Tuesday, December 2, 2008 4 comments ++[ CLICK TO COMMENT ]++

Well, Sears is certainly being run like a hedge fund... Is that good?

The fact that Sears is being run like a hedge fund can be either good or bad. But the outcome will only be clear in the long run.

Why do I say Sears is run like a fund? Consider the following three reasons.

Sears reported numbers today that missed analyst consensus estimates (do keep in mind that the consensus is already bearish compared to, say, Wal-mart, Home Depot, Lowe's, and the like):

Its net loss was $146 million, or $1.16 a share, compared with a profit of $4 million, or 3 cents, a year earlier, the Hoffman Estates, Ill.-based company said Tuesday. Revenue in the quarter ended Nov. 1 declined 7.8% to $10.7 billion.

Excluding costs to close 14 stores and a gain from Sears Canada's hedge transactions, the company said the loss would have been 90 cents a share. On that basis, it missed the 54-cent average loss estimate of analysts surveyed by FactSet.

It misses badly but...

However, shares, having lost two-thirds of their value this year, jumped 12% after the company said it's closing additional stores and buying back as much as $500 million of its stock.

It actually plans to buy back shares, which is around 15% of the market cap.

Buying back shares when the stock price is way below book value (P/B is 0.4) is a faster way to create shareholder wealth than trying to increase sales or profits. However, a lot of firms trading way below book value are distressed and often face monumental challenges. Sears is certainly facing decling sales, along with a weak economy, so it seems kind of risky to be buying back shares right now. It would be better to hold on to the cash or to buy back bonds (bonds are trading way below par as well.)

The buyback at this moment seems more akin to a hedge fund strategy than anything.

The second item to note, and it may be minor, is the following:

Separately, Sears announced new executives to lead various business units, including posting former Lehman executive Scott Freidheim to a newly created position as executive vice president of operating and support businesses.

I'm just a lowly lemming so maybe I don't know much about executive jobs or what is involved but it seems like Sears is hiring a financial guy to run the operations (I assume "operating and support businesses" implies retail operations.) Sounds very much like a hedge fund, where financials and numbers are the focus.

There is also a third reason for it resembling a hedge fund. Edward Lampert has cut so much of the cost structure that even the investor relations deparment has gone missing. I can't find anyone's e-mail for investor relations (wanted them to send the prospectus for some of their bonds) or find a way to request the printed annual report/proxy/etc. The amount of information that is disclosed also seems minimal, again typical of hedge funds. The good thing for investors is that, even though they can't easily access information, costs are surely being kept to a minimum. It remains to be seen if the cost savings make up for the number of potential investors that are kept at bay. This seems similar to their store strategy, which some claim is driving away customers.

Having said all that, you might think I'm bearish on Sears. Not really. I'm very bullish on the bonds (assuming you can get them at around 25% to 30% yield) and mildly bullish on the stock. It's just that anyone investing in Sears should know that it isn't being run like a typical company. It's too early to tell whether this is good or bad.


4 Response to Well, Sears is certainly being run like a hedge fund... Is that good?

December 2, 2008 at 2:36 PM

If you have not already, check out Bruce Berkowitz recent take on the company. You can listen to it on valueplays.blogspot.com


December 2, 2008 at 4:20 PM

Friedheim will probably be responsible for monetizing the brands, their supply chain/operations position and store operations executive will manage typical retailing operations.

December 2, 2008 at 4:40 PM


I heard some of the Berkowitz conf call (only the front part.) He doesn't really give any concrete arguments. He says that as long as Sears keeps buying back stock, he's happy. But if the financial situation keeps weakening?

December 3, 2008 at 9:52 PM

Porsche showed that production or merchandising is for chumps. Let the CFO run the show and make profits out of reverse risk -arb strategies and the like. :-P

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