Stock Brief by Briefing.com
Updated: 16-Aug-01
A New Sears
[BRIEFING.COM - Robert J. Reid] The problems at Sears are no secret. The slowing economy is hurting the company's credit card business and appliance sales. However, the company will be announcing an overhaul of its business in October. Briefing.com recommends getting in the stock ahead of the announcement.
Background
Sears, Roebuck and Co. (S 45.10 -0.26) is one of the largest US retailers of apparel, home and automotive products and services, with annual revenue of more than $40 billion. The company operates 860 full-line department stores, approximately 2,100 specialized retail locations, and a variety of online offerings.
Credit Problems
Its credit card business is responsible for only 10% of sales, but over 50% of the company's operating profits despite attempts to reduce its reliance. With the economy slowing, delinquencies at its credit card business are on the rise. Credit is the main concern with Sears, in particular, as it boasts the largest proprietary credit card business in the retail industry with 63 mln cardholders.
Appliance Business Not Great
The worsening credit environment is a double-edged sword for Sears. Its the same poor credit customers that buy appliances, a Sears mainstay at roughly 17% of sales. The appliance business is changing. Although Sears is facing increased competition for appliances from megastores, the company will benefit from a couple of developments: Circuit City (CC), which held a 16% market share, has exited the appliance business and Montgomery Ward (6%) has gone out of business. Sears held an impressive 53% of the US appliance market last year but will have to deal with home improvement giants Lowe's (LOW) and Home Depot (HD) which have recently entered the appliance business. Sears is taking the offensive as it plans to close 89 stores, redesign its core stores with wider aisles and expand its private-label Kenmore, Craftsman and Diehard brands. Progress has been slow as the economy has not helped out.
Why Buy This Stinker? Because so many hate it.
Analysts are Skeptical.....Good
Sears has its problems, but much of the bearishness has been priced into the shares. The sell side analysts continue to dislike the stock. Currently, 8 of the 11 analysts covering the company have Hold ratings. That's fine with us. We would rather buy a stock ahead of upgrades. It's easy to find a well run company with universal Buy ratings. Great, but returns are better on companies that are on the upswing rather than the cream of the crop stocks. With the October announcement, there's a good chance of an upgrade or two.
Reinventing Itself
The company's business model is under review. In October, management is expected unveil its plan during its Q3 conference call. Briefing.com believes that announcement will be very positive with some fundamental changes. The company's recent termination of its agreement with Avon was pretty significant, however, mgmt stressed on its call that softlines would continue to be an integral part of the company. The Avon decision leads us to believe the October announcement will be major, but with a detailed plan for an improved outlook. We would rather be in the stock ahead of the announcement.
Analysts are speculating on how the new Sears will look. CSFB expects that the new company will more likely resemble an off-the-mall retailer than a department store, particularly in the softlines areas, but still a general merchant. Management will focus its resources more on existing customers than on chasing after new customers. Sears will also work to convey a more consistent message across the store across categories and its businesses. On its call, Sears characterized the current practice as 13 separate businesses under one roof.
Valuation
Sears is expected to earn $4.21 per share this year for a p/e of 10.7x. While no comparison is exact, JC Penney (JCP 25.67 +0.02) and Best Buy (BBY 59.45 -1.55) trade at forward p/e's of 34x and 23x, respectively. To be fair, Sears should trade at a discount as so much of its profit comes from its credit card business, which is not its core business. Even so, the spread between the comparisons is much too wide even taking that into account.
Gaining Momentum
The one year chart for Sears points to a strong return over the next 12 months. The company finally broke out of its $35-$40 trading range. And it did so impressively. It's beginning to build a strong base around $45. While the stock has moved nicely, we believe there is still room for growth as many investors are still skeptical about Sears' ability to reinvent itself. Hopefully, they join our team with the October announcement. Also, the bears cannot make the valuation argument as the stock is still cheap on most metrics.
Chart:
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