Sears Holdings: The Second Coming of AutoZone

Shares of Sears Holdings (SHLD) are down about 5% today after reporting quarterly earnings of 65 cents per share, two cents ahead of estimates. Without news of any real estate related deals, the combination of a 1 percent profit margin and same store sales down year-over-year aren’t making investors too excited today. Even still, if you haven’t gotten into this stock yet, this is an opportunity to do so in the 140’s.

There is one thing you should understand though, before you do invest. This company is not going to compete with Wal-Mart (WMT) and Target (TGT). They’re not going to try to. Same store sales growth at Sears Holdings will lag those of both arch rivals. I saw a quote in an AP story today saying something like it’s impossible to survive in retail without same-store sales growth that translates into maintained or increased market share.

If you believe this to be true, shares of SHLD are not for you. I can tell you right now that Sears Holdings is not going to gain market share. The company is going to be run just like AutoZone (AZO) has been in recent years. The focus is going to be on profits, not sales. AutoZone has been lagging its competitors in both sales store sales growth and market share for years. However, judging from the stock’s performance (it’s risen from $20 to nearly $100 in the last 5 years) you’d never know it.

Eddie Lampert’s ESL Investments owns a third of AZO stock, as well as half of SHLD. Lampert has been influential in AutoZone’s strategy of maximizing earnings per sahre, not sales, and he will do the same thing at Sears. Oftentimes this is accomplished by choosing to invest money in share buybacks, as opposed to store expansion. The way Lampert sees it, if buying back stock is more profitable than opening a new store, he’s going to buy back the stock. Retail analysts will focus on normal metrics of the retail business, but shareholders will see earnings per share rise,which will boost the price of SHLD shares.

If you hear analysts and retail experts knock the prospects of Sears Holdings due to the reasons I have mentioned, the appropriate reaction is to laugh, and buy the stock if it has fallen due to those negative comments. The day to sell SHLD will come when they can no longer increase earnings at a meaningful rate. I think that time is years away, which is why I continue to like and recommend the stock.