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Sears: The GM of retailers

The chain that once dubbed itself "where America shops" is increasingly a place shoppers avoid. Despite its much-publicized recovery efforts, investors should consider steering clear, too. Sears Holdings Corporation (NYSE: SHLD) has been in the news a great deal lately, announcing awful sales results and planning yet another stock buyback to prop up its flailing price.

The recent store changes have not worked, and neither will the financial engineering. This company is on its way down, and a visit to a local store showed me why.

Sears used to be the General Motors (NYSE: GM) of retailers -- an apt analogy when both were all-American giants, and just as apt today as both struggle. Sears had completely lost its way when vulture investor, Eddie Lampert, bought the company in late 2004 and combined it with Kmart. Wall Street analysts went nuts, pushing the stock price to $192 a share.

Today, Wall Street has lowered that price to near $40.


Of course, no one who works on Wall Street actually shops at Sears or Kmart. These geniuses fell in love with the potential for financial engineering and real estate value rather than the core business, which is to sell lots of stuff to people at prices that produce profits. And that ain't happening. Lampert has been a total failure as a retailer.

The customers aren't there

I was just in a Sears store in the Westfield Montgomery Mall, which is in an affluent Maryland suburb of Washington, D.C. There were less than 20 prospective customers on the two floors of the store -- less than I saw in a Crate & Barrel that had about 1/20 the square footage.

The store reminded me of the era of Frank Sinatra. Prices were between high and ridiculous for its category of store.

Now, I am a Target/Chevy Blazer/Hampton Inn kind of guy, and Sears was flat out non-competitive on everything from flat-panel televisions to those fleece blankets you get for your car or playroom.

No sales associates came up to ask if I needed help, and I only saw two cash registers in the entire store being staffed to help customers.

This was at lunchtime, in a very strong mall in the middle of an area not hit as severely by this recession as other parts of the country. The California Pizza Kitchen (NASDAQ: CPKI) had a line out the door and the Apple (NASDAQ: AAPL) store was moderately busy, as were selected parts of Nordstrom (NYSE: JWN) and Macy's (NYSE: M). Not great, but not a ghost town like Sears.

Yes, that's just one store but the numbers bear out what I saw on a larger scale.

On Dec. 2, Sears announced a loss of $146 million ($1.16 per share) -- more than twice what analysts were anticipating.

Sales in the quarter declined 7.8% and same-store sales fell 9% to $10.7 billion -- far more than other retailers.

These numbers are truly awful and not a huge surprise.

Sears historically has made a lot of money from selling Kenmore appliances. A lot of those appliances go into newly purchased homes -- and there's not a lot of that going on. Recent retail surveys show appliance purchases in November were down nearly 25% year-over-year.

I write at this time because the company created a little buzz by saying it would close more stores (22 out of 3,900 -- big deal, right?) and it said it would buy back another $500 million in stock, about 11% of its market cap. The stock popped more than 12% on the news.

Given the state of the economy, forecasts for 2009, and other problems at Sears and Kmart, do you think it is wise to spend 40% of your existing cash to buy back shares after having already spent more than $4 billion on shares rather than fixing the company?

This is simply a bribe to prop up the stock price -- the kind that doesn't hold up stock prices for very long when fundamentals continue to deteriorate. And they will.

ChangeWave surveys and other third-party data tell us the economy is not only contracting faster than Wall Street estimates in Q4 of this year, but that it will do so in the first half of next year and probably for all of 2009.

For now consumers are keeping their pocketbooks closed, and when they decide to open them again, they can get a better bargain and a better shopping experience at many of Sears' competitors.

The die-hard bulls say Sears can still turn it around.

Here's why they won't: lousy management, lousy locations and a tremendous competitive disadvantage to other discount retailers.

Eddie Lampert is not a retailer, he is a financial engineer, and the chains have fallen rapidly since he bought them.

The situation with management is almost comical -- the company bragged it has just made major new hires from Lehman Brothers (you're kidding me) and the Gap (you must be kidding me).

Sears stores are often located in malls, not the place to be for a discounter. And, are they a discounter? Yes and no.

Yes, they are attracting discount store customers, but they really don't offer discount store prices. So they are competing against discounters, but are not really a discounter -- they are in the middle, which is a terrible place to be. Retailing has migrated to higher end (Nordstrom, Macy's) or low end (Target, Wal-Mart, Costco). There is little room for a retailer in the middle.

I would consider avoiding the stock -- or, if you are the type, consider shorting it with put option contracts.

And if you go to the stores, bring a BlackBerry or iPhone to compare prices. I mean, a fleece blanket for $19.99? They're eight bucks at Wal-Mart (NYSE: WMT).

Michael Shulman is a contributor to OptionsZone.com.

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Last updated: November 08, 2009: 09:24 PM

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