There has been this persistent rumor on Wall Street that retailer Sears Holding (Nasdaq: SHLD) is going to announce a major business combination that will help boost its top line growth going forward. However, a big deal hasn't materialized, at least not yet.
The only potential deal that seems to be up for consideration these days in one involving Restoration Hardware (Nasdaq:RSTO), a California-based hardware, lighting and furniture retailer. But does this acquisition or even kicking the tires really make sense? Given Restoration's recent third-quarter earnings results, I wonder what the brass at Sears, and specifically chairman Eddie Lampert, is thinking. (For more on the mergers and acquisitions game, see M&A Competition Is Cutthroat For Acquirers.)
Q3 Train Wreck
In the period ended November 3, Restoration Hardware posted a loss of $15.2 million (39 cents per share). That's markedly worse than the $5.7 million (15 cents per share) loss it posted in the comparable period a year ago. It's also much lower that then 23-cent-per-share loss that Wall Street analysts polled by Thomson Financial had forecast.
Its revenue numbers were disappointing as well. In the period the company generated $173.7 million in revenue which is about a 10.6% improvement over the $157.1 million it reported last year. However, it was below the $182.8 million that analysts had been expecting.
Restoration’s chief executive officer, Gary Friedman chalked the lousy results up to "weakening consumer spending and traffic levels", which is not exactly an earth-shattering revelation.
Restoration Hardware is struggling, big time, and I just can't figure out why Sears would be interested in kicking the tires in the first place. There are several potential issues with this company. As I just mentioned already, its numbers are lacking. Plus, it's a small chain, with only about 102 stores under its umbrella. This isn't much to a behemoth like Sears. Restoration has locations in 30 states, but the concentration remains in California. And California is not exactly a Mecca for construction projects these days.
Not Much Value In Restoration's Asset Value
Oh wait! I know, maybe Sears is interested in Restoration's assets and their worth. No, I don't think that can't be it either. Let's do a little calculation:
• The company's total current assets of $260.8 million (which includes its cash, receivables, inventories etc) plus property and equipment of $89.3 million gives a total of about $350.1 million – in what I would deem to be hard assets.
• Then subtract current liabilities of $119.3 million (i.e.. accounts payable), and long term debt of $131.3. This gives a new a total of $99.5 million. If I then divide that number among the roughly 38.8 million shares outstanding, I get a bottom line value of $2.56 a share.
In other words, Restoration Hardware's shares are worth $2.56 each (excluding its future earnings potential). Sears recently offered $6.75 a share. What is management thinking?
The Flip Side
Proponents of the acquisition bid indicate that Sears could bring a money and a marketing punch to the table and that those things could really give Restoration Hardware a boost. In addition, it could give the company an improved foothold in the California market. Also, Restoration might benefit from Sears' distribution prowess as well. But again, a price of $6.75 a share seems mighty steep.
Bottom Line
Many investors have been expecting Sears to announce a major business combination that would revitalize its ailing retail sales. Instead, what they have received is interest in a small, currently unprofitable California-based specialty retailer. Frankly, based upon a quick rundown of its recent income statement and balance sheet, I just can't figure what Sears and Eddie Lampert are thinking.
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