ERICOPOLY

One thing I'd like to reassert is that buying back shares is mathematically identical to paying a dividend where the shareholder reinvests 100% of the dividend in the shares. Taxes aside. So all this talk about how many shares were bought back... It's like crowing about how much dividends Coca Cola paid last year. It doesn't mean shit to knowledgable investors like yourselves who know how best to allocate proceeds from a dividend (well, taxes aside). What you are left with is less cash in the company (less flexibility), fewer shares matched with that lower flexibility (more leverage), and exactly the same operations. Works best when the remaining operations are extremely strong. The best thing for Berkshire has always been to buy more businesses with the cash -- forever adding to the diverse, individually strong streams of cash flow that form together the mighty Amazon.

I understand your point but you didn't describe SHLD in your example. They've already closed their 300 presumably worst stores. And it didn't make the Adjusted EBITDA increase over that period. It just made it suck less bad than otherwise.

Going forward though, the 25% will either have to come from ESL's other investments, or from the operating results of SHLD if they aren't going to sell the assets. Sorry to sound like a total pain in the ass. But we should not be talking about Eddie's past success, and instead simply talk about what a wonderful stable of businesses SHLD owns. Because if we compare it with Berkshire ("Eddie's BRK") then we need operating companies similar to Berkshire's. Do we already have those operating businesses that are so wonderful? This is why he does not need to buy any businesses. It is all within SHLD - right there for everyone to see.

This is what I keep coming back to. A homeowner can have 3% home equity. After paying the realtor for selling the home, he can have none. Berkowitz never ever ever ever ever talks about the hidden cost -- only the hidden value.

Yes, but the vast majority of these stores were likely their worst performing stores. To get any profits from the under-performing stores is not a bad situation at all to be in (plus it reduces on-going liabilities tied to the lease and other operating costs). And that's not factoring in any profits from the inventory liquidation. Well what I'm speaking about is when Berkowitz claims the real estate is worth $160 or so. That type of valuation is pointless exercise unless they are actually going to net $160 per share from selling it today (after accounting for the costs of severance and store closures). I'm 100% certain that it won't happen. Suppose it takes years to happen... then it must be discounted to the present. And like you say, they seem to be selling the underperforming stores. In other words, they intend to keep the performing stores as going concerns. Thus the liquidation simply "ain't gonna happen". And thus Berkowitz' real estate thesis seems pointless. Or maybe the real estate thesis is just to serve as a proxy for what the whole enchilada would be worth if they could turn the operating performance around to the degree that the retail operations perform as profitably as what a REIT would get through lease income of those same properties? In which case we are depending on a revival of Sears and KMart?

Ah, you're right.

For 2012 real estate transactions... Sears Domestic $67m gain (after netting out cost of severance and closings) KMart $37m loss (after netting out cost of severance and closings) $30 million of "hidden value" unlocked by putting the Sears Domestic and KMart transactions together. Unfortunately SHLD doesn't own all of this one: Sears Canada $150m gain (after netting out cost of severance and closings) So in total, $106.5m unlocked "hidden value" in 2012 for SHLD shareholders (assuming 51% ownership of Sears Canada). EDIT: IMHO this isn't a fast enough pace to justify the lofty valuations that I have heard the bulls talking about. Remember $100m unlocked 7 years from now is only worth slightly more than $50m in today's dollars with a 10% discount rate.

Sears Canada fared better (page 39 of 2012 AR): We recorded a total gain on sales of assets of $170 million in 2012 Operating loss in 2012 included expenses of $20 million related to store closings and severance,

regarding the 2012 annual report: see page 26: Domestic pension expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165 then skip to page 36: We recorded total gains on sales of assets of $261 million in 2012 and $30 million in 2011 which were primarily attributable to several real estate transactions. Sears Domestic’s operating loss included expenses related to domestic pension plans and store closings and severance of $674 million and $242 million in 2012 and 2011, respectively, alright... now... Gain of $261 million on selling the real estate versus store closing and severance expense of roughly $500 million (after subtracting out the domestic pension expense which I assume is unrelated to the store closings). So is that $500 million expense really attributed to selling the Sears stores? If so it's vastly greater than the $261 million gain from selling the real estate. Ouch! Am I making some sort of mistake here? Perhaps pension severance costs were thrown in there? but it doesn't add up as pension settlements were $455m. Add that to the $165m domestic pension expense and it come to $620m just for pensions. Okay, then that leaves only $54m for store closings. But then a bunch of their sales they weren't expected to surrender the premises for up to 18 months afterwards (delaying the expenses). So they established a "closed store reserve and allowance" of $140 million to cover the costs that would be realized in 2013 (see page 26). Take that reserve and add the $54m to it, and we get possibly $194m cost of store closings and severance. Weigh that against the sale gain of $261 million. So there was a little bit of hidden value there, but not that much.

