RadioShack Earnings Prove Naysayers Wrong Again

Despite bearish stories out of Barron’s and the Wall Street Journal in recent weeks, electronics retailer RadioShack (RSH) shook up those betting against the stock this morning by reporting first quarter earnings that more than doubled analyst estimates. Shares are up nearly 10% this morning.

If this sounds familiar, it is exactly what has propelled shares of Sears Holdings (SHLD) from $15 to more than $190 each. Analysts, reporters, and industry experts will always sound the warning bells when they see overall sales declines, especially same store sales. Although many believe SSS to be the best indicator of a retailer’s health, stock prices reflect earnings, not sales.

We are likely to continue to see naysayers complain about poor sales at RadioShack. After all, they did the same thing with Sears and even continue to do so, despite the stock’s astronomical move. I would expect analysts to continue to underestimate the earnings power of RSH, just as they have done with SHLD. As a result, neither stock is ripe for sale yet despite the fact that negative press will continue to cause temporary worries and sell-offs along the way.

As I have written about before, RadioShack is imitating the Sears Holdings model of ridding itself of unprofitable sales. Over the last three months, RSH has shrunk its business from 6835 retail locations to only 5205. The result of closing underperforming stores has been declining sales, as one would expect, but gross margins jumped to 52% from 48% last year and earnings soared to $0.29 per share, more than doubling the consensus forecast of $0.14 per share.

Full Disclosure: Long shares of RadioShack and Sears Holdings at the time of writing

The Saks Turnaround is Worth Watching

Followers of Peridot Capital are well aware that I am a big fan of turnaround stories in the retail industry. Historically poorly run retailers can be revitalized if the right management teamĀ is brought in to oversee the turnaround. Not every instance will result in the 1,200 percent return Kmart shareholders have earned since the company came out of bankruptcy and merged with Sears (SHLD). However, RadioShack (RSH) was the best performing stock in the S&P 500 during the first quarter, and other retailers like Eddie Bauer (EBHI) and Pier One (PIR) have been run into the ground in recent years, so there is a lot of upside potential if the right people are hired to run the business.

One other retail stock I think warrants value investors’ attention is Saks (SKS). The company unloaded its lower end department store brands last year to focus more on its upscale luxury offerings. A new management team is trying to boost merchandising in order to get margins up to the level of competitors such as Neiman Marcus and Nordstrom (JWN).

The early results have been positive. Investors were slightly disappointed with the company’s March same store sales growth of 10% (expectations were for a few percentage points more), but after a dismal performance in recent memory, comps at Saks are accelerating. When you focus on the high end of the market, as Saks does, you have far more pricing power, so margin expansion is highly likely if management continues to do a good job merchandising.

After trading down to $19 after releasing March sales this morning, SKS shares have rebounded to more than $20 each. I think they are interesting in the teens. Despite a rally lately as the turnaround has taken shape, the stock still trades at less than one times sales. The P/E looks high due to depressed margins, but the leverage there could result in exploding earnings in coming years. If you look at what type of price Neiman Marcus was able to garner when it went private, you can see that Saks is a prime comparison and trades at a very attractive level. Shares could easily fetch a price in the mid to high 20’s if the turnaround continues to be successful.

Full Disclosure: Author was long shares of Eddie Bauer, RadioShack, and Sears Holdings at time of writing

Sears Holdings Securitizes Its Brand Names

According to a story in Business Week magazine, there is more evidence that Eddie Lampert’s Sears Holdings (SHLD) is a lot more than just a company that has supposedly lost its relevance in consumer retailing. A move to securitize the Kenmore, Craftsman, and Diehard brands for $1.8 billion shows just how creative Lampert and Co. are at creating value for shareholders, or in this case, the potential for future value creation. Read about how they could monetize the Sears Holdings brands.

Full Disclosure: Long shares of Sears Holdings at the time of writing

Moodys Does What to their RadioShack Credit Rating?

NEW YORK (AP) — Moody’s Investor Services downgraded RadioShack Corp.’s long-term senior unsecured rating and short-term commercial paper Monday on lackluster sales and operations. The ratings agency lowered the electronics retailer’s senior unsecured rating to “Ba1” from “Baa3.” The move means the company’s senior unsecured rating is no longer investment grade. Moody’s also cut RadioShack’s commercial paper rating to “Not Prime” from “Prime-3.”

Sometimes you have to wonder what exactly rating agencies like S&P and Moody’s are looking at when they change corporate bond ratings. This news isn’t material for RadioShack (RSH) common stockholders, but still, it doesn’t make sense.

As I pointed out recently, the RadioShack turnaround is on solid ground. Despite the surge in earnings at the company, Moody’s is looking at sales numbers, not profitability and balance sheet metrics when rating the company’s debt. Not only have most equity analysts missed the huge run in RSH shares, but it appears debt analysts are pretty clueless as well.

