SHLD Market Research & Analysis Report
Updated Oct 15, 2014

Growth and Balance Sheet

The company reported net loss of $573 million, or $5.39 diluted loss per share, for the second quarter of fiscal year 2014 ending August 2. That's down from a net loss of $194 million, or $1.83 diluted loss per share for the same quarter last year. Revenues for the second quarter were $8,013 million, down from $8,871 million for the same quarter last year. The decrease is primarily due to separation of Lands’ End business, decline in number of Kmart and Sears Full-line stores, as well as to decrease in sales of Sears Canada and decrease in domestic comparable store sales. Domestic comparable store sales declined 0.8%. All of company segments recorded decrease in revenue in comparison to the same quarter last year. Kmart revenue for the quarter was down 26.1% to $2,341 million; Sears Domestic revenue was down 5.9% to $4,310 million; and Sears Canada was down by 15.2% to $780 million. Company’s gross margin declined nearly 300 basis points to 21.7% of sales from 24.6% in the second quarter of fiscal year 2013, with decreases experienced in a majority of categories, particularly apparel, home and grocery & household. Moreover, the operating margin deteriorated to -6.41% of sales from 0.57% for the second quarter of last fiscal year. Cash, and cash equivalents as of August 2, 2014 were $829 million in comparison to $1,028 million as of February 1, 2013. SHLD forecasted third quarter of fiscal year 2014 loss per share are expected to be around $4.26, compared to actual loss per share of $5.03 for the third quarter of fiscal year 2013. The financial strength indicators of the company are lagging behind the industry averages. Company’s current ratio is 1.00 and the industry average ratio is 1.27. The quick ratio of 0.22 is much worse than the industry average of 0.94. The interest coverage ratio of -7.96 is lagging behind the industry average of 76.72, and it is suggesting that the company is unable to earn enough profits to cover its interest expenses. In terms of efficiency, the asset turnover ratio of 1.95 is better than the industry average of 1.28; the inventory turnover ratio of 3.80 is at much unhealthier levels than the industry average of 10.61; and the ROE of -130.01% is worse than the industry average of 15.20%. 

Valuation

SHLD PE is not meaningful due to the fact that the company has not shown positive earnings over the last 3 years. SHLD's current Price/Sales of 0.08 is below the average of its industry of 1.22. SHLD’s head to head comparison to its main competitors shows that the company has the lowest gross margin, and one that is below the industry average. Moreover, the achieved operating margin is negative and the worst result out of the selected peers, and below the industry average. The quarterly revenue growth of the company is negative and lowest result out of the selected peers, and below the industry average. The company trades at the lowest P/S ratio out of the selected peers. SHLD’s twelve trailing months EBITDA is -$934 million, below all of the competitors, and below the industry average of $219.98 million. The stock is currently trading below its intrinsic value of $32.11, this suggests that the stock is currently undervalued at these levels. The beta of 3.84 implies much higher volatility of the stock with respect to the S&P 500. SHLD has not shown favorable earnings consistency over the last five years, in fact they have significantly fallen over the last five years. The current quarter earnings in comparison to the same quarter last year have decreased over 194%. SHLD’s Total Debt/Equity of 840.62 is above the required maximum, and it is well above the industry average of 59.6. SHLD’s current price levels are above the maximum level, 57.79% below the 52 week high of $67.50, and the technical analysis give negative view of the stock. The majority of analyst ratings are underperform. SHLD currently does not pay any dividends.

About SHLD

Sears Holdings Corporation (Holdings) is a retailer with 2,172 full-line and 1,338 specialty retail stores in the United States operating through Kmart Holding Corporation (Kmart) and Sears, Roebuck and Co. (Sears) and 500 full-line and specialty retail stores in Canada operating through Sears Canada Inc. (Sears Canada), a 95%-owned subsidiary. The Company operates in three segments: Kmart, Sears Domestic and Sears Canada. As on January 28, 2012, it had 38 domestic supply chain distribution centers, of which 12 were owned and 26 were leased for terms ranging from 3 to 5 years. Of the total, 11 primarily support Kmart stores, 23 primarily support Sears stores and four support both Sears and Kmart stores. On December 31, 2011, the Company completed the spin-off of its interest in Orchard Supply Hardware Stores Corporation. In April 2014, Sears Holdings Corp completed the separation of Lands' End, Inc., from the Company.