A bit of info from the 2012 annual report. This is information regarding KMart's store closings. It seems to me at first glance that the "hidden liability" exceeds the "hidden asset" by a wide margin. For 2012 we have $48 million in gains but $85 million in severance costs. Then there is a $10 million impairment charge but I don't understand what that is -- some sort of leasehold improvement or something that was written down? starting at bottom of page 33: Gain on Sales of Assets Kmart recorded a total net gain on sales of assets of $37 million and $34 million in 2012 and 2011, respectively. The gains on sales of assets in 2012 included a gain of $11 million recognized on the sale of one store while 2011 included a gain of $12 million recognized on the sale of one store. Operating Income (Loss) Kmart recorded operating income of $5 million in 2012 as compared to an operating loss of $34 million in 2011. This improvement was primarily driven by the improvement in gross margin rate and a decrease in selling and administrative expenses which more than offset the above noted decrease in revenues. Operating income in 2012 included expenses related to store closing and severance costs of $85 million and store impairments of $10 million as well as a gain of $11 million related to the sale of one store. Kmart's operating loss for 2011 included expenses related to store impairments of $15 million, store closing and severance costs of $76 million as well as a gain of $12 million related to the sale of one store.

Ahhhh.... got it. Well, sorry for my latest reply then which beat a dead horse.

You stated mostly what I too believe and understand. Here is the part that I agree with: 1) Not 100% of the inventory is financed. Thus, the difference would be used to pay off the closing costs. - completely agree 2) net inventory proceeds covers all closing costs and proceeds from RE/cancelling leases are all passed onto SHLD. - completely agree 3) If you were to assume that the liquidation of the inventory covers all costs associated with closing you can work with the assumption that you get all the RE proceeds. - completely agree Now, here is where my point is at: You might be making a gain on the real estate sale that went entirely to SHLD, but however you made a loss on the closing of the store. Whether or not the loss was funded from cash Eddie borrowed from his grandmother, or whether they sold the Queen Mary to fund the loss... doesn't really matter. Do the gains from the real estate sale and the losses from employee severance cancel themselves out? Or lets frame it differently to completely avoid confusion... Suppose on the next store they close down, instead of selling the inventory they move it to another Sears location across town. Now, do the profits from selling the store cover the costs of closing it and employee severance?

He isn't talking about an offsetting liability on the balance sheet when he talks about operating losses. I'm just talking about the balance sheet here. We've all heard the pitch from Berkowitz about how GAAP is insane because of the value of Manhattan when the Pilgrims came ashore. But when is the last time you heard Berkowitz pound the table that GAAP is equally insane for not recording the anticipated cost of shutting down stores and letting go of employees as a liability?

We have very different understandings. When he says "net cash", I believe he means how much cash is left after paying down the credit lines that are secured by the inventory. Okay, so then there is your interpretation: I will ask a question... If they can sell inventory at a profit so large as to fund all of the expenses of shutting down the store, employee severance, etc... then why don't they just do this all the time and not close the store? I mean that sounds like a good businesses if you can turn over your entire inventory in a short period of time at such a profit level.

Expressed differently: Hidden liability: cost of closing stores and severing employees Hidden asset: undervalued real estate What is the net difference between the two?

Inventory is an asset. It declines when the inventory is sold, and at this point is converted to an offsetting amount of cash if the inventory is sold at carrying value. There is net cash left over after paying off the financing used to purchase a portion of the inventory. But this net cash disappears when paying the closing costs and severance. At that point the assets on the balance sheet suffers a decline. The inventory is gone, and so is the net cash that was generated from selling the inventory. So my (restated) question is, to what degree does recapturing the "hidden" value of the real estate (upon sale) exceed this new hole in the balance sheet?

Welcome to 2012! When did he reduce his BAC price target from $60?

It's somewhat like the problem of having your desktop computer running before there was a sleep/resume power management implemented in the OS: Here is what a Tesla employee wrote on the Tesla Forum: Regarding the ancillary drain of Model S. Over the course of the next several months the firmware will continue to be updated to reduce the power consumption of the car’s computer systems. We strive to strike the right balance between minimum energy consumption and ability to have the car always ready and responsive. In our next major firmware release coming this summer, the car's computer systems will use half the power they currently do when the car is off. By the end of this year, they will use about 1% of the power that they do now when the car is off. The loss of range when the car is off has absolutely nothing to do with energy needed to heat, cool or otherwise do anything to the battery pack. The battery pack simply doesn't consume energy when the car is off nor do the systems that manage it. All of the "sleep" energy loss is going to onboard computer systems and providing the useful benefit of keeping them ready to start-up at a moment’s notice when the driver returns. As noted above this energy consumption will be almost completely eliminated over the next 2-6 months. http://www.teslamotors.com/forum/forums/vampire-drain

The profits from just these 5 properties alone accounts for more than 4% of the market cap for the entire company ($184M / $4.51B). Aren't there expenses associated with these closures that are booked on a separate line item? There are. And, I believe these closing expenses are always covered by the inventory liquidation (with extra cash to spare). I think we are misunderstanding each other. Your point about inventory liquidation seems to answer a separate question -- I wasn't asking if their cash levels were being reduced by closing stores. FCharlie talked about "gains". I'm pointing out that there may be expenses related to, for example, severing employees that would take a big bite out of those gains. So I'm trying to find out of FCharlie is counting those expenses when he figures out what the profits are on closing stores. He talked about gain on selling the stores -- not about the net gains on both closing and selling the stores. I guess I'm wondering if the undervalued real estate is being swallowed up by costs of trying to sell it (which involve first closing the stores and laying off employees).