RSH has had a huge run, so I wouldn’t be aggressively buying at the current price above $26 per share. That said, a credit downgrade to below investment grade seems to be a strange thing to go ahead with when operations are improving.

Full Disclosure: Long shares of RSH at time of writing

Dow’s 400 Point Drop Aside, RadioShack’s Turnaround is Solidly in Place

Despite Tuesday’s dramatic 416 point drop in the Dow Jones Industrial Average, you may have noticed one stock that managed to gain 12% for the day. That stock was RadioShack (RSH), the electronics retailer that I highlighted earlier this month as a major turnaround candidate in retailing, similar to Sears Holdings (SHLD).

Why all the fuss over RSH shares when the rest of the market was getting pummeled? Well, the company reported fourth quarter earnings of $0.62 per share, soaring past the $0.43 forecasted by analysts. RadioShack also gave 2007 earnings guidance of $1.00 to $1.20 per share. That second part is most important because the average estimate for RSH’s earnings is $1.12 in 2008!

That’s right, analysts aren’t exactly confident about RadioShack’s prospects. In fact, heading into the earnings report, more of them rated RSH a “sell” than a “buy” (quite a rarity on Wall Street). Prior projections of $0.91 in EPS for 2007 and $1.12 in 2008 will obviously have to be adjusted upward dramatically, as the company is on track to beat the current 2008 estimate one year early.

Since the turnaround plan at RSH was not expected to be bearing this much fruit so early, the stock price is adjusting to the success newly crowned CEO Julian Day is having. The stock has gone straight up from $16 to $25 in recent months, so investors might want to hold off buying more until the stock pulls back a bit. However, the company’s turnaround plan is firmly in place, and equity holders will likely reap the benefits over the next several years.

Full Disclosure: Long RSH and SHLD at time of writing

Is RadioShack the Next Kmart?

Ask the average person on the street to compare RadioShack (RSH) to Kmart and you will likely hear a lot of similarities posed from people who have no investment background at all. Both retailers were a lot more popular with shoppers many years ago, but were run poorly and new chains have stolen their customers. It’s not hip to go to either place to buy something. Kmart shoppers now visit Wal-Mart (WMT). RadioShack’s customers likely prefer Best Buy (BBY). So, in that sense RadioShack is Kmart.

But let’s look at this from an investment perspective. Followers of Kmart’s emergence from bankruptcy and subsequent merger with Sears (SHLD) know that good management led to a stock surge from $15 to $175 in a few years’ time. RadioShack isn’t quite in as bad a shape as Kmart was (the company is not close to going under, but profits have tumbled and the stock price has followed suit) but the outlook is bleak and shoppers likely have a long list of stores they’d prefer to go to before RadioShack for most electronic products.

The similarities don’t end there. RadioShack has embarked on a turnaround plan that is being led by CEO Julian Day, who has been running the retailer since July. Kmart/Sears fans may recognize this name. Day ran Kmart upon its exit from bankruptcy, leading the company’s comeback, which ultimately allowed Kmart to buy Sears outright. Now at RadioShack, Day is trying to revive the company (and its stock price) using the same methods that brought Kmart back from the dead.

The similarities, in fact, are striking. RadioShack is closing down unprofitable stores, focusing on profits and not sales (and as a result, comp store sales are declining, much like Sears Holdings), and has even discontinued quarterly conference calls, a favorite move of Eddie Lampert. Though Day has only been at RSH for about six months, early indications are that the plan could very well work. On January 8th, RSH preannounced a positive fourth quarter and the stock jumped more than 10 percent.

Now I’m not saying RadioShack shareholders are in for some sort of parabolic ride, on the order of the 1,000 percent gain in shares of Sears Holdings. Far from it, in fact. However, investors have seen this concept play out before. RadioShack appears to be just another retailer that got in trouble by chasing unprofitable sales, hoping that revenue would solve its problems. However, on Wall Street earnings are what matter and earnings growth has never been boosted by selling product for less than one paid for it.

It will be interesting to see how well newly crowned CEO Julian Day can turn around this seemingly dead company. Many investors don’t seem to be very enthused, as short interest in RadioShack is about 15% of the company’s float. However, with 6,000 stores worldwide and a proven plan in place, there seems to be a lot of potential.

Full Disclosure: Long RSH and SHLD

Sears Isn’t Ignoring the Retail Operations After All

Critics of the Sears and Kmart turnarounds have long argued that if Sears Holdings (SHLD) Chairman Eddie Lampert ignored the retail business by cutting capital expenditures and marketing expenses, the company would begin to die a slow death. Well, the skeptics have proven to be very wrong, as shown by the stock’s move from $15 several years ago to nearly $180 today.

After the bell on Wednesday we learned that Sears has hired John Walden, an eight-year veteran manager from Best Buy (BBY), to become Chief Customer Officer, with core responsibilities including customer-focused strategies and new business development. Such a move certainly doesn’t seem to imply that Lampert and Co. are not focused on the retail operations.

