SHLD?

[zarley]

The uncertainty with the company is not the shitty sears  retail business. We all know that blows, its the end game plan by Mr. Lampert. What is his plan after the float is essentially non existent.

 

I agree with your whole post premfan, but the above point is the one I've been thinking of lately, seeing as Lampert/ESL own nearly 60% already.  Excepting situations where Lampert is forced to sell his SHLD holdings or goes to jail, I think most scenarios for SHLD are pretty good.

 

One bad scenario, as a small SHLD holder, is that Lampert takes his ownership up to some crazy % like 80+% and then stops retiring shares and starts paying out cashflow as a dividend.  That way, ESL/Lampert can redirect the cash however they want in other areas.  This is only bad from my perspective because I will lose out on the potential benefit from having Lampert allocating the cash for me.  Yes, I'll get a nice dividend (presumably), but I'll lose Lampert's investing skill.  I think this is probably unlikely because of the extra taxes on dividends, but it is possible.

 

Nearly as bad would be Lampert opportunistically taking SHLD private a some depressed price that doesn't reflect the true value of the company.  Minority shareholders get squeezed out and lose the opportunity to have Lampert investing for them.  This option is potentially worse than the dividend option, depending on the take-out price.

 

My preferred scenario involves Lampert closing ESL and turning SHLD into his investment vehicle.  Yes, it's the BRK/Buffett scenario, but I think that would be the best outcome for the minority shareholder.

[Guest Bronco]

I may have mentioned this before, but is there any chance of a AZO / SHLD merger?

 

Who knows what Eddie will do.  I am short puts on this, but I realize there is a risk owning a crappy retailer.

 

Maybe Eddie will buy Fremont Insurance of Michigan and start taking advantage of float.

 

 

[maxprogram]

The problem I have with investing in Sears (used to be a shareholder) is that the real estate is certainly valuable at market price, but is almost worthless in its current state with the stores on it.

 

For Sears, you have (1) Sears Canada (doing well); (2) Consumer brands (would do well if they could be sold off or distributed in other stores); (3) Internet (could be worth up to $1bb alone); and (4) Domestic Sears & Kmart.

 

Just 1 - 3 could be worth $6bb alone. Subtract debt and pension liabilities, your left with about $2bb (i'm doing this quickly so my estimates may be rough). Current market cap is $7bb, so you would have to think the Domestic Sears & Kmart operations were worth a minimum of $5bb, but probably much more if you want a margin of safety. If you're looking for a 40% margin of safety Sears/Kmart would have to be worth about $10bb.

 

They are still producing free cash flow, but it is declining, and I think the speed of the decline may increase. Even using fairly optimistic assumptions I don't think the value of this free cash is worth more than $6bb.

 

That is the value of Sears as a retailer, but what about the real estate? They own around 85mm square feet of space, plus some very advantageous long-term Kmart leases. If this real estate was sold off piecemeal or as a REIT at market value, then it would likely go for over $10bb and Sears would be a bargain. Otherwise, it doesn't matter how valuable the real estate is because there is an underperfoming store on top of it paying far below market rent.

 

The only way to realize the value would be to liquidate most of the stores (most Sears, and all Kmarts). This would mean laying-off 200,000+ employees and a lot of headache. Won't happen anytime soon but it may over time, possibly taking 10+ years to finally get the true real estate value. If shares went back down to $30-40 and Lampert bought out most of the minority shareholders, it might look good regardless. Too hard for me to figure out.

[zarley]

I may have mentioned this before, but is there any chance of a AZO / SHLD merger?

 

Some sort of AZO/SHLD merger is certainly possible.  ESL/Lampert owns something like 30% of AZO and nearly 60% of SHLD.  From that perspective, a merger wouldn't be surprising in any way.  How well they might fit together geographically or organizationally is hard to say.  I really have no idea.

[txlaw]

I'm with you, Premfan. 

 

At worst, SHLD is a cigar butt where runoff value is materially higher than the price at which SHLD is currently trading.  I believe this because I think Lampert is a great capital allocator who will maximize the use of cash that comes into the coffers and who will not destroy the value of the good assets held by SHLD.  If Lampert sees that Mr. Market is quoting him a price for SHLD that is substantially lower than runoff value, he will buy it hand over fist.

 

Now, in a deflationary environment the cash inflow could noticeably deteriorate at Sears, reducing the runoff value of SHLD.  But such a situation also could lead to a market price that falls much more than runoff value is reduced, giving Lampert a chance to buy back even more stock at rock bottom prices. 

 

It's our job to handicap the likelihood of such an outcome, and it seems like at the current price of SHLD (sub $65), we will do fine.

[Guest Bronco]

Max - not sure when you see FCF declining.  If memory serves, the last fiscal year's FCF was higher than the prior years. 

 

I wouldn't make that statement unless this year's number comes in less than $700m, which is the average over the past 3 years I believe.

 

Regardless - I am long the stock via being short puts.  I just can't make this a big position due to risks, but I can't get rid of it either.  I am still waiting for that Buffett type magic which may never happen.

 

Biggest position is still Loews.

[Guest Bronco]

2 comments to follow-up my prior post.

