Can Sears Surge Higher?

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With shares of Sears (NASDAQ:SHLD) trading around $44, is SHLD an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Sears operates as a specialty retailer in the United States and Canada. The company’s Kmart segment operates stores that sell merchandise under Jaclyn Smith and Joe Boxer labels; and Sears brand products, such as Kenmore, Craftsman, and DieHard. This segment’s stores provide consumer electronics, seasonal merchandise, outdoor living, toys, lawn and garden equipment, food and consumables, and apparel; and operate in-store pharmacies. The company’s Sears Domestic segment operates stores that sell merchandise under the Kenmore, Craftsman, DieHard, Lands End, Covington, Apostrophe, and Canyon River Blues brand names. Its stores provide appliances, consumer electronics, tools, sporting goods, outdoor living, lawn and garden equipment, home fashion products, apparel, footwear, jewelry, accessories, health and beauty products, pantry goods, household products, and toys, as well as automotive services and products.

When someone says “the future of retail,” is “Sears” the first word that comes into your mind, swiftly followed by “Kmart”? If not, perhaps you need to re-educate yourself, starting with the annual shareholder letter from Sears chief Eddie Lampert. “Not only do I believe that we are headed in the right direction in important ways,” he says in the letter, released today, “I believe the entire retail industry is headed to where we already are.” That might not be the image many have of the company, whose stores have attracted attention over the last year for the grim state of their merchandising, the closure of the famed Sears portrait studios, and their troubled attempt at equipping sales staff with iPads. But according to Mr. Lampert, those critiques are missing the point: the company is becoming an “integrated retail” powerhouse merging online sales with brick-and-mortar stores.

More importantly, many of the changes that other retailers are making to survive today follow innovations that were either pioneered or significantly advanced in Sears and Kmart locations, like converting physical stores to be able to fulfill online orders and emphasizing ship-to-store and ship-from-store programs. These are areas where much of our investment has been focused over the years, despite the widespread and, we believe, incorrect belief among many outside commentators that what our stores need most are hundreds of millions of dollars more in décor and fixtures. We believe that the developments in the entire retail industry validate our decisions to shift much of our investment instead to digital and integrated retail.

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