SHLD anyone?

[ShahKhezri]

Anybody have a view on this?

 

"The retailer’s creditworthiness matters to its pension plan beneficiaries because last year, in an unusual move, the Sears pension fund bought $250m of Sears debt."

 

http://www.ft.com/intl/cms/s/0/ba9c98a0-3700-11e1-96bf-00144feabdc0.html#axzz1ib9qtEPZ

 

So just from a pure accounting perspective, it's not a repurchase so he's not recording a "gain" but he thinks they are good enough to buy it for the pension fund. I guess that's one way to hit the 8% target for the pension fund, or whatever their mid-single digit target is. 

 

What if he's waiting for the next round of retail bankruptcies to use pension assets to purchase distressed bonds and gain control.  He really is an intresting figure and so mysterious.

 

 

[txlaw]

Anybody have a view on this?

 

"The retailer’s creditworthiness matters to its pension plan beneficiaries because last year, in an unusual move, the Sears pension fund bought $250m of Sears debt."

 

http://www.ft.com/intl/cms/s/0/ba9c98a0-3700-11e1-96bf-00144feabdc0.html#axzz1ib9qtEPZ

 

So just from a pure accounting perspective, it's not a repurchase so he's not recording a "gain" but he thinks they are good enough to buy it for the pension fund. I guess that's one way to hit the 8% target for the pension fund, or whatever their mid-single digit target is. 

 

What if he's waiting for the next round of retail bankruptcies to use pension assets to purchase distressed bonds and gain control.  He really is an intresting figure and so mysterious.

 

I believe Lampert also issued similar bonds in 2010 to the pension plan. 

 

I liked these transactions because it gave Sears pensioners senior rights to the assets that SHLD controls in case of BK.  Fair is fair. 

[JEast]

Whitman also was pounding the drum on MBIA back when Ackman was shorting it.  We know who won that one

 

From a price only perspective of MBIA - this is true.  However, I am of the belief that once the lawyers and the judges got involved with MBIA then the law changed which flipped the analysis.  In the end, we are in the probability business, not the certainty business.  One could fault Whitman on this specific case, but much like John Bogle, he has been a steward of the mutual fund industry.

 

Cheers

JEast

[stahleyp]

Whitman also was pounding the drum on MBIA back when Ackman was shorting it.  We know who won that one

 

One could fault Whitman on this specific case, but much like John Bogle, he has been a steward of the mutual fund industry.

 

Cheers

JEast

 

I wouldn't really go that far. Long term performance is outstanding (20 years) and past 10 years have been bad. Third Avenue came out with new mutual funds to charge higher fees to client. Yes, clients could get into their funds with a 1.13% expense ratio for $2500. Now, to get that same fund class you gotta put in $100,000. They re marketed it as the "institutional class" but didn't bother lowering the fees to my understanding. They then came out with a new fund with a 1.38% expense ratio and $2500 minimum.

 

http://www.thirdave.com/ta/products-mutual-funds.aspx

[bargainman]

Whitman also was pounding the drum on MBIA back when Ackman was shorting it.  We know who won that one

 

From a price only perspective of MBIA - this is true.  However, I am of the belief that once the lawyers and the judges got involved with MBIA then the law changed which flipped the analysis.  In the end, we are in the probability business, not the certainty business.  One could fault Whitman on this specific case, but much like John Bogle, he has been a steward of the mutual fund industry.

 

Cheers

JEast

 

sorry if you want to be a "steward" you better have lower fees than he does.

 

Yeah I wouldn't put him anywhere near the same class as Bogle.  Vanguard is shareholder owned, I don't think third avenue is.  Plus they have rock bottom fees, are one of the largest in the industry, plus Bogle talks out about all sorts of abuses and excess, I haven't heard Whitman do that.  Bogle is a constant advocate for the individual investor.  I don't know what happened in this case exactly but I read a reasonable amount by Whitman and Ackman.  When Whitman threw in the towel he basically said that he didn't realize he was dealing with toxic management and that was what broke his thesis.

[ERICOPOLY]

When Whitman threw in the towel he basically said that he didn't realize he was dealing with toxic management and that was what broke his thesis.

 

 

"We have interviewed the MBIA people up the kazoo and I am convinced they are utterly responsible, diligent underwriters, and the probabilities are they've done a terrific job," Whitman said.

 

http://www.reuters.com/article/2008/03/04/sppage012-n03399090-oisbn-idUSN0339909020080304

[Rabbitisrich]

When Whitman threw in the towel he basically said that he didn't realize he was dealing with toxic management and that was what broke his thesis.

 

 

"We have interviewed the MBIA people up the kazoo and I am convinced they are utterly responsible, diligent underwriters, and the probabilities are they've done a terrific job," Whitman said.

 

http://www.reuters.com/article/2008/03/04/sppage012-n03399090-oisbn-idUSN0339909020080304

 

Whitman got the monolines completely wrong as exemplified by the ACA Holdings investment. Keep in mind that, unlike Berkowitz, Whitman's thesis actually relied upon Brown and Dunton being strong financial underwriters. Whitman's responses to Ackman never strayed from ad hominem, and he seemed to treat the idea of ratings downgrades as "poor form". I don't remember him speaking up when Brown tried to keep the proceeds of a 2008 equity raise at the holding company, an action that caused the hapless Eric Dinallo to complain, "I thought that we had an understanding."

