Hi Herb,
Yes, I have looked at the financials, and they don't look very good. KMart is a hard turnaround. It has some high fixed costs compared to Wal-Mart and Sears, so its operating income at 2.8% is about half of those two competitors, although the gross margins are about the same. Inventory turns are also about half those of Wal-Mart and Sears.
The P/E for KMart is high, as you pointed out, for a company that has had negative sales and earnings growth over the past three years while Wal-Mart has grown 9%-10% in both. The P/E should be down where Sears is, in the 20s; which means that the price is an optimistic expectation of the success of the turnaround, and speculative. If investors believe the Internet hype, I suppose the P/E could go to 50.
Even if the Internet move is fabulously successful it can't impact sales more than 1%-2% at best, and, if you look at Amazon, it would further increase SG&A, which is not what KMart needs.
Martha Stewart didn't have much of an impact on the stock price, so I have to suspect that hype won't work here. I think the company has to show some successive quarters of increased operating margins and reduced SG&A before it is a good buy on fundamental reasons. |
