Taking Stock: To Sell or Not to Sell

Dear Mr Berko: I bought 100 shares of Sears Holding last year at $69 and it went to $80, and I wanted to sell it but my broker told me he thought it could easily go back to $100 because the economy is improving, increased consumer spending will increase Sear's revenues and earnings and its vast real estate holdings will be worth a lot more as the real estate market improves. Now the stock is down to $64 and he has changed his mind. He wants me to sell Sears because Yahoo Finance reported that Sears lost $30 last year and he thinks the company could go bankrupt. Please advise me to do the right thing. --FL: in Durham, N.C.

Dear FL: That broker is dumber than an outhouse mouse and Yahoo Finance is an inappropriate source for accurate financial information. Those Yahoos at Yahoo Finance who reported that Sears ( SHLD-$64) lost $29.52 a share last year wouldn't understand the cash register tapes at a kid's lemonade stand. Nearly 85% of that $29.52 loss was based upon a one-time GAAP accounting charge that does not reflect on the value of the shares. Standard & Poor's, Value Line, Morningstar, Merrill Lynch, Goldman Sachs and others report that SHLD's bookable loss for 2011 was $4.52 a share .

SHLD is in trouble and Edward ''Big Eddie'' Lampert, who owns 61% of SHLD, could be in bigger trouble.

Most of us used to equate Sears with motherhood, apple pie and nighttime baseball, and I recall an analyst who compared Sears to one of the stars on the American flag. But that was before mass immigration, before Internet shopping, before the flood of mega malls every 30 city blocks, before the avalanche of Big Box Stores and before Big Eddie decided to purchase a skunk in a sewer called K-Mart. And since the 2005 purchase of K-Mart, SHLD's revenues began to fall like tears from a tall camel's eye and net profit margins started to rust. Visit many of SHLD's 4,000 stores today; it feels like you're walking in an empty soccer stadium and you could actually hear an echo. However, SHLD is far from bankrupt, and with a serious book value above $70 a share, free cash flow in excess of $5.00 a share and long term debt of $2.3 billion, Sears is in far better financial shape than most free world countries including the US of A. However, because of hundreds of millions of dollars in recent losses, Sears needs liquidity. And because Big Eddie needs to raise cash to increase liquidity, SHLD's preppy Lands End clothing division is on the block, which could fetch $1.3 billion but may be a tough sale in this market. Lands End generated $1.7 billion in revenues last year vs Sears, which generated $42 billion but contributed more than half of its $277 million in earnings before EBITDA, which stands for interest, taxes, depreciation and amortization. Sears Canada is also on the chopping block. Big Eddie is spinning off SHLD franchised Hometown Stores and recently sold 11 of its better mall locations, raising approximately $770 million in cash. The company badly needs this cash to cover its previous deficits and its expected losses of $200 million this year. Too bad Big Eddie spent billions to buy back SHLD shares during the past couple of years.

The near term looks horrible. Sears announced in late January that it's closing 120 stores and selling inventory (about $2.2 million per store), to raise cash and reduce expenses. But Big Eddie will be hard put to sub-lease those locations. Big Eddie also plans to sell some of its better locations to a national real estate investment trust. Meanwhile, the value of Sears' real estate, its remaining 850 store properties and 12 distribution centers in Illinois and Canada have nearly evaporated. Most are located in economically challenged communities with declining traffic patterns. This could be the beginning of SHLD's slow liquidation. On the marketing side, there are no merchandising initiatives to encourage consumer spending , but the street reckons revenues will increase this year, though SHLD is expected to lose about $250 million. So sell your Sears, which in the next 20 years may disappear into the ethers like the Sinclair and Marathon gas stations, the Pontiac and Mercury, video stores, Frigidaire, Eastman Kodak and Polaroid and the public pay phone.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko @yahoo.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

Copyright 2012 Creators.com

Published: Thu, May 24, 2012

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