 

[ERICOPOLY]

When Whitman threw in the towel he basically said that he didn't realize he was dealing with toxic management and that was what broke his thesis.

 

 

"We have interviewed the MBIA people up the kazoo and I am convinced they are utterly responsible, diligent underwriters, and the probabilities are they've done a terrific job," Whitman said.

 

http://www.reuters.com/article/2008/03/04/sppage012-n03399090-oisbn-idUSN0339909020080304

 

Whitman got the monolines completely wrong as exemplified by the ACA Holdings investment. Keep in mind that, unlike Berkowitz, Whitman's thesis actually relied upon Brown and Dunton being strong financial underwriters. Whitman's responses to Ackman never strayed from ad hominem, and he seemed to treat the idea of ratings downgrades as "poor form". I don't remember him speaking up when Brown tried to keep the proceeds of a 2008 equity raise at the holding company, an action that caused the hapless Eric Dinallo to complain, "I thought that we had an understanding."

 

A lot of big ego talking here too:

 

"The analysts -- Ackman and all the others -- have no background in distressed securities," Whitman said.

 

http://www.reuters.com/article/2008/03/04/sppage012-n03399090-oisbn-idUSN0339909020080304

 

 

[Rabbitisrich]

Whitman also was pounding the drum on MBIA back when Ackman was shorting it.  We know who won that one

 

From a price only perspective of MBIA - this is true.  However, I am of the belief that once the lawyers and the judges got involved with MBIA then the law changed which flipped the analysis.  In the end, we are in the probability business, not the certainty business.  One could fault Whitman on this specific case, but much like John Bogle, he has been a steward of the mutual fund industry.

 

Cheers

JEast

 

sorry if you want to be a "steward" you better have lower fees than he does.

 

Yeah I wouldn't put him anywhere near the same class as Bogle.  Vanguard is shareholder owned, I don't think third avenue is.  Plus they have rock bottom fees, are one of the largest in the industry, plus Bogle talks out about all sorts of abuses and excess, I haven't heard Whitman do that.  Bogle is a constant advocate for the individual investor.  I don't know what happened in this case exactly but I read a reasonable amount by Whitman and Ackman.  When Whitman threw in the towel he basically said that he didn't realize he was dealing with toxic management and that was what broke his thesis.

 

That is a bit of revisionism on Whitman's part. His original thesis anticipated excess funds in the case of a runoff. He characterized the 2008 equity as an excess of caution measure intended to pacify the ratings agencies. If you go back to a 1Q08 Third Avenue shareholder letter, his analysis consisted of slicing MBIA CDOs into senior and junior tranches, assuming respective default rates, and then calculating the present value. There was a major assumption that the tranches receive their payments in a vanilla, intuitive fashion and that ratings downgrades do not affect liquidity through forced settlement or collateral calls.

[Rabbitisrich]

When Whitman threw in the towel he basically said that he didn't realize he was dealing with toxic management and that was what broke his thesis.

 

 

"We have interviewed the MBIA people up the kazoo and I am convinced they are utterly responsible, diligent underwriters, and the probabilities are they've done a terrific job," Whitman said.

 

http://www.reuters.com/article/2008/03/04/sppage012-n03399090-oisbn-idUSN0339909020080304

 

Whitman got the monolines completely wrong as exemplified by the ACA Holdings investment. Keep in mind that, unlike Berkowitz, Whitman's thesis actually relied upon Brown and Dunton being strong financial underwriters. Whitman's responses to Ackman never strayed from ad hominem, and he seemed to treat the idea of ratings downgrades as "poor form". I don't remember him speaking up when Brown tried to keep the proceeds of a 2008 equity raise at the holding company, an action that caused the hapless Eric Dinallo to complain, "I thought that we had an understanding."

 

A lot of big ego talking here too:

 

"The analysts -- Ackman and all the others -- have no background in distressed securities," Whitman said.

 

http://www.reuters.com/article/2008/03/04/sppage012-n03399090-oisbn-idUSN0339909020080304

 

Yeah, it was an odd display. If you just read his shareholder letters he is a font of good ideas and sober analysis. Then Ackman challenges his thesis and suddenly he throws his name around.

[BargainValueHunter]

But is it the next Berkshire-Hathaway?

 

YES! (maybe) ;)

 

http://www.forbes.com/sites/moneybuilder/2012/01/05/is-sears-the-next-berkshire-hathaway/?partner=yahootix

 

A well-respected value investor buys an old American company in decline, promising to restore its fortunes. Alas, the recovery never comes. The industry’s economics have changed, and the company can’t compete with younger, nimbler rivals. It ceases operations, but the value investor holds on to the shell to use as an investment vehicle.

 

hmmm...

 

Unless you’re a history buff or a dedicated Buffett disciple, you might not have known that Berkshire Hathaway wasn’t always an insurance and investment conglomerate. It was a textile mill, and not a particularly profitable one. It was, however, a cash cow. And after buying the company in 1964, Buffett used the cash that the declining textile business threw off to make many of the investments he’s now famous for, starting with insurance company Geico.

