Sears Holdings (SHLD)

Since the recession, Sears has fallen behind its competitors, like Kohl's and Wal-Mart, in terms of sales and net income. Although part of the blame can be placed on consumers spending less money on discretionary items, a lot of blame has to be placed on the lack of creative ideas and new strategies the company has had to get people into its stores. In order to reverse the declining trend, at the end of 2010, Sears launched Alphaline Entertainment, an online movie download service that allows users to stream movies and TV shows onto their TVs via RoxioNow. The emerging and constantly changing technology means that Sears has a chance to steal marketshare from leaders such as Netflix. If Sears can do so, it would help in mitigating the effects of low retail sales.

Lampert noted the importance of the brands owned by Sears. Sears wrote $1.8 billion dollars worth of bonds backed entirely with these brands. The bonds are currently held in an offshore insurance subsidy owned by Sears. These bonds can sit and appreciate while acting like a potential $2 billion dollar insurance policy for the company This portfolio of brands presents SHLD with strong potential future cash flow. Add the potential of real estate leasing, credit cards, continuing operations,buybacks and you have a holding company with far more potential than a useless textile factory. Somehow, Buffett did alright and Lampert should too.

I was complaining about Sears Holdings (SHLD) websites:

What is Lampert doing? Well ,first of all he basically bought the CEO to become VP of Sears. Lampert had made no secret in desire to increase Sears web presence. Currently it is a bit unorganized. You have Sears.com, Kmart.com, Sears2go -- a mobile commerce Web site, Partsdirect.com (you can find almost any part for anything there), Landsend.com, managemyhome.com and Service Live (allows people to bid improvement projects out) and a few others.

Sears has valuable online brands, their Sears and Kmart site are some of the most visited retail site (although far behind #1 Amazon (AMZN)). What Sears needs is a way to consolidate the various properties in a cohesive site that could be very powerful. For instance. If I am on Sears.com and do a search for "home improvement", I get a listing of dvd's from Tim Allen's sitcom by that name. I do not get choices for managemyhome.com or thegreatindoors.com. Just the dvd. Sears is not maximizing its properties with its search feature. In a way Sears has its online stores almost standing alone rather than under Amazon.com type umbrella.

Lampert has expressed in the past his desire to sell more direct to customers and expand Sears online presence. My thought is this move is a way for Sears to rapidly increase progress there.

"Ask and ye' shall receive"

Sears has released a beta version of it's new website and it is nothing short of fantastic.

It tackles my main complaint that I had to travel back and forth from the Sears to Kmart sites to check product availability. Sears now has the inventory combined.

Other features:

• Easy site to store pickup
• The ability to post products easily to Facebook, Twitter and other social networking sites.
• Extensive and easy to use inventory navigation to make search easier
• Easily usable "profile" section that contains address book, saved payment methods, order history, wishlists, registries, and "save for later".
• A "virtual shopping" assistant
• Each product listing notifies the buyer if it is available for in-store pickup, site to store and if there are any special offers attached to it.

Now it has been no secret Lampert has been investing in Sears online presence for the past two years. It would appears the fruits of that labor may finally come to fruition.

Chairman Lampert has a record of creating wealth for company shareholders. He dramatically improved Sears' profitability through aggressive cost cutting. Lampert is buying back stock and paying down debt. He remains focused on his long term strategy. SHLD continues to generate over $1 billion in revenue a week.

Great news for shareholders: By Mary Ellen Lloyd Of DOW JONES NEWSWIRES

Sears Holdings Corp. (SHLD) increased its share of the U.S. retail market for major appliances in 2008 - its first increase after years of declines - as new marketing programs and price discounts helped sales.

The department-store holding company plans to build on its momentum in 2009 through a new rebate-finder program, consumer credit offers and an ongoing rollout of appliances to more stores in its Kmart chain, executives said in a recent interview with Dow Jones Newswires.

"We're not doing any victory laps yet, but we're encouraged," said Doug Moore, Sears' president of home appliances.

