with fellow retailer JCPenny (NYSE:JCP). Like Sears today, JCPenny was a struggling mall-based retailer in need of a direction. Yet even today, JCP trades for 7 times EV/EBITDA while Sears fetches about 8 times.

The Bottom Line
Despite all the bad news for Sears, Lampert's huge investment of both time and capital makes him his own activist investor and gives the company a much-needed sense of direction. Currently, the key assets at Sears are its commercial real estate and brands like Lands' End and Craftsman. Lampert's ability to monetize those assets will be key to Sears' future.

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