Saturday, November 8, 2014

Sears ‘Cannot Be Accused of Not Trying,’ Credit Suisse Says

Shares of Sears (SHLD) have popped today after the beaten-down retailer announced that it could pursue forming a real-estate investment trust. Credit Suisse analyst Gary Balter and team note that “the story opens a new chapter; the ending looks the same.” They explain why:

Associated Press

A few months ago, Sears highlighted how it had not disposed of any of its core locations, and those people arguing differently don’t understand the turnaround story. Yet since that time, the company subleased its remaining space in the King of Prussia mall and this morning disclosed that it sold its location in Cupertino, again one of the better locations in the country, and
more important, the company announced that it is exploring a REIT with between 200 and 300 properties, an interesting development for at least two reasons.

First, to do the REIT, the comprising Sears or Kmart stores have to generate enough free cash flow to pay the rent, so we assume given overall financial results that these are the best performing stores out of nearly two thousand that would qualify. Second, by playing the REIT card, Sears is using what the bulls on the stock have long argued is the real value in the company, its real estate. Doing this transaction leaves Sears with very few other assets to sell, so while the company seemed quite pleased with losing $300 million in EBITDA (at the midpoint of guidance) again this quarter, we still need to see evidence that the company can significantly reduce its operational cash burn to be considered a long-term viable competitor.

Still, Balter is willing to give CEO Eddie Lampert “significant credit for his
efforts not just to monetize the good assets, but to focus on the larger money losing categories…Sears cannot be accused of not trying.”

Balter says the sale of the Cupertino location and the sublease of others should be good news for Home Depot (HD) and Lowe’s (LOW), while its decision to reduce exposure to big-screen TVs could give a small benefit to Best Buy (BBY).

Shares of Sears have jumped 31% to $42.82 at 12:59 p.m., while best Buy has gained 0.9% to $35.53, Home Depot has ticked up 0.2% to $97.45 and Lowe’s has risen 0.7% to $57.97.

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