Indeed, Sears isn't completely out of the woods. Weak appliance sales contributed to an 11% drop in comparable-store sales at the entire Sears chain in the fourth quarter. Even so, Sears picked up a larger share of the overall appliance market.

Moore wouldn't share dollar or unit sales but said third-party research shows Sears maintained market share in the first quarter of 2008, then gained in each of the remaining quarters to capture a full-year increase.

With its top-ranked Kenmore brand, Sears has long been the top U.S. seller of refrigerators, washers and other major appliances. Lowe's Cos. (LOW) in the late 1990s and Home Depot Inc. (HD) around 2001 began pushing harder to take market share, expanding selling space and adding brands.

Sears saw its market share decline from about 40% in 2001 to 29.5% in 2007, according to trade magazine This Week in Consumer Electronics, in conjunction with market research firm The Stevenson Co. of Louisville, Ky.

Second-ranked Lowe's had 15.3% of the $28.1 billion retail appliance market, Home Depot ranked third with 13.8%, and Best Buy Inc. (BBY) was next with 6.8%.

TWICE typically updates appliance rankings in June. Bob Tancula, Stevenson's vice president of research, declined to release 2008 numbers, citing the confidentiality of paying clients such as Sears. But he confirmed the company had stemmed market-share losses.

"Sears is still the No. 1 by a long shot," he said.

The gains didn't come from Lowe's or Home Depot but were likely taken from smaller local or regional players. "Home Depot and Lowe's market share in 2008 did not drop off," Tancula said.

Category Hit By Economy, Discounting

Like automobiles and other big-ticket categories, major home appliance sales have been hit hard by the weakening U.S. economy, tighter credit and the collapse of the housing market. Industrywide unit shipments in the U.S. fell 8.9% to 68.2 million units in 2008, according to the Association of Home

Appliance Manufacturers.

And pricing has been very competitive. Sears regularly offered 15% to 20% off appliances around the holidays. Home Depot gave up appliance sales rather than sacrifice profit margins in the latest quarter, said Chief Financial Officer Carol Tome. "It was a highly promoted category and we elected not to promote it," she said.

Lowe's spokeswoman Chris Ahearn said the retailer's fourth-quarter unit market share was 18.1%, up 1.4 percentage points from a year earlier. But matching some of the promotions at Sears and others hurt gross margins. Moore, the Sears executive, said it's taking share "in a financially responsible way."

"We are not abandoning principles of profitability in how we go to market," he said, declining to provide specifics.

Customers have responded favorably to Sears' "Blue Appliance Crew" marketing campaign launched last fall, Moore said. As part of that, Sears' blue-shirted employees use Web kiosks to show customers other retailers' prices on the spot, potentially removing one obstacle to completing a sale.

The campaign also touts Sears' delivery, variety of brands and financing offers. Sears has been able to offer no-payments and no-interest financing for 12 months on major purchases more frequently than some of its competitors, said Kevin Brown, chief marketing officer for appliances.

Sears' competitors and some analysts don't expect appliance discounting to accelerate. Moore said the company plans to capture more business by touting its repair services and by expanding retail space devoted to the category through Sears Home Appliance Showrooms and other newer formats. It also expects to add appliances to more of its 1,400 Kmart stores after putting them in about 286 stores in recent years.

New customer service programs could help, too. For example, Sears recently launched a rebate-finder service. Store employees can determine whether a specific appliance qualifies for a state, federal or utility company rebate through the "Energy Star" program, and they can walk customers through applying for the rebate when they make a purchase.

Sears is working to expand the program to manufacturers' rebates.

Such conveniences may help close the sale, but the big issue facing Sears and others will be folks like Nick McCoy, who recently waited to replace his washing machine "until the puddle got too big to live with."

McCoy, who is a senior consultant following home goods for market-research firm Retail Forward, said price and having the key brands are the key issues for most customers these days.

"It's going to continue to be a battle," he said.

Some interesting trends have emerged since February. Remember when looking at these numbers that Circuit City began the liquidation process in late January.