Competitor Comparison

Sears Holdings Corporation (NasdaqGS: SHLD) N.V.

Highlights

Sears Holdings Corporation operates as a retailer in the United States and Canada. The stock closed yesterday’s trading session at $28.49. In the past year, the stock has hit a 52-week low of $24.10 and 52-week high of $67.50. The intrinsic value of the stock is above the current price. SHLD has a market cap of $3.03 billion and is part of the Services sector.

• Shift from a store network to a member-centric integrated retail model
• Focus on divesting non-core business
• Presence in value retail allow price catering to price conscious customer

• Weak financial performance

SHLD Intrinsic Value

Stock Valuation Model & Intrinsic Value Definitions

Investors should keep an eye open for stocks that are trading within 10% of their 52-week highs, as it is likely to continue in its upward trend. SHLD's 52 week high is $67.50, current price is $28.49, is 57.79% below the 52 week high.

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which in this model states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. The company has negative earnings over the last three years, therefore its P/E ratio is not meaningful.

When there is strong insider ownership which we define as 8% or more, management is more likely to act in the best interest of the company, as their interests are right in line with that of the shareholders.  Insiders own 27.59% of SHLD stock. Management's representation is large enough. This does satisfy our minimum requirement; companies that pass this test are more attractive to our valuation model.

The model is using several technical indicators (MACD, RSI, MFI, OBV, position Indicators) to forecast the trend of the stock for 6 and 12 months, and assign a value.

SHLD is trading in the range of $24.10 - $34.26 in the past 30 days. The stock has been showing support around the level of $25 and resistance in the $40 range. The stock is trading below the 50-Day Moving Average and below the 200-Day Moving Average. The RSI(14) is 47.46. As can be seen from the chart on page 1, since May the stock is trading in downward slopping trading channel. It seems that the stock is finding support around the level of $25 for now. The stock was also unable to go past the $30 mark in two consecutive trading days which shows that bulls are still weak. Currently is in the middle of the trading channel. Our indicators give a negative view of SHLD.

The financial health of the company the higher the better, we evaluate all the financial ratios of the company. 

Investor’s sentiment for the stock.

The model assigns a value according to analyst’s recommendation for the stock. Analyst rating on Reuters.com is 1 Hold, and 2 Underperform.

We are searching for EPS numbers that are better than the previous year's. One dip is allowed, but the following year's earnings should be higher than the previous year. SHLD’s annual EPS for the last 5 years were 1.99, 1.19, -29.4, -8.78, and -12.87 this type of earnings action is not favorable.

The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry. SHLD’s Total Debt/Equity of 840.62 is above the required maximum, and it is above the industry average of 59.6.

The EPS growth for this quarter relative to the same quarter a year earlier is above the minimum 15% that this model likes to see for a "good" growth company. Stocks with improving earnings are worthy of your extra attention. SHLD’s EPS growth for this quarter relative to the same quarter a year earlier is -194.81%, below our target.

This stock valuation model looks for annual earnings growth above 12%, but prefers higher than 20%. SHLD has not shown any growth over the last five years.

¹Tradespoon Score and Outlook: This score conveys Tradespoon’s long-term outlook of 1 to 5 years for a particular stock. Tradespoon uses proprietary methods to rate its trading picks on a scale from 1 to 10, with a 10 being the most favorable expected risk and return outlook. To determine a stock’s rating, Tradespoon uses an advanced algorithm that factors in fundamental and technical analysis to determine a stock's expected risk and return.