 

1) For what it is worth, adjusted EBITDA as reported by the company was flat year over year - around $250m

 

2) I always wonder what members of this board (and other stock market commentators) would have said about Warren Buffett and Berkshire Hathaway in the early years.  That was a crappy business and a crappy company - much worse than Sears IMO.

[biaggio]

for whatever it is worth, I have picked up a position recently + am hopeful that this cigar butt turns into a prince.

[Guest Bronco]

Biaggio - I wish you luck my brother!  I consider this by far my most risky position, so I am ok with the cigar butt type investment.  Just not normally my style. 

 

Anyway, if you think about it, another year like last year and in theory they could pay off all their LT Debt.

 

Someone made a good point - you pay off all the debt, you buy back all the shares (of course not all), you fund the pension - what is left to do with cash?

 

Either dividends or acquisitions, or it sits there.  When debt is paid down to a level EL feels safe, when pensions are funded as much as they get funded, and when bubyacks are no longer attractive, we will also be in that position.  What to do with the cash?  I hope their is some excitement, but one never knows.

 

Maybe Eddie will merge ESL investments with Sears Holdings and take a 2/20 pay package out of Sears.

[maxprogram]

I don't think Sears is a terrible investment, it does have downside protection -- just not much upside in my opinion. Selling puts is probably a good way to play it if you want to.

 

RE: declining cash flow.  Here are some figures:

                2009    2008    2007
Sales change   -5.8%   -7.8%   -4.4%
EBITDA margin   3.6%    3.4%    5.1%

NI+D/A margin   2.8%    2.3%    3.8%
CapEx % sales  -0.8%   -1.1%   -1.1%
W/C % sales*    0.3%    0.3%    0.2%
               =====   =====   =====
Net FCF margin  2.3%    1.6%    2.9%
* Decline in working capital assuming it goes down at the same level as sales.

 

With minimal capex to maintain the stores (probably a good decision because even with spending they couldn't compete), sales will continue to decline. The only way FCF won't decline with it is if they cut expenses faster. Expenses are already cut to the bone, and any further as a % of sales would further send sales down.

 

Take the Kmart stores. I did the numbers a while back (don't have them handy) but Kmart EBITDAR (op. income before D&A and rent) was somewhere around $10 to $15 per square foot. A normal retailer like Walmart or TGT would never be able to remain a going concern on that figure because maintenance capex and rent would be much higher. Kmart is only still around because they have very little capex and very cheap rent (like $4/sqft vs. $12+ for market). The best thing they can do is close the stores and if able to under lease agreement sublease the property at market. But that also isn't easy in this economy.

[Guest Bronco]

Not to split hairs, but FCF was around $1B in FY08, .5B in FY09, and $1B in FY10.

 

I respect your comments however. 

 

We'll see.  Das Wanderkid...make it happen.

[txlaw]

With SHLD, it's probably wise to assume a continual decline in cash flow from the domestic operations.  But even assuming such a continual decline, I still come up with a runoff value that is higher or equal to the current price.  And that's assuming that cash will just sit there on the balance sheet and not be deployed in any way. 

 

Granted, though, how you value the real estate will have a big effect on what that runoff value is. 

 

The upside comes from Lampert possibly deploying the cash from runoff into great investments/businesses.  Or from buying back shares that trade at a price substantially below runoff value.  So long as it does not affect SHLD's ability to get financing, I'd love to see the price tank so that Lampert could scoop up more shares.

[biaggio]

http://blogs.wsj.com/health/2010/09/10/screening-for-aortic-aneurysms-at-kmart/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+wsj%2Fhealth%2Ffeed+%28WSJ.com%3A+Health+Blog%29&mod=smallbusiness

 

 

Screening for Aortic Aneurysms … at Kmart!

 

 

[bttmline]

I haven't had a chance to dig too much into the real estate side yet, but I can tell you as someone in the commercial real estate industry that it still has value. I have come across 2-3 leases in the last couple of months at $2-3 SF where market is closer to $10 SF with options with minimal or no increases for 50 yrs. Some of the big box tenants such as Kohls, Costo, other value retailers, etc are still doing deals if they are cheap. There will be a new retailer that will able to get a start based on some of these below market deals. Home Depot was able to really get started in the last recession due to a couple large retail bankruptcies. Also, as stated prior its not like they are going to have to market their whole portfolio today at distressed prices. They will have time to slowly wind down unprofitable stores.

[CONeal]

Nice $3.50 special dividend for Sears Canada holders.  Also making a short term loan to parent company.

 

http://www.reuters.com/article/idCAN1010295820100910?rpc=44

 

 

[schin]

If Sears Holding is 90.4% owner of Sears Canada, Sears Holding will be getting some cash back -- albeit double/triple taxation? (2 at SCanada and 1 SHolding?) I wonder what EL will do with it? Pay down debt?

 

Also, do you know the terms of the loan is?

[CONeal]

Since Sears Holdings holds over 80% of the stock they are not taxed for the dividend they receive.  Not sure what the terms of the loan are other than the press statement mentioned it was a 60 day loan.

