Sears (SHLD) has been on one wild ride in 2013. Though total year to date returns are a ho-hum 10% gain, the details are pretty crazy.
- From January to May, SHLD stock jumped about 35%.
- From May to August, Sears stock lost roughly 30%.
- From August to November, it gained about 40%.
- From its November peak, SHLD stock is down almost 30%.
So is the latest Sears stock selloff only the beginning … or is it time to jump in and then ride the wave higher once more?
Unfortunately, it seems that this is only the beginning of more declines for Sears stock — particularly in the long-term.
SHLD Outlook Sucks
Lampert Takes his Lumps: Chairman and CEO Eddie Lampert is under pressure — at least, his ESL Investments hedge fund is. Thanks to a lack of confidence in SHLD stock, his fund has been forced to return billions to clients. Earlier in December, ESL Investments announced that it was forced to reduce the size of its stake in Sears Holdings stock for the second consecutive year to fulfill investor redemptions. The total stake of ESL owns in SHLD is now less than 50% for the first time since 2008.
Spinning Off Any Growth: While the recently announced spinoff of the Lands End clothing line could allow this brand to grow without the yoke of Sears’ struggling retail model, the bottom line is that … well, Sears retail model is still struggling. Investors who currently own stock in SHLD will get a stake in the spinoff, yes, but it only makes the battered remnant of Sears Holdings even less attractive. The same is true of the 2012 spinoff Sears Hometown and Outlets (SHOS) which has managed to post year-over-year revenue growth in six of the last seven quarters. If you pull these parts out of SHLD as the parent … what’s left?
Scorched Earth Tomorrow for Profits Today: The spinoffs are part of a larger narrative: Eddie Lampert is simply pillaging SHLD assets one at a time. The hedge fund manager has been widely criticized by management experts for his decision to divide the company into more than 30-40 business units under the guise of maximizing each division’s potential. While that theory works for businesses like General Electric (GE) where business divisions are actually different, the structure at SHLD has largely resulted in turf wars and infighting that damages the overall mission of the retailer at the cost of smaller internal groups. Furthermore, Lampert has starved upkeep budgets to prop up profitability at the cost of store appearances — with most retail analysts estimating Sears and Kmart spend the least capital expenditures per square foot among big players like Walmart (WMT), Target (TGT) and Macy’s (M). Heck, even bare-bones DIY mecca Home Depot (HD) spends more per square foot on its stores than Sears does. The general consensus is that Lampert is juicing short-term profits (which are still meager, by the way) at the cost of Sears’ future.
What’s the Strategy of the Month?: Lampert has boggled Wall Street with his rapidly changing strategy for Sears. Since his high-profile deal to merge Kmart and Sears in 2005, the combined company has burned through four CEOs. Through it all, Sears has confounded retail analysts by introducing and abandoning one strategy after another. The latest idea? Turn Sears into a membership chain centered around a rewards program. We’ll see how long that plan lasts.
None of this adds up to a positive long-term outlet for Sears. And short-term? Well, the good news is that Q3 Sears earnings were roughly in-line with recent targets … but that’s only after lowered guidance and massive misses in Q1 and Q2.
The company is bleeding cash still, projected to suffer another year-over-year revenue decline in Q4 … but hey, its loss might be narrower if this keeps up!
If you’re willing to catch a falling knife, I suppose you could play around with a swing trade in Sears.
But given the strength of the rest of the market, why would you bother?
More on SHLD stock
- Lampert still vulnerable after Land’s End plans. (Bloomberg)
- How Sears is run in splintered, “warring” divisions in the name of growth. (BusinessWeek)
- On the recent Land’s End spinoff. (InvestorPlace)
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not own a position in any of the stocks named here. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.