This is not to say that Sears will become Target (TGT) or Wal-Mart (WMT), because the window for that opportunity has long been closed. However, if they can earn similar profit margins to other large retailers over the next several years, the earnings power of the company will be much higher than it is today.

Full Disclosure: Long SHLD at time of writing

 

Sears Holdings Issues Upside Guidance

Sears Holdings (SHLD) projected fourth quarter earnings well above consensus estimates Wednesday. The company estimates EPS for the period will be in a range between $4.87 and $5.39, well above estimates of $4.86 per share. Despite reports in the financial press that sounded much more gloomy about the company’s core retail business, real estate sales and derivative contracts are expected to contribute only 8 cents to earnings for the quarter.

Chairman Eddie Lampert has decided against share repurchases for the period, which will result in a cash balance of $3.5 billion, or $23 per SHLD share. What exactly he will use the cash for is still unknown, but many are speculating that a lack of share repurchases in Q4 signal that other uses for the money are far more likely in coming months. That seems like a very reasonable assumption.

Shares of SHLD rose 3.5% on the pre-announcement, to $172 per share, but it still appears to be attractively valued. Full year earnings should come in around $9.38 per share, putting the stock’s trailing P/E at around 18. With 2007 earnings expected to jump more than 20 percent, a below-market multiple for Sears stock seems quite low. As a result, it remains a large long position of mine.

Full Disclosure: Long SHLD

Sears Holdings Drops 5% After Earnings

It’s the same old story with Sears Holdings (SHLD). In fact, I feel like I’m just repeating myself a lot. However, I have long been positive on the stock, and it is one of Peridot’s top five holdings, so rather than ignoring it just for the sake of not sounding repetitive, I will likely continue to share my views on the company and the stock’s investment merit.

In case you missed it, Sears reported Q3 earnings of $1.27 per share and sales of $11.94 billion. The revenue number was at the high end of estimates, and the earnings number included investment income of 42 cents per share. Excluding one-time charges and investment income, earnings did miss consensus estimates, which caused the sell-off in the stock.

Comments on the quarter across Wall Street were very predictable. Same store sales were down, which is bad and must be turned around at some point. Earnings were up on cost cutting, but such moves can’t be maintained forever. Most analysts are ignoring the investment income when looking at the quarterly results, because they are unrelated to operating activities of the main retailing business.

It is my view, however, that ignoring the investment income is a mistake for investors. If an investment in Sears stock was merely a bet on the retail operations, then I can understand not caring about profits derived from investing excess cash. However, a large piece of the investment thesis behind SHLD has been, and will continue to be, Eddie Lampert’s ability to allocate excess capital in order to earn returns that far exceed those of the retail business. There is a reason he changed the name of the firm to Sears Holdings. It’s a holding company. There is more than just retail here.

Investors who are in Sears merely for the retail operations should probably move on to something else. SHLD will continue to report declines in same store sales and grow profits via cost cutting, share repurchases, and investment income. This will ultimately lead to a tremendous increase in shareholder value.

If, however, you are like me and are investing in this stock for the entirety of the operation, then you should stay with it despite today’s decline. Sears is a holding company and will continue to boost shareholder value via multiple ways. In fact, as the company finds new avenues for allocating capital, they will become less and less reliant on Sears and Kmart than they already are. While this will draw criticism from many, especially retailing analysts, the end result will be a rising share price, which is really all that matters to me.

Full Disclosure: I own shares of Sears Holdings personally, and my clients do as well.

 

Taking Some Profits in Coach, Among Others

With the recent market rally we find ourselves within 1% of the previous highs on the S&P 500 index. I am beginning to trim positions a bit here into the strength. I am fully aware that this move could backfire given that we are heading into a seasonally strong period for equities, but as we once again near the top of the trading range, I feel it is prudent to tread more carefully.

What have I been trimming exactly? A couple of areas. First, asset managers. These stocks have been strong with the market doing well. Since they track the overall direction of the indexes over the short term, they seem to be ripe for selling if I’m right and the market is closer to the end of the rally than the beginning of it.

I have also been selling much of the Coach (COH) stock that I alerted readers to in the $25 area. The stock has soared, along with other consumer discretionary names. At more than $33 per share, we’ve seen a 30% jump in a very short amount of time. The stock now trades at 20 times forward earnings, about in line with their projected 15-20 percent growth rate. While the stock is not overly expensive here, the value proposition that got my attention has largely been corrected with the recent rally.

All in all, I urge investors to tread carefully now that we have gained much of the losses back from July and August. I have a tough time justifying a 2007 target on the S&P 500 of more than 1,400 at this time. This leaves us with about 6% upside in that scenario. If that is the most I could miss by raising some cash here, I don’t think I’ll be doing anyone any great harm by shifting some funds away from equities and into more income-related securities.