SEARS HOLDINGS GOT SMOKED THURSDAY, falling more than 10%, to around $104, after the retailer disclosed a shockingly bad third quarter.
Earnings fell 99%, from $1.27 a share a year earlier to just a penny. Sales at stores open at least a year sank 4.2%. Gross margins, or what Sears (ticker: SHLD) and Kmart earn before figuring in general administrative and sales costs, also sank far more than analysts anticipated. Obviously, Sears had to indulge in heavy discounting just to clear its floors. And yet inventories still grew 4.5%. Hedge-fund manager Eddie Lampert, whose ESL owns more than 45% of Sears, saw the company's selling expenses rise relative to sales, despite extensive cost-cutting.
In an Oct. 22 article entitled "A Storied Name on Sale?", we argued that the stock, then around 134, was cheap in relation to Sears' net asset value, mostly its real estate and valuable brands like Kenmore and Craftsman. Yet we warned that it might be a long slog before these values were monetized, since Lampert seems bent on using Sears' cash flow to buy in its stock.
Deutsche Bank analyst William Dreher apparently agrees with our thesis, though he has cut his 12-month price target on the stock from $182 to $161, which more closely approximates his $150-a-share estimate of Sears' net asset value. We think that number is conservative. Lampert, now caught in what Dreher calls the current "Bermuda Triangle of retailing," may speed up his restructuring plans. If successful in his offer last Monday for Restoration Hardware (RSTO), he'd have an excellent potential tenant for some of Sears' mall space.
In the meantime, at least one hedge fund we contacted said it is backing up the truck to buy more Sears shares.