Sears Holdings Corporation
/ (SHLD-NASDAQ)/ Equity Research / SHLD | Page 1
Current Recommendation / NEUTRAL
Prior Recommendation / Underperform
Date of Last Change / 05/24/2012
Current Price (05/23/12) / $56.83
Target Price / $60.00
Despite a 2.8% decline in top line, Sears’ first-quarter 2012 loss per share narrowed to $0.31 from $1.34 in the prior-year period and fared better than the Zacks Consensus estimate of a loss of $0.59. The improved results were primarily driven by its ongoing cost reduction, inventory management, strengthening liquidity strategies and merchandise initiatives. Moreover,adjusted EBITDA margin expanded 150 basis points to 2.1% from 0.6% in the prior-year quarter.The company has revamped its organizational structure and operating model in an effort to simplify its business lines.Apart from this, Sears has been focusing on improving margins through leverage on buying and occupancy expenses. However, intense competition and exposure to adverse foreign currency translations may undermine Sears’ future operating performance. Currently, we are maintaining a long-term Neutral recommendation on the stock.
SUMMARY
/ Equity Research / SHLD | Page 1SUMMARY DATA
52-Week High / $83.4352-Week Low / $29.20
One-Year Return (%) / -18.86
Beta / 1.95
Average Daily Volume (sh) / 1,411,418
Shares Outstanding (mil) / 106
Market Capitalization ($mil) / $6,047
Short Interest Ratio (days) / 9.26
Institutional Ownership (%) / 81
Insider Ownership (%) / 16
Annual Cash Dividend / $0.00
Dividend Yield (%) / 0.00
5-Yr. Historical Growth Rates
Sales (%) / -4.6
Earnings Per Share (%) / -42.1
Dividend (%) / N/A
P/E using TTM EPS / N/A
P/E using 2012 Estimate / N/A
P/E using 2013 Estimate / N/A
Zacks Rank*: Short Term
1–3 months outlook / 2 - Buy
* Definition / Disclosure on last page
Risk Level * / Above Avg.,
Type of Stock / Large-Value
Industry / Retail-Discount
Zacks Industry Rank * / 21 out of 267
OVERVIEW
Sears Holdings Corp. is the fourth largest broadline retailer in the U.S. and offers home appliances, tools, lawn and garden equipment, electronics, automotive repair and maintenance products through a countrywide network of over 4,000 retail stores. The flagship brands of the company include leading product labels like Kenmore, Craftsman and DieHard, Jaclyn Smith, Joe Boxer, Apostrophe and Covington. The Illinois-based company reports its operating results under three segments:
Sears Domestic: Sears Domestic is the flagship segment and generated 52% of total revenue during fiscal 2011. This segment is further bifurcated into full-line Stores, which are large mall-based stores averaging 134,000 square feet offering a wide array of merchandise under popular brands such as Kenmore, Craftsman, DieHard, and Covington; Specialty Stores, located primarily in free-standing, off-mall locations, averaging primarily between 5,000 and 40,000 square feet; Lands’ End retails traditionally-styled casual clothing, accessories and footwear for men, women and children as well as home products and soft luggage; Commercial Sales offers merchandise, parts, and services to commercial customers through business-to-business channels; and Home Services, and is the largest product repair service provider in the U.S. and key to the company’s active relationship with more than 38 million households.
Kmart: Kmart stores are primarily large, off-mall discount stores that carry a wide assortment of general merchandise, including well-known brands such as Jaclyn Smith, Joe Boxer and Martha Stewart Everyday as well as certain Sears brand products. The segment generated about 37% of total revenue in fiscal 2011.
Sears Canada: Sears Canada is a 95%-owned subsidiary of Sears Holdings and operates in a similar fashion as Sears Domestic with a greater emphasis on apparel and other soft lines. The segment generated about 11% of total revenue in fiscal 2011.
REASONS TO BUY
Sears Holdings is one of the largest broad line retailers in the U.S. The company operates a strong network of over 4,000 full-line and specialty stores across the U.S. and Canada to compete effectively against rivals, such as Wal-Mart, Target and Home Depot. Furthermore, in order to attract more customer footfalls, the company is continuously taking prudent steps to improve its merchandise and realign its inventory with sales trend.
Sears reported a robust bottom-line performance for first-quarter 2012driven by the company’s ongoing cost reduction, inventory management and strengthening liquidity strategies. The company’s first-quarter adjusted loss of $0.31 per share was not only better than the Zacks Consensus Estimate of a loss of $0.59 but also narrowed from the year-ago quarter’s loss of $1.34. Moreover, adjusted EBITDA margin expanded 150 basis points to 2.1% from 0.6% in the prior-year quarter.Sears has long been grappling with sluggish top-line performances and even weaker bottom-line results. However, the measures undertaken to revive the operating performance are showing some signs of improvement as evident from the company’s margin expansion and narrower loss per share from the prior-year quarter. We believe the ongoing strategic initiatives will provide cushion to Sears’ bottom line.
In order to boost top-line growth, Sears Holdings has strategically entered into a license agreement with Dorcy International. As per the agreement, Dorcy will be allowed to sell Sears Holdings’ DieHard-branded rechargeable batteries and flashlights to the retailers in the U.S., Puerto Rico and the Caribbean. This will help the company to generate incremental retail sales.
The company has revamped its organizational structure and operating model in an effort to simplify its business lines. The new structure is based on five business units, namely operating businesses, support, brands, online and real estate. Each unit operates separately to facilitate greater focus on profitability of the unit and rapid decision-making to capitalize on opportunities and mitigate risks.