Wal-Mart (WMT) and Target (TGT) - They have remained stable since February with very little fluctuation in numbers. Best Buy (BBY), Amazon (AMZN) and Sears (SHLD) is where it gets interesting. Sears has seen a 14% jump in traffic since February, growing each week. Now, my first thought was that this is coming at the expense of Sears' other owned site, Kmart. A quick check there however shows that Kmart has also seen growth since February albeit less at 6%.

Best Buy has seen traffic fall 15% and Amazon has seen a 22% fall in traffic.

It should be noted that the Circuit City liquidation would not be baked into these numbers as it began in earnest after the reported quarters numbers were finished. So, where did the Circuit City web traffic go? The general consensus of the investing community as stated in the above quote was that Best Buy and Amazon would be the main beneficiaries of the Circuit City liquidation.

Based on the above charts, it appears shoppers may have skipped Amazon and Best Buy and gone to Sears. Let's look closer:

Now, Sears has probably garnered increased internet traffic from it recent appliance push (coupled with people getting tax return money back to buy them) but one cannot escape the oddity of the timing of its traffic increase coupled with the dramatic decreases at both electronics competitors while Wal-Mart and Target held constant.

One also could assume that lawn and garden played a role as both Lowes (LOW) and Home Depot (HD) saw gains. While some of this is surely in the numbers, Sears would not expect to see the same surge as a Home Depot or Lowes because lawn season is coming around. Sears is not as large a player in the field and have smaller offerings than they do, especially when it comes to plants and yard items. The numbers here also show Sears/Kmart outpaced both home Depot and Lowes, not what one would expect unless there was a another reason.

That still leaves us with Sears' large gain (+20% Sears/Kmart combined) corresponding to the large declines at both Amazon (-22%) and Best Buy (-15%) that cannot be explained away easily. Had they both kept share close or above previous levels, then the Sears gain could be said to be purely appliance/lawn and garden. But they didn't, so we can't explain it that way. Sears must be making gains in electronics traffic.

We have essentially 7 weeks of data in these results and no definitive conclusions can be drawn from it. But, the results do seem to be running contrary to what people were expecting to happen when Circuit City finally closed the door and does mean it requires close monitoring.

Now, this all means very little if Sears is not converting this traffic into sales and we will not know this until May as Sears does not report monthly numbers. This trend does bear very close attention. Should it continue, it is is very good news for Sears shareholders as it means the effort Lampert and the rest of the folks there have put into the internet properties may be paying off.

Sears Holdings, the giant retailer controlled by Mr. Lampert’s hedge fund, ESL Investments, bought 400,000 shares of Sears Canada on Monday, people with knowledge of the transaction told DealBook.

Add that to stock purchases made in December and early March, totaling 60,000 shares, and Sears now owns about 74 percent of its Canadian counterpart.

So what’s Mr. Lampert up to? He won’t say, and a spokesman declined to comment. But analysts and investors believe Sears could soon try to buy the remaining shares of Sears Canada that it doesn’t already own.

In the past year, Sears has been hurt by falling consumer spending. And the retailer faces the expiration next March of a $4 billion revolving credit facility it uses to pay suppliers and fund other working capital needs. Securing a new loan of that size could carry a hefty interest rate, given Sears’ already leveraged balance sheet, the ongoing credit squeeze and a continued drop in the company’s earnings.

But acquiring Sears Canada would actually reduce the company’s overall debt-to-earnings ratio and, therefore make it much cheaper to obtain a new multi-billion dollar loan. What’s more, it would cost Mr. Lampert and Sears virtually nothing.

Analysts point out that Sears Canada has more than $630 million in cash on its balance sheet and swaths of valuable real estate. Mr. Lampert could easily use Sears Canada’s own cash to finance a deal, or he could use Sears’ stock, which would be even cheaper.

According to a recent analysis by RBC Capital Markets, Sears could buy the remaining shares of Sears Canada for 23.38 Canadian dollars per share — an 18 percent premium to the current stock price — and still have cash that leftover that can be consolidated onto its balance sheet.

Sears Canada is also performing better than its American counterpart and any deal would be accretive to the combined company’s earnings.

