1 Retailer That's Not Worth Your Penny

The sluggish economy has had visible effects on a number of companies. But as shares get hammered on poor financials, the correspondingly lower prices can be entry points for the keen investor. By shopping around, an investor may be able to enter into a good stock at attractive valuations.

With that in mind, let's take a look at Sears (NAS: SHLD) , which is trading well off its 52-week high.

A look at the numbers
In the last reported quarter, revenues slipped by 1% to $10.3 billion on a year-over-year basis. The company reported a net loss of $146 million, as it was forced to clear its inventories at lower prices due to lower sales. The company has been suffering from lower sales primarily due to faulty management strategies. Sears has been pursuing cost-cutting measures for quite a while, which has likely affected the standard of service it provides to its customers. To make matters worse, the merger with Kmart did not prove to be a great decision for Sears, as it has realized a regularly eroding top line since it picked up the discount retailer.

The company has been facing tough competition from other retailers that offer cheaper alternatives to Sears' products. Retailers like Home Depot (NYS: HD) , Lowe's (NYS: LOW) , and Best Buy (NYS: BBY) have slowly swallowed up the company's market share.

What's ahead?
In a bid to cut costs and improve margins, the company cut 700 jobs in June and is planning to cut around 200 more in the near future. Also, it plans to close more than 29 stores and seven product repair centers that have not been performing well.

The word on the street is that the company is planning to sell its Craftsman tools through Costco (NAS: COST) . Craftsman is one of the popular tool brands owned by Sears, which has seen a decline in its market share to 33% in June 2011 down from 35% a year ago. This is not the first time Sears is selling its Craftsman brand outside its namesake store. The company has been selling the Craftsman brand through Ace Hardware stores since 2010. The move may not do wonders for the company, but may prove to be a blessing if it pushes the top line to a certain extent. Let's keep our fingers crossed.

In another important development, the company is planning to lease the unutilized space in its stores. It had long been anticipated that to make full use of its real estate assets, the company would lease the stores and sell its products through third-party stores. This might turn out to be significant as it would help the company optimize its assets and could unlock tremendous value for equity holders.

Now let's take a look at its valuation.


Trailing Price to Sales (LTM)

Trailing Price to Book Value (LTM)

Sears Holdings

0.19 times

0.72 times

Home Depot

0.87 times

2.93 times


0.52 times

2.26 times


0.64 times

1.49 times

Source: S&P Capital IQ. LTM = last 12 months.

Sears' earnings have been negative in the last 12 months, so a P/E multiple is meaningless. Its price-to-sales and price-to-book ratios, however, look very cheap when compared to its peers. The big question for investors, then, is when Sears will be able to return to profitability.

The Foolish bottom line
Sears has been losing its market presence due to intense competition from its peers. Management's strategies are not yielding great results. Stress on cost cutting rather than upgrading existing facilities, and selling products through outside vendors instead of developing in-house branding are just some of the moves for which management has been criticized. It needs to be proactive with its strategies but in the right direction, which will not only boost its top and bottom lines, but also help it regain its lost market share.

The only silver lining for stockholders would be if the company starts using its real estate assets to their full value. Till then, I don't see much hope, as the company's woes may continue. If you're looking for one retailer that's succeeding in today's market, I invite you to check out the Motley Fool's "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." Simply click here to download this special report for free.

At the time this article was published Navneet Bajaj doesn't own any shares in the companies mentioned above. The Motley Fool owns shares of Costco Wholesale. Motley Fool newsletter services have recommended buying shares of Costco Wholesale, The Home Depot, and Lowe's. Motley Fool newsletter services have recommended writing covered calls in Lowe's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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