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People walk past the main Sears store in downtown Vancouver, British Columbia February 23, 2011. (ANDY CLARK/REUTERS)
People walk past the main Sears store in downtown Vancouver, British Columbia February 23, 2011. (ANDY CLARK/REUTERS)

Eye on Equities

Sears Canada struggles to win over Street with revamp plans Add to ...

Sears Canada Inc.'s new management team has released details on its turnaround plans for the struggling retailer - and Desjardins Securities Inc. analyst Keith Howlett likes what he sees. Just not enough to recommend investors buy the stock.

CEO Calvin McDonald, a former Loblaw executive, and other executives summarized the plans in Sears Canada’s 2011 annual report, annual information form and proxy circular, which were made public on Monday.

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To revive growth, the company is shifting from an emphasis on cost cuts to one focused on enhancing the customer experience, including modest investment in new store formats and improved merchandise presentations. As our Marina Strauss previously reported , Sears plans to emphasize categories in which consumers expect Sears Canada to excel, including in major appliances and mattresses.

“We applaud the focus on reinvigorating the customer relationship and improving the in-store experience, and the underlying determination to resolve basic execution issues,” Mr. Howlett said in a research note. “The plan is well thought out, and appears to recognize both Sears Canada’s historical positioning in the Canadian market and the ongoing changes to the marketplace.”

The big problem is that the competition is ramping up their own plans. Of particular concern is Target’s unveiling of 135 newly renovated stores in Canada by early 2014. They will compete with Sears in certain categories such as home decor and kitchen supplies.

Given very weak operating profit trends, the turnaround plans aren’t enough to change Mr. Howlett’s stance on the company. He reiterated a “hold-speculative” rating and $13 price target. He thinks the stock will be supported by Sears Canada’s real estate assets and its valuable leases in major shopping malls. He also predicts Sears Holdings, which now owns 94.9 per cent of the outstanding shares of Sears Canada, will eventually make another offer to take Sears Canada private.

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Altus Group Ltd. reported strong fourth-quarter earnings before interest, taxes, depreciation and amortization, helping to bring its debt level relative to income to more comfortable levels, noted CIBC World Markets Inc. analyst Alex Avery. “Improved operating results, a focus on internal operational efficiency, recent and planned assets sales to reduce debt, and better prospects for a less dilutive refinancing for its U.S. convertible debenture have significantly reduced AIF's risk profile,” he said.

Upside: Mr. Avery raised his price target by $3.25 to $8.25.

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China Kanghui Holdings reported a strong fourth quarter “that demonstrated a significant outperformance across geographies and product segments,” said Canaccord Genuity’s William Plovanic. He expects good things to come, too, given that the manufacturer of orthopedic implants in China has seven new product launches planned for 2012.

Upside: Mr. Plovanic reiterated his “buy” rating and $29 price target.

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While Ensign Energy Services Inc.’s fourth quarter was disappointing, the results do not fully reflect the underlying performance of the company’s business, said CIBC World Markets Inc. analyst Jeff Fetterly. The provider of oilfield services has shifted and modestly expanded its capital program, and its debt - while elevated at $700-million as of year-end 2011 - is still manageable given the company’s free cash flow and recent term debt financing, he said.

Upside: Mr. Fetterly reiterated a “sector outperform” rating and trimmed his price target by 50 cents to $20.50.

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Raymond James Ltd. analyst Rafi Khouri is recommending investors who want exposure to oil and gas exploration to buy shares of Petromanas Energy Inc. . He believes Petromanas’ joint venture announced last year with Royal Dutch Shell is extremely positive for the Albanian-focused company, given the global energy giant will bring its technical knowledge, experience and resources to the table.

Upside: Mr. Khouri upgraded the stock to “outperform” from “market perform” while maintaining a price target of 35 cents.

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