Still, Mr. Lampert will have to deal with an old nemesis: fellow activist investor William A. Ackman, whose Pershing Square Capital Management owns 17.2 percent of Sears Canada and would likely to demand a big premium for its shares.

Under Canadian law, Sears must get the approval of all minority shareholders before making a deal for the whole company. That could lead to a showdown with Mr. Ackman, who isn’t shy about demanding a higher price.

Over two years ago, Mr. Ackman led a group of shareholders that rejected Sears’ first offer for Sears Canada. The price, $18 a share, or $792 million, was deemed too low by Pershing Square and other investors who voted down the deal. Mr. Lampert decided to walk away.

Mr. Ackman seems to believe another bid could be coming soon — Pershing purchased over a million shares of the thinly traded company in the last quarter. With the $4 billion revolver coming due next year, Mr. Lampert may not be so quick to walk away this time.

Lampert can effectively run his stake up to 83% before he is forced to deal with Ackman. At that point, he can simply just let his stake sit. Ackman has said in the past he want to avoid situations in which he cannot be a majority shareholder as he has no power to effect change.

It will come down to a test of patience. Lampert wants Sears Canada for it cash, Ackman owns shares for the buyout premium he thinks he'll get from Lampert. Can Lampert wait longer for the cash than Ackman will wait to find a better use for the money he has invested in Canada shares?

One must also assume not much will happen on either front for a while. Lampert will probably just keep buying what is on the open market until he is only forced to deal with Ackman.

Either way it will make for a fun spectator sport this summer/fall

Retails is lousy now, we know that and Sears is in the unenviable position of being both a clothing retailer and a housing supplier (appliances, tools etc.). With the expected downturn there, how did we hold up and are the reason we invested in the company still valid??

In a word yes. Here are the key take-away points (more will be available when the 10-Q is filed Friday). Remember, I expected a small loss

- $500m inventory reduction - Added 65 net stores since last year which consist of Home Appliance Showrooms, dealer stores and outlet stores, and have continued to expand online and multi-channel capabilities. In May they nearly quadrupled the number books, DVDs, music and software available at sears.com. - CEO Bruce Johnson said, “We expect to generate higher EBITDA in the second half of this year as compared to the corresponding period in 2007 as we benefit from our lower domestic inventory levels and continued vigilant expense management. Given our year-to-date results and the state of the economy, our current full-year EBITDA forecast, which assumes flat to modest comparable store sales declines for the rest of the year, is comparable to, but no longer exceeds, last year’s EBITDA”. - Repurchased $5.6 million shares in Q2 bringing outstanding count to 126 million as of 8/2 (watch the 10-Q Friday, Lampert is famous for buying shares between the end of the quarter and the 10-Q filing). - Cash sat at $1.5 billion, down $100m from Q1. - LT Debt reduced from $2.6b in Q1 to $2.2b in Q2

Lampert is still producing profits, reducing debt, buying back shares and fixing two bankrupt retailers (Kmart was BK and Sears was days away from it).

All of those items are still happening. Yes, profits are falling (key word being profits) but so are those at JC Penny (JCP), Home Depot (HD), Lowes (LOW), Macy's (M) etc. What we want to know is, if we assume sales and profits are going to fall until the economy and in Sears case, housing stabilizes, what is happening to the financial condition of the company?

In the case of Sears, the balance sheet is in the top echelon of retailers with the exception of Wal-Mart (WMT) and Target (TGT).

Cash is stable, debt is being reduced and shares repurchased. Shorts are going to get squeezed here. Ackman, Lampert and Berkowitz will not dump shares and they hold roughly 65% to 70% of the total and Lampert keeps reducing share count through the buybacks. If you do the math, there are plenty of shorts out there "swimming naked" that will be fighting for shares when they have to cover.

That, will cause a surge in shares, a big one....

Sears has a large amount of cash on its balance sheet that can be used to make strategic and financial investments. Lambert who has an investing background has already demonstrated his willingness to put this capital to work. We can look forward to seeing the company's capital utilized in a more efficient manner thus returning better value to investors.