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The profits from just these 5 properties alone accounts for more than 4% of the market cap for the entire company ($184M / $4.51B). Aren't there expenses associated with these closures that are booked on a separate line item?

The Kmart in Goleta is pretty vacant of customers despite not even having a Target nor a Walmart to compete with. Now that is pathetic! The nearest Walmart/Target stores are like 45 miles away in Ventura. The Goleta KMart also serves the neighboring city of Santa Barbara. So no, to believe that Walmat and Target are killing them would be delusional. I heard Santa Barbara is a rich city, no? If there are no Walmarts there to compete with Kmart, at the minimum, SHLD should close the store and rent it or sell it to Walmart. :) How would you evaluate the value of this Kmart property? It sounds like it is in a good location. There are plenty of struggling people here that clean houses, wash dishes, mow lawns for a living. The store is just hideous inside. It is located across the street from Home Depot and Costco, which are both inviting and thriving. Goleta's Kmart -- if it can't thrive without Target and Walmart, then what possible hope is there for the rest of their stores? Is the Goleta Kmart the one about a mile from UCSB? If so, can't believe it's still there. I remember back in the day it was the only place in the area to buy things like toiletries and such. Very close to Isla Vista: 6865 Hollister Ave Goleta, CA 93117 That's likely an example of a valuable property. The Goleta store is listed on shcrealty.com as an 'opportunity' within an operating store. That tells me that SHLD is willing to sell, or sublease, this store at the right price. It must be considerably undervalued by the tax assessor. Those of you not familiar with California's tax nonsense should read about Proposition 13: http://en.wikipedia.org/wiki/California_Proposition_13_(1978) According to the tax assessor's office, that parcel is valued at: Land -- $11.1 Million Building $1.2 Million Not sure if this link will work -- https://mytaxes.sbtaxes.org/PropTax/WebPages/PropertySearch.aspx?SearchParameterList=Secured-Address&SearchString=6865%20HOLLISTER%20AVE%20GOLETA%20CA%2093117&SearchStringDisplayed=6865%20HOLLISTER%20AVE%20GOLETA%20CA%2093117 It was valued at half as much a decade ago. It must have changed ownership in order for that type of reassessment to happen.

The Kmart in Goleta is pretty vacant of customers despite not even having a Target nor a Walmart to compete with. Now that is pathetic! The nearest Walmart/Target stores are like 45 miles away in Ventura. The Goleta KMart also serves the neighboring city of Santa Barbara. So no, to believe that Walmat and Target are killing them would be delusional. I heard Santa Barbara is a rich city, no? If there are no Walmarts there to compete with Kmart, at the minimum, SHLD should close the store and rent it or sell it to Walmart. :) How would you evaluate the value of this Kmart property? It sounds like it is in a good location. There are plenty of struggling people here that clean houses, wash dishes, mow lawns for a living. The store is just hideous inside. It is located across the street from Home Depot and Costco, which are both inviting and thriving. Goleta's Kmart -- if it can't thrive without Target and Walmart, then what possible hope is there for the rest of their stores? Is the Goleta Kmart the one about a mile from UCSB? If so, can't believe it's still there. I remember back in the day it was the only place in the area to buy things like toiletries and such. Very close to Isla Vista: 6865 Hollister Ave Goleta, CA 93117 That's likely an example of a valuable property. The Goleta store is listed on shcrealty.com as an 'opportunity' within an operating store. That tells me that SHLD is willing to sell, or sublease, this store at the right price. It must be considerably undervalued by the tax assessor. Those of you not familiar with California's tax nonsense should read about Proposition 13: http://en.wikipedia.org/wiki/California_Proposition_13_(1978)

The Kmart in Goleta is pretty vacant of customers despite not even having a Target nor a Walmart to compete with. Now that is pathetic! The nearest Walmart/Target stores are like 45 miles away in Ventura. The Goleta KMart also serves the neighboring city of Santa Barbara. So no, to believe that Walmat and Target are killing them would be delusional. I heard Santa Barbara is a rich city, no? If there are no Walmarts there to compete with Kmart, at the minimum, SHLD should close the store and rent it or sell it to Walmart. :) How would you evaluate the value of this Kmart property? It sounds like it is in a good location. There are plenty of struggling people here that clean houses, wash dishes, mow lawns for a living. The store is just hideous inside. It is located across the street from Home Depot and Costco, which are both inviting and thriving. Goleta's Kmart -- if it can't thrive without Target and Walmart, then what possible hope is there for the rest of their stores? Is the Goleta Kmart the one about a mile from UCSB? If so, can't believe it's still there. I remember back in the day it was the only place in the area to buy things like toiletries and such. Very close to Isla Vista: 6865 Hollister Ave Goleta, CA 93117

It seems unlikely to me that they refused to comply with the accounting rules. Maybe the rules allow some inventive (not realistic) means of coming to "fair" value. Or perhaps there was some nuance that allowed them to not have to revalue many of the properties?