Market Overview

Sears Not Having a Happy Holidays, Home Depot to Benefit?

Shareholders in Sears Holdings (NASDAQ: SHLD) are not having a happy holidays Tuesday morning, as shares took a hit. However, not just any hit. A 25% hit to be exact. Benzinga Professional covered the news in real-time, so traders could benefit.

Sears announced this morning that comparable-store sales for the first 8-weeks of its quarter fell by 5.2%. The broadline retailer said the primary driver of the lower sales was from its consumer electronics and home appliance businesses.

The company also announced the plan to close 100-120 Kmart and Sears stores, which it expects to generate $140-$170 million of cash.

However, this is cash generation is immaterial as Sears announced it will record a non-cash charge on certain deferred tax assets of $1.6-$1.8 billion.

Commenting on the events, Lou D'Ambrosio, CEO of Sears said, "Given our performance and the difficult economic environment, especially for big-ticket items, we intend to implement a series of actions to reduce on-going expenses, adjust our asset base, and accelerate the transformation of our business model. These actions will better enable us to focus our investments on serving our customers and members through integrated retail – at the store, online and in the home."

These actions included the 120 store closings, "better" inventory management, and reducing fixed costs. I think they need to do more than that, as do investors, as shares of Sears are down about 25%.

With regards to inventory, Sears currently expects the store closures and inventory reduction actions to reduce peak inventory in 2012 by $500 to $580 million and reduce its peak borrowing need by $300 to $350 million in 2012.

As of now, Sears is refusing to discuss how many jobs will be cut, but it is unlikely that everyone working at all of the closed stores will be relocated. Sadly, this decision spells a festive period full of uncertainty for thousands of people.

Sears concluded its release and said they have not repurchased any shares under its repurchase program in the entire fourth quarter. This could be seen as good and bad. Bad because the company did not believe the price was worth paying at previous levels. Good because it still has $524 million left under the program, or at current prices, about 15 million shares or about 15% of its float.


ACTION ITEMS:

Bullish:
Traders who believe that Sears will turn things around, you might want to consider the following trades:
  • Long shares of Sears, obviously.
  • If Sears turns it around, it will be because of the consumer. So go long the Consumer Discretionary SPDR ETF (NYSE: XLY)
Bearish:
Traders who believe that Sears is fading fast, you may consider alternative positions:
  • Short shares of Sears, obviously.
  • If Sears continues to fade away, try going long shares of Lowes (NYSE: LOW) and Home Depot (NYSE: HD) as these companies also sell some of the bigger ticket items like washer and dryers, but also has other sources of revenues.
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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