In streak to optimize its financial performance, the company recently announced string of measures to enhance its growth prospects by dipping investment in sections of the company that no longer contributes significantly to its growth. In doing so, Sears Holdings recently announced that it intends to lower its shareholding in Sears Canada to 51% from 95%. Apart from this, the company has been focusing on cost containment, inventory management, and merchandise initiatives to improve margins through leverage on buying and occupancy expenses.
REASONS TO SELL
The company’s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels, and high household debt levels, which may negatively affect their discretionary spending, and in turn, the company’s growth and profitability.
Sears Holdings operates in a fiercely competitive industry, which includes retailing giants such as Wal-Mart, Target, Kohl’s, JC Penney, Home Depot and Lowe’s. Moreover, the company also faces competition from regional departmental stores, home improvement stores, consumer electronics dealers and specialty retailers. Consequently, this may dent the company’s future performance.
Sears Holding’s financial performance may be substantially affected due to its significant presence in international market, which exposes it to unfavorable foreign currency translations, economic or political instability and other governmental actions on trade and repatriation of foreign profits.
RECENT NEWS
Sears’ 1Q Loss Narrows – May 17, 2012
Sears Holdings reported first-quarter 2012 adjusted loss of $0.31 per share, better than the Zacks Consensus Estimate of a loss of $0.59 per share. The quarterly loss was much better than the prior-year quarter loss of $1.34 per share. Including special items, the company reported earnings of $1.78 per share compared with a loss of $1.53 per share posted in the prior-year period.
The robust bottom-line performance resulted from the company’s ongoing cost reduction and strengthening liquidity strategies along with reduced inventory of $8.8 billion at the end of the quarter compared with $9.7 billion at the end of first-quarter 2011.
Quarterly Detail
For the first quarter of 2012, revenue decreased 2.8% year over year to $9,270 million, missing the Zacks Consensus Estimate of $9,413 million.
The decline in quarterly revenue not only reflects lower comparable store sales at the company’s each and every segment, but also reduced Kmart and Sears full-line stores in operation during the quarter. Comparable store sales at Sears Canada registered a decline of 6.3% in the quarter. Moreover, the company witnessed a 1.3% decline in domestic comparable store sales, including a fall of 1% and 1.6% at Sears Domestic and Kmart, respectively.
Segment wise, during the reported quarter, sales at Sears Domestic and Kmart dropped 1.3% and 1.8%, to $4,938 million and $3,415 million, respectively. Moreover, sales at Sears Canada registered a decline of 9.6% to $917 million.
Revenue decline at Sears Domestic segment reflects weak sales of appliances and consumer electronics, partially offset by increases in apparel and footwear categories. Decline in the consumer electronics were partially offset by an increase in apparel and footwear categories, resulting in a drop in sales at the company’s Kmart stores. Moreover, revenue decline at Sears Canada reflects weak sales of electronics, home décor, hardware and apparel, partially offset by improved sales of major appliances and mattresses.
Adjusted EBITDA for the first quarter of 2012 was $197 million compared with $58 million in the prior-year quarter. However, EBITDA margin expanded 150 basis points to 2.1% from 0.6% in the prior-year quarter.
Balance Sheet and Cash Flow
Sears Holdings ended the quarter with cash and cash equivalents of $784 million and long-term debt of $3.2 billion compared with a cash balance of $754 million and long-term debt of $3.5 billion at the end of the prior-year period. The company’s shareholder equity stands at $4,578 million at the end of first-quarter of fiscal 2012.
Measures to revive operational activities
Sears has long been grappling with weak top-line performances and even weaker bottom-line results. However, the measures undertaken to revive the operating performance are showing some signs of improvement as evident from the company’s margin expansion and narrower loss per share from the prior-year quarter.
In its streak to optimize its financial performance, the company recently announced string of measures to enhance its growth prospects by dipping investment in sections of the company that no longer contributes significantly to its growth.
In doing so, Sears Holding has announced its intention to partially spin-off its interest in Sears Canada Inc. (SSC.TO). Sears Holdings has currently 95% ownership interest in Sears Canada, which it intends to reduce to 51%. The move is expected to enhance Sears Holdings’ liquidity position.
Further, Sears Holdings filed a registration statement with the Securities and Exchange Commission (SEC) for spinning off its Sears Hometown and Outlet stores businesses. The separation is expected to provide an additional liquidity of $400-$500 million while focusing on its core business.
Moreover, Sears Holdings also intends to shutter 100 to 120 Kmart and Sears full-line stores to trim down costs and produce cash. Further, the company expects to produce $140 to $170 million of cash from store closures through inventory clearance.
Apart from this, the company is focusing on cost containment, inventory management, and merchandise initiatives to improve margins through leverage on buying and occupancy expenses.
VALUATION
Sears is trying hard to optimize its financial performance through a string of measures for enhancing its growth prospects. Currently, the company is focusing on improving its structure by dipping investment in sections of the company that no longer contributes significantly to its growth. Apart from this, the company will focus on cost containment, inventory management, and merchandise initiatives to improve margins through leverage on buying and occupancy expenses. However, intense competition and exposure to adverse foreign currency translations may undermine Sears’ future operating performance.
Currently, we have a long-term Neutral recommendation on the stock. Our target price of $60.00 is based on P/CF multiple of 17.3x.
Key Indicators
Earnings Surprise and Estimate Revision History
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DISCLOSURES & DEFINITIONS
The analysts contributing to this report do not hold any shares of SHLD. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts’ personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will underperform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1025companies covered: Outperform- 14.1%, Neutral- 80.5%, Underperform – 4.6%. Data is as of midnight on the business day immediately prior to this publication.
Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company’s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock’s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.
/ Equity Research / SHLD | Page 1