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What Is Sears Worth?

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What Is Sears Worth?

Sears Holdings(SHLD) chief Eddie Lampert just announced that they would be closing 12 under-performing stores outside of Illinois.  Sears continues to plummet in almost every possible metric. The stock has dropped from a 52 week high of 139  to its current trading price around 50 plus or minus a few points.  This translates to a market cap valuation drop in excess of 4 billion dollars. That’s the good news.  As we approach what should be on of the biggest holiday “non-spending” seasons since the Great Depression and an expected demand plunge in the retail appliance sector, the plummet should continue.  IMHO we will see Sears trading in the 30-40 range bye the end of the year.

The most recent stock plummet while more dramatic than others has followed the trend of most other retailers in these troubled economic times.  Word on the street is the Sears actually puts itself in as better positioned than the likes of Target and Walmart due to a hefty cash on hand surplus.  That is the biggest slight of hand since Houdini.   A cash surplus hoarded while your company goes under is not a positive asset.  Sooner or later, sales do not keep up with expenses and that cash will have to be used.  You can only close so many stores.  Pretty simple math.   Walmart, Target and Loews are well run companies.  People who shop there will continue to shop there even if they are going less frequently . They are not going to suddenly decide to switch to a poorly run Sears with outdated stores and a less desireable inventory with the exception of a very few brand that inspire loyalty such as Craftsman.  The Sears free-fall is only accelerated.  Not only do they have to deal with  reduced foot traffic as a result of the current economy, they are still the same poorly run company they were before the Wall Street meltdown. The same retail decision making fundamentals will continue to plague them apart from these troubled times.

Word on the street is that Sears is locked in on their lines of credit(although I hear they had one reduced). If this is true Lampert may be able to continue to sit on his cash surplus while spending none of it to improve infrastructure and most importantly get someone in who knows retail and will actually be allowed to speak out with authority to get things done.  If it is not true and credit continues remain  tight throughout the holiday season, we can expect Eddie Lampert to have to part with a lot of that cash surplus to keep things going.  I also find it interesting that guys like TheStreet.com’s Jim Cramer have consistently spoken positively about  about Sears.  Have we been looking at the same company?  Jim seems to consistently fall back on Sears strong balance sheet and their EBITDA.   I am not sure what that has to do with sound company fundamentals going forward.  It is no secret that  Jim has  been “in the tank” for Sears.  His friendship with Eddie Lampert dates back to their Goldman Sachs days.   This in a vacuum does not mean Jim can not be objective but it does get to the point where you look at his Sears analysis and recommendations and say WTF.

There is a huge differene however between the drops of Sears as compared to Walmart, Target and some other retailers.  While they will also suffer as a result of depressed spending and severely tightened credit, they are still fundamentally well run companies.  Even in these ridiculously tight credit enviorment, while they may pay a little more for their money, the banks will still renew their lines at comparatively favorable rates.  Their custmoers may show up less frequently but they will still show up.  Business will continue as usual. Sears will continue to lose market share through these tough times.  Credit will be harder to get. When they do get it the money will be more expensive.  Eddie will be forced to use cash surplus.   When the cash is gone will there even be a Sears?

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Sears On Life Support

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Sears On Life Support

In the war for retail supremacy top Sears Holding brass continue to desert faster than members of the Iraqi military.  After parting ways with  Yum alum Alwyn Lewis, they have now seen the defection of the SVP of Home Services Mark Good and marketing chief Maureen Maguire.  They also lost Lands’ End chief David McCreight, who took the No. 2 post at Under Armour Inc. and Bill Stewart, Kmart’s chief marketing officer, who left in June to work on a campaign to protect gay marriage in California.  I met  both Maguire and Stewart last year.  My impression was that regardless of talent, it was difficult for them to function in an environment whose structure was defined by chaos.  Sears still has some some talent hanging on in the likes of head of Kmart retail chief Don Germano  and SVP of Supply Chain Robert Phelan.   How much longer they will tolerate Eddie Lampert’s “top to nowhere” management style or end up being the newest scapegoats is anyone’s guess.

Alywn Lewis left almost a year ago and has not been replaced.  His position has been filled in the interim by W. Bruce Johnson whose primary experience was in supply chain.  Word on the street is that Johnston is not a fan favorite of employees and is considered almost as aloof and out of touch as Lampert.   This can not be a good sign for quarterly numbers expected to be released shortly.  We should see another terrible quarter on the heels of the biggest quarterly loss since hedge fund guru Eddie Lampert took over the helm 3 years ago.

