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Sears Holdings Corp (SHLD) & Sears Canada Inc (SCC): A Turnaround Story You Need to Watch

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When investors hear the word “Sears,” most immediately think of Sears Holdings Corp (NASDAQ:SHLD), the Eddie Lampert-controlled real estate play that has polarized investors and analysts for years. In the value neck of the woods, much attention has lately found its way toward Sears Hometown and Outlet Stores Inc (NASDAQ:SHOS), a business I relentlessly tout as a top retail pick. But there’s yet another Sears Holdings Corp (NASDAQ:SHLD) that attracts even fewer investigators, probably because it resides north of our borders, in America’s big brother, Canada. The company is called Sears Canada Inc (TSE:SCC), and it’s bouncing off its 52-week lows, trading cheap, cheap, cheap. Let’s take a look and see if this is the Sears Holdings Corp (NASDAQ:SHLD) you should be focusing on.

Sears Holdings Corp (NASDAQ:SHLD)

Blame Canada!
Sears Canada Inc (TSE:SCC), 51% owned by its American parent, disappointed investors and analysts with a net loss of US$30.3 million, or $0.31 per share, for the first quarter of 2013. This comes a year after the company’s profit of $0.88 in 2012’s first quarter. The main culprit was weakness in the company’s home goods department — an issue facing many department stores. Investors should note, however, that last year’s results included a $159.3 million lease termination benefit. Same-store sales for established stores fell 2.6%.

The company, like many large retail operations, is in a turnaround effort. Facing increased competition from new Canadian market entrants, such as Target Corporation (NYSE:TGT), Sears Canada Inc (TSE:SCC) has laid off 700 workers and poured money into revitalizing stores. Only a year into the effort, though, investors have yet to be impressed, as revenues continue to fall. Similar to U.S.-based Sears Hometown and Outlet Stores Inc (NASDAQ:SHOS), the company is continuing to open Hometown-style stores in Canada. There are currently 248, in addition to 141 corporate stores.

The question is: At its 52-week low and trading at a market cap less than a quarter of 2012’s sales, is this a deep value play or a falling knife?

Looking ahead
In 2012, the company did $45.58 million in EBITDA. As of mid-February, the company had an enterprise value of approximately $730.8 million (using current exchange rates), implying a trailing EV/EBITDA of about 16 times. That is mighty rich, especially when compared to U.S. department stores and Sears Holdings Corp (NASDAQ:SHLD)‘ U.S. counterparts. But again, 2012 was year one of the three-year turnaround plan. Investors can expect this metric to trend down in coming years.

Sears Hometown and Outlet Stores Inc (NASDAQ:SHOS) trades at under 10 times EV/EBITDA. Sears Holdings Corp (NASDAQ:SHLD) is currently EBITDA negative.

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