The Barron’s article does a good job of pointing out the upside and the contingencies here.  The one issue that exists is that Sears as a retail player just isn’t doing that well and 24/7 Wall St. has pointed out how poor of a retailer it is.  But there is lot more to the story that we have been investigating for subscribers of our Special Situation Investing Newsletter which might imply close to a doubling of shares if the company makes the right calls.  There is the shot of a REIT-qualification aspect to Sears, but that will be another discussion at a different time.

Some of the factors that are working against the company are actually not the fault of the company.  And some are.  In fact, if you were going to evaluate the macro-scenario here we’d go ahead and warn the Sears permabulls that the raw numbers out of Eddie Lampert’s retail empire may have another 18 to 24 months of having to stomach poor retail results.  In its latest fiscal year, Sears mustered margins of 4.74%, in comparison to Penney’s 9.66%, Target’s 8.76% and Kohl’s’ 11.7%.

But there are two companies here that we believe will be the savior of the otherwise poor situation: Simon Property (NYSE:SPG) and Target (NYSE:TGT).  Simon is a very expensive stock with premium mall and shopping operations and it would be able to acquire the dirt owned and under long-term leases for a fay cry short of the lofty valuations of each square foot it owns.  It recently raised cash as well.  Target (NYSE:TGT) has already expressed that it outright wants to continue its current expansion and outlined a 25% increase in stores over the next few years. 

Eddie has to be noticing how poor Sears has done this year.  He isn’t arelative return manager that believes that if the sector or the marketfell by 12% that he is happy with an 9% loss.  We think he might infact be very close to a major shift that would be far more aggressivethan creative securitizing of brand royalties.  He definitely has theopportunity and motivation here.  There may still be a hidden $6Billion to $12 Billion that can be monetized if he decides that Searswould be a better empire as a smaller empire.  The REIT aspect alone isworth a look.  The company may continue retiring stock via buybacks,but the opportunity of launching a dividend (and a high one to boot)may be a better strategy with longer-term merits than quarter toquarter share buybacks.

Barron’s also notes…. A Screaming Bargain: The implied value of Sears’ retail real estate is absurdly low relative to competitors’ property.

There have been rumorsthat Circuit City (NYSE:CC) could become a target of the retail giant.As smart as Eddie is, 24/7 Wall St. would like to issue the "CaveatEmptor" warning IF he is really thinking about that.  Based on the poorstance and lack of competitive position of Circuit City, it is theopinion of 24/7 Wall St. that Sears would be shooting itself not justin the foot.  That might knock Sears stock down between 4% and 7%.We’d throw a yellow flag for a 15 yard penalty for uninvestorlikeconduct if Eddie thinks he has to have a better tech-sales platform.

Barron’s concludes: "SearsHoldings sells for $134 a share, but could have a break-up value ofmore than $300. If Lampert turns around its retail operations, theshares could rally to 200 or more."

There is of course theflip side of the story: Sears could keep think share buybacks andsmaller plans will ultimately win out, and if so then the company willhave to be evaluated merely on the merits of being a lagging retailer.If the retail situation continues and if the company doesn’t get moreaggressive on the surface, then there is nothing really to keep thestock from heading towards $100.00. 

It is the opinion of 24/7 Wall St. that "IF" Eddie can bolster up someof the damage here and decides that a smaller operator of Sears,K-Mart, and Lands End will be better to manage that the $200 mark couldend up being rather low.  $300 is a stretch because markets are rarelyTHAT inefficient in such a widely held situation.  Both Simon andTarget have the means, interest, and perhaps even the need to buy andassume some of the dirt.  Eddie could really capitalize off this.  Andit’s about time.

Jon C. Ogg
October 21, 2007

Jon Ogg is the editor of 24/7 Wall St.’s Special Situation Investing Newsletter; he does not own securities in the companies he covers.

In reality, Eddie Lampert is a true mystery to many "retail analysts" on Wall Street because they are having to evaluate a retail company that is now worth $28 Billion since the combination of Sears and K-Mart that is not merely a large retailer.  In fact, the retail efforts have recently been mixed instead of the turnarounds seen in prior quarters.  The wildcard for just analyzing this as a retailer is that this is still a large real estate holder that is deemed as undervalued on the books versus what the remaining dirt might really fetch in a true sale lease-back, and when you culminate the real estate with the point that this is really a hidden hedge fund it is mystifying. 

As long as Eddie Lampert doesn’t start to AND then continue to consistently make costly errors quarter after quarter, no one is going to say anything.  Even if they did, they don’t have the votes or shares to influence a change.  Shareholders have been so rewarded that any major hit to the stock might just make investors think there is a shot to go back in.  As long as investors feel like he is potentially the next Warren Buffett, he is virtually immune from any criticism or efforts against him. 

With the potentiality that he has been mentioned (via rumors and occasional holdings) as potentially rolling up numerous other retail related efforts, and seeing those stocks rise, he is well-heeled there AND wherever else he wants to go.  Much more money has been made investing with Eddie Lampert than against him.

Jon C. Ogg
April 5, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.