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.