Recently, Bruce Berkowitz, a “Stock Manager of the Decade,” initiated a long position in Sears Canada Inc (TSE:SCC). In the fourth quarter he bought more than 6 million shares in the company, with the total transaction worth more than $68 million, accounting for around 1% of his portfolio. Berkowitz also owned 16.94 million shares in the company’s parent, Sears Holdings Corporation (NASDAQ:SHLD), which held a 51% stake in Sears Canada. Let’s look closely to see whether or not investors should follow Berkowitz into Sears Canada.
Sears Canada, which was partially spun off from Sears Holdings, is a multi-channel retailer with 122 department stores, 371 specialty stores, 16 floor covering centers, nearly 1,600 catalogue merchandise pick-up locations and 105 Sears travel offices. Sears Canada had two main sales channels: the Retail Channel (Hometown Dealer, Outlet, Corbeil…) and the Direct Channel. In 2011, Sears Canada generated more than $4.6 billion in revenue and $50.3 million in losses. At first glance, Sears Canada didn’t seem to have a lot of debt. As of October 2012, Sears Canada had $1.15 billion in total stockholders’ equity, $227 million in cash and only $37 million in both long and short-term debt. However, the operating lease, $501 million in total, was not included in the long-term debt. At the beginning of 2012, Sears Canada reported that it had around 19.6 million square feet for store locations, including 16.5 million square feet of full line Department stores, and 2.1 million square feet of Sears Home stores.
Berkowitz is More Interested in the Parent
Berkowitz might receive Sears Canada stocks due to the partial spin off from Sears Holding. After the spin off, Sears Holdings owned 51% of Sears Canada, and Eddie Lampert owned a 27% stake in Sears Canada. Actually, Berkowitz has been quite bullish on its parent, Sears Holdings. With 16.94 million shares, or 13.4% of his total portfolio, Sears Holdings was the second biggest position in his investment portfolio. Regarding Sears Holdings’ investment, Berkowitz mentioned that it was not a retail play but a liquidation play. The liquidation value of Sears Holdings lies in two areas: merchandise inventory and real estate. Berkowitz said that the market was trading at the liquidation value of the retailer’s inventory. For real estate, he conservatively estimated that if the real estate was fully valued on the balance sheet, Sears would be worth as much as $160 per share.
A Big Rival is Coming to Town
In October, it was reported that the US retailer Target Corporation (NYSE:TGT) was preparing to enter Canada. Target is one of the big box retailers in the US, operating around 1,778 stores across the US. Target is trading at $63 per share, with a total market cap of $41 billion. The market is valuing Target at 7.82x EV/EBITDA. Canada will be Target’s first expansion outside of the US. It intended to open around 125 – 135 stores in March and April at locations that used to belong to Zellers. Barclays Capital commented that Sears Canada was considered to be the most at-risk among Canadian retailers due to its significant overlapping offerings, at up to 70%. In addition, 37% of Sears Canada’s locations were less than a kilometer away from a Target store.
At the current trading price of $9.60 per share, the total market cap of Sears Canada is $970 million. The market is valuing the company at 9.45x EV/EBITDA. Its parent, Sears Holdings, generated $470 million in LTM EBITDA. With $4.93 billion in market cap, Sears Holdings is valued at 17.7x EV/EBITDA. One of its peers, Canadian Tire Corporation Limited (TSE:CTC.A) is worth $6.5 billion in the market. Canadian Tire is valued at a much cheaper valuation, at 8.13x EV/EBITDA. Canadian Tire has a quite strategic retail network in Canada. At least one store of the company is within 15 minutes of 90% of Canadians. The retailer has more than 1,700 outlets in Canada, with a total of 30 million retail square feet.
Commit to Turning Around
Sears Canada has recently announced that it would stick to its three-year turnaround plan as the CEO Calvin McDonald was not satisfied with the company’s performance over the last year and a half. Sears Canada is trying to upgrade service and refocus on several important categories, including mattresses and major appliances. In addition, it has been constantly evaluating its store portfolio. It had closed three big downtown stores in Vancouver, Calgary, and Ottawa. McDonald said, “The business, financially, is still healthy. We have a strong balance sheet, we have no debt. We still have access to a lot of means to drive the transformation.”
Foolish Bottom Line
Sears Canada seems to commit to turning the business around by boosting services and restructuring its retail focus. Investors need to dig deeper to better understand the potential value of Sears Canada’s real estate. Personally, I would rather wait to see any further developments before buying the stock.
The article Is Sears Canada a Buy Now? originally appeared on Fool.com and is written by Anh HOANG.
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