Can Sears’s Slumping Stock Recover?

With shares of Sears (NASDAQ:SHLD) trading around $35, 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, as well asSears 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; they also 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, 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.

Sears Holdings Corporation today announced financial results for its first quarter ended May 3, 2014. Net loss attributable to Holdings’ shareholders was $402 million ($3.79 loss per diluted share) for the first quarter of 2014, compared to $279 million ($2.63 loss per diluted share) for the prior year first quarter. Adjusted EBITDA was $(221) million for the first quarter of 2014, compared to $(26) million in the prior year first quarter.

“Sears is undergoing a significant transformation, and we fundamentally are changing the way we do business,” said Edward S. Lampert, Sears Holdings’ Chairman and Chief Executive Officer. “Our performance in the first quarter highlights the challenges we are facing as well as the progress we are making in this transformation. We are moving away from a company that was heavily based on selling products solely through a store-based network to a member-centric business model focused on providing benefits to our members anytime and anyplace. We are seeing progress in our transformation to a member-centric, integrated retailer, as we continue to invest heavily in driving our Shop Your Way program. Member sales for the first quarter represented their highest level ever, representing 74% of eligible sales. Points redemptions also increased substantially, demonstrating that our members are becoming more engaged with the program and taking advantage of the points that they are earning. While this progress continued, the biggest negative contributor to sales has been from our consumer electronics business at both Sears and Kmart. Without the poor performance of the consumer electronics business, our Sears Domestic comparable store sales would have been positive 0.8%, as compared to positive 0.2%. Finally, as we invest in our new program and platforms, we are continuing to bear the costs of two promotional models, which adversely impacts our margins.”

T = Technicals on the Stock Chart are Weak

Sears stock has been getting hit hard in the past couple of years. The stock is currently trading near lows for the year as it continues to pull back. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Sears is trading below its rising key averages which signal neutral to bearish price action in the near-term.

SHLD

Source: Thinkorswim

Taking a look at the implied volatility (red) and implied volatility skew levels of Sears options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Sears options

97.61%

76%

74%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

June Options

Steep

Average

July Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Sears stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Sears look like and more importantly, how did the markets like these numbers?

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

44.11%

-27.02%

-4.73%

-19.85%

Revenue Growth (Y-O-Y)

-6.78%

-13.62%

-6.6%

-6.30%

Earnings Reaction

-1.89%*

6.46%

-2.86%

-8.2%

Sears has seen rising earnings and decreasing revenue figures over the last four quarters. From these numbers, the markets have had conflicting feelings about Sears recent earnings announcements.

* As of this writing

P = Weak Relative Performance Versus Peers and Sector

How has Sears stock done relative to its peers, Kohl’s (NYSE:KSS), J.C. Penney (NYSE:JCP), Macy’s (NYSE:M), and sector?

Sears

Kohl’s

J.C. Penney

Macy’s

Sector

Year-to-Date Return

-10.90%

-6.52%

-2.95%

7.88%

-2.12%

Sears has been a poor relative performer, year-to-date.

Conclusion

Sears operates as a specialty retailer in the United States and Canada. The company today announced financial results for its first quarter ended May 3, 2014. The stock has not made significant progress in several years and is currently trading near lows for the year. Over the last four quarters, earnings have been rising while revenue figures have been decreasing, which has produced conflicting feelings among investors. Relative to its peers and sector, Sears has been a weak performer year-to-date. WAIT AND SEE what Sears does the rest of this quarter.

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