Sears top revenue generators are a telling sign of the bleak future.  While still the largest supplier of home appliances their market share is on steady decline to the benefit of of competitors such as Lowes and Home Depot offering better service and more aggressive pricing.  The loss of Home Services SVP Mark Good may be just as telling. His Home Services division was responsible in part for installing and repairing Sears appliances.  Good was widely considered one of Sears top talent acquisitions.  He was unable to turn around  a division already under constant attack for terrible customer interaction, shoddy response and scant part availability.  We could gasp and say that this is shocking and reflect on the once mighty Sears that supplied our parents and our grandparents homes but this spiral into complete retail irrelevancy was pre-destined from the moment Wall Street Hedge fund guru Eddie Lampert took over as majority shareholder and CEO.

In the retail industry same store sales is what Wall Street looks at to gauge how well as retailer is doing. It is not the final word in how well a store is really doing but for better or worse it is the bench mark. Edward Lampert prefers to use EBITDA (Earnings before interest, taxes, depreciation and amortization) as his benchmark. That is well and good for the egg heads. You can have all the MBA ‘s in the world working for you but in the end someone still has to want to walk into your store and buy something. That someone then has to want to come back. That someone then has to want to tell others to come and check it out.  Its called customer evangelism.   That is the cycle every retailer strives for.  You want someone to buy your product and tell others to buy it.  You want someone to like your “brand” and tell others to check it out.  When consumers stop participating in that cycle irrelevancy follows.

In what could be the most telling sign of the last gasp of a once proud retail giant, Lampert did something he swore up and down he would never do to generate revenue.  Sears in true pre-bankruptcy Kmart form has engaged in across the boards Midnight Madness sales and other sales gimmicks designed to rid Sears of an enormous amount of excess inventory. Sears has been in continuous mark-down mode ever since.  We can expect this to be reflected in their 2008 2nd quarter numbers.  Never-ending sales, markdowns and gimmicks are signs of flailing companies not healthy ones.

Ironically there is a book out entitled “Kmart’s Ten Deadly Sins: How Incompetence Tainted An American Icon. (Kmart is now owed by Sears Holding Corp) In this book one of the specific areas of incompetent actions discussed repeatedly in leading to the downfall of Kmart was the use of excessive sales and clearance gimmicks to generate revenue and get rid of excess inventory and how this is a major sign of financial distress. Even more ironic is the book was given to me by a high level Sears employee when I was at their headquarters last year. I would have thought they were all reading the book to learn from prior mistakes. Eddie’s reign over Sears to  date has been an example of mistake after mistake.  Mistakes of arrogance, ignorance and simple stupidity.  Case in point-Eddie does the smart thing.  He brings in Alwyn Lewis from Yum who had a proven track record in both generating revenue and employee relationships.  He then in true monarch form, gives Alwyn zero responsibility, zero direction and zero autonomy.  This formula  will always translate into zero productivity.  He basically says:

“This is what I want to see happen but you cant make it happen without talking to me first and I don’t talk to anyone.

Not long ago  I had dinner with an employee at SHLD who reported directly to Eddie Lampert. The employee confided to me that while everyone knew what Alwyn was brought in for, the general consensus was that no one knew what he was in fact doing or what his responsibilities were. He seemed to be a guy just “floating” out there with no real focus or impact.  Was that Alwyn’s fault? Absolutely not. I believe he was extremely qualified to help turn Sears around. I also believe that they will not find anyone out there more qualified to replace him which is why his position is still vacant.  When they do find someone it won’t matter.  The problem was not Alwyn.  The problem was Eddie Lampert’s total lack of understanding of retail and how to delegate.  He did not have that understanding then and unless he has undergone an epiphany in the last year, there is no reason to believe anything will change no matter who he sticks in there.

Eddie is about control. Eddie is about spreadsheets, data, algorithms, stock buybacks, numbers hocus-pocus, Ivy League MBAs, the latest Wall Street Journal book of the month, advance teams, posses, and entourages. In other words, he is completely out of touch.  In all fairness to him, he didn’t suddenly one day lose touch.  All those things he is about have made him a huge success in the hedge fund numbers crunching world where you don’t have to leave your office and don’t have to talk to anyone but the crunchers.  Until Eddie is ready to be a “regular guy” talking to “regular customers”  in the trenches the only big change at Sears Holdings will be when he unloads bits and pieces and finally dumps at “Midnight Madness” prices.

At this point, does anyone really even care?

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