Thursday, January 8, 2009

Sears' Surprising Results

Today's press release from Sears was shockingly positive:

The fact that Sears earned over $300 million in net income for Q4 in what is a Discretionary Income Depression, where malls across the country look like eerie ghost towns – is utterly astounding. As a highly imperfect, anecdotal indicator, the Sears stores that I have visited lately have been among the busiest stores at the mall.

Yet the reduction in inventory is immediately obvious: the stores have considerably less clothing in stock, with deep discounts on what is available. With the benefit of hindsight, Eddie Lampert's not reinvesting in the stores was a brilliant capital allocation decision. Macy's, by contrast, has impeccable stores and no business.

Lampert may not have timed the market perfectly with his share buybacks (a ridiculous expectation anyways, which does not take intrinsic value into account). But when the smoke clears, the buyback program will have delivered substantial value to shareholders.

Moreover, H&R Block is now running tax services within Sears stores, which is an interesting combination. In fact, given that H&R Block is an extremely high ROE business an economic characteristic on which Eddie Lampert seems to closely focus (e.g., AutoZone, Deluxe Corp.) could this be on the radar for a huge future acquisition? Either in the form of common stock or similar to what Warren Buffett did with absorbing GEICO into Berkshire?

Speculation aside, Sears truly has, to borrow Jamie Dimon's term, a "fortress balance sheet." No debt on the revolving credit facility and a fourth of the market capitalization in cash? The current economic crisis is possibly the only event that could have caused the Sears turnaround to crash and burn. But, quite clearly, this is not even close to happening.

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This work by Nicholas E. Radice is licensed under a Creative Commons Attribution-No Derivative Works 3.0 United States License.