[Grenville]

If Sears Holding is 90.4% owner of Sears Canada, Sears Holding will be getting some cash back -- albeit double/triple taxation? (2 at SCanada and 1 SHolding?) I wonder what EL will do with it? Pay down debt?

 

Also, do you know the terms of the loan is?

 

The press release is below. It's an interesting transaction. If you include this dividend with the last one a month ago, they have sent out 7 in cash to shareholders. Also, they bought the 10% stake from Ackman earlier in the year for 30. It's a lot of cash sent up to Sears Holding and now you add the 60 day loan. A lot of signs point to the privatization of the remaining 10% stake in Sears Canada, not sure why else you would have a 60 day loan. The 60 day loan would disappear if they bought up the remaining stake in Sears Canada.

 

Should be interesting to see what Eddie Lampert has up his sleeves.

 

Sears Canada Announces Extraordinary Dividend

TORONTO, Sep. 10, 2010 (Canada NewsWire via COMTEX) --

 

Sears Canada Inc. (TSX: SCC) announced today that its Board of Directors declared that an extraordinary cash dividend of CAD $3.50 per share on all Common Shares of the Company, or approximately CAD $376.7 million, will be paid on September 24, 2010 to shareholders of record as at the close of business on September 22, 2010. 

 

The Company also announced that the Board of Directors has approved the Company entering into a CAD $800 million Senior Secured Revolving Credit Facility with a syndicate of lenders.  The closing of the facility is expected to occur on September 10, 2010, and the availability of the facility will be subject to a number of customary funding conditions and to the prior payment or defeasement of the Company's outstanding medium term notes due September 20, 2010.  The facility is expected to be available for five years to fund working capital needs, capital expenditures, acquisitions and other general corporate purposes.

 

The Board of Directors has also approved the Company making a loan of CAD $400 million to Sears Holdings Corporation of Hoffman Estates, Illinois.  The loan is expected to be made within the next five business days and is to remain outstanding for no more than 60 days.

 

Sears Canada hereby notifies shareholders that it designates the full amount of the dividend to be paid on the common shares, to be an "eligible dividend" as defined in subsection 89(1) of the Income Tax Act (Canada), and in any similar provincial and territorial tax legislation.

 

This release contains information which is forward-looking and is subject to important risks and uncertainties. Forward-looking information concerns the Company's plans to enter into the credit facility and the intercompany loan.  Factors which could cause actual results to differ materially from current expectations include, but are not limited to the satisfaction of typical closing conditions.  While the Company believes that these transactions will proceed, there can be no assurance that the applicable conditions of closing will be satisfied.

 

Sears Canada is a multi-channel retailer with a network of 197 corporate stores, 241 dealer stores, 31 home improvement showrooms, over 1,800 catalogue merchandise pick-up locations, 108 Sears Travel offices and a nationwide home maintenance, repair, and installation network.  The Company also publishes Canada's most extensive general merchandise catalogue and offers shopping online at www.sears.ca.

 

SOURCE: Sears Canada Inc.

 

 

[Guest Bronco]

The dividend exclusion is not available to SHLD (at least that is my guess). 

 

SHLD US will pay tax on the dividend, offset by Canadian taxes paid (national and province), or the foreign tax credit.

[Guest Bronco]

Also, the SHLD US will pay tax on the loan from Sears Canada, as it is a deeemed dividend.

[biaggio]

http://www.sec.gov/Archives/edgar/data/1310067/000119312510263486/d10q.htm

 

Earnings out (10Q) this am.

[premfan]

They make most of there earnings in the 4th quarter but, still its a horrendous quarter.

[stahleyp]

I'd like to see sears do well. However, I was there yesterday. I know that my one little store isn't a pure estimate of value...there was almost no one there. I ordered an item online, tried to cancel it, and the online service wouldn't not cancel the order. I emailed them back and forth around 10x. I then went to the store to speak to a manager while I was picking up my item, and they said they couldn't do anything because the system was down. I was very, very disappointed.

[Myth465]

I am still watching Sears. Lamp is crazy like a fox and I would love to see his master plan. I dont think he should be running a public company though. He doesnt communicate his plan to Shareholders which inmo is unfair. We all know his plan isnt to manage those crappy stores.

 

Only time will tell. I never invested because I saw the same thing you saw. I would prefer to go to Walmart instead of Sears, and dont know anyone who doesnt feel the sameway.

[Guest Bronco]

To all our crazy Canadian friends up north, how are the Sears stores above the US border?

 

Same POS?  Or are they well perceived?  It seems like Sears Canada and Kmart are profitable, Sears US sucks (no surprise).

 

As someone mentioned, this is and always will be a 4th qtr FCF story.  Buybacks continue.

 

There was a lot of hype about Lampert several years ago - this has died.  Is he a capital allocator?  Will he be with SHLD?  Will he merge with Autozone (I doubt)? 

 

How successful will internet sales be?  May be a good route to go considering how everyone hates the customer service at the stores.  I know our company, internet sales is the big growth engine and everything else slower. 

 

This is still an interesting story, especially as it becomes either more hated or forgotten.  FCF - 4th quarter...we'll see.