 

Gotta love forbes... :)

[ERICOPOLY]

Unless you’re a history buff or a dedicated Buffett disciple, you might not have known that Berkshire Hathaway wasn’t always an insurance and investment conglomerate. It was a textile mill, and not a particularly profitable one. It was, however, a cash cow. And after buying the company in 1964, Buffett used the cash that the declining textile business threw off to make many of the investments he’s now famous for, starting with insurance company Geico.

 

Gotta love forbes... :)

 

 

This explains very succinctly the difference that makes SHLD different from early years BRK. 

 

One guy redeployed the cash from a textile mill in order to buy valuable streams of income, and the other guy just returns the cash to shareholders.

 

The two strategies are very different.  Berkshire practically never returns cash, just uses it to diversify the river of profits that's grown to be an Amazon.  Eddie always returns the cash.

 

 

[prevalou]

He is more like  Singleton who bought Teledyne stock at 20, at 14, at every price (everybody was bearish)  and the stock soared a couple of years later.

[prevalou]

In insight, it is easy to see what was high and what was low. Time will tell in Lampert case.

 

[prevalou]

The case of Teledyne shares repurchases is interesting:

 

-first purchase at 16.38$ on 9/14/72

-second purchase at 10.88$ on 12/13/73

-third purchase at 10.75$ on 5/31/74

-fourth purchase at 7.88$ on 12/4/74

 

... I imagine people reaction when he purchased for the 4th time!! Patience is sometimes required...

[prevalou]

Why would Sears borrow money now ? Sears has a credit line,  borrowed long term last year 1 B$+ and cuts its inventory through stores closures.

What the market tells is interesting but don't forget it's Mr Market.

[prevalou]

I don't know if he has zero financial flexibility (borrowing is not the only option). The market thinks so anyway...

[maxprogram]

The case of Teledyne shares repurchases is interesting:

 

-first purchase at 16.38$ on 9/14/72

-second purchase at 10.88$ on 12/13/73

-third purchase at 10.75$ on 5/31/74

-fourth purchase at 7.88$ on 12/4/74

 

... I imagine people reaction when he purchased for the 4th time!! Patience is sometimes required...

 

The difference is not in the price paid for buybacks, but the fact that the value of Teledyne was growing (at a very good rate) while the buybacks occurred. Buybacks are equivalent to re-investing in the assets you currently own. For Teledyne, that was a great proposition.

 

Lampert has been giving long-term shareholders a bigger and bigger share of a shrinking pie. Time is the enemy of a bad business. (In regard to Sears' other assets, as time goes on not only do their retails ops deteriorate but the value of the real estate and brands does along with it.)

 

About a year ago in an interview Berkowitz pointed out that although revenue at Sears has continually declined over the years, revenue per share has remained about the same. In other words, for remaining shareholders (not those who cashed out) the buybacks have been nothing but maintenance or worse.

[prevalou]

http://www.fundinguniverse.com/company-histories/Teledyne-Technologies-Inc-company-History.html

 

Look at 1974 Teledyne history. It doesn't seem to be pretty! There was a reason for the stock plunge

[Guest Hester]

Think of Buffett's best investments in distressed companies. Geico, American Express, Coke, GS & GE, etc...

 

What did they all have in common? The reasons for the distress were removed from the core business. They were a balance sheet/liquidity problem, or a one time marketing snafoo, or a rogue employee. The core businesses were still strong and had moats.

 

Sears, in addition to having a liquidity/funding problem now, has a really really sh*tty core business that is declining, with no moat, negative brand equity, in a really competitive and difficult industry. The amino acids of a successful turnaround aren't present.

 

The junior bonds are trading between 40-50 cents on the dollar, the HTB fees on the stock are 30%, CDS's are soaring, but for good reason.

[mevsemt]

Keep in mind that Eddie is using AZO stock for redemptions, effectively doubling down on SHLD for the investors that are keeping their money with him.  If bankruptcy or liquidity were an imminent concern, my guess is he might be handling the redemptions differently. 

[FCharlie]

Why would Sears borrow money now ? Sears has a credit line,  borrowed long term last year 1 B$+ and cuts its inventory through stores closures.

What the market tells is interesting but don't forget it's Mr Market.

 

I never said they should borrow now. I said they can't. not such a great situation is it? amgen just borrowed $6b and used every penny to buy back stock. esl would probably love to do that. he can't. point? he has zero financial flexibility.

 

Zero financial flexibility is going too far. SHLD will produce free cash flow this quarter. Next quarter they will close 100-120 stores which will produce $150 million of cash as net inventory is sold. If you go back to Q2 2011, in the earnings release, SHLD announced they were closing about 28 stores and they expected annual savings of $50 million as a result. How much will closing 120 stores help? It won't hurt. They aren't going to close profitable stores. If closing stores produces cash, and then they can later sell the building, or sublease the property, that helps too. It's very possible SHLD has been holding open stores that lose money where they pay $2/foot in rent and could sublease for $5/foot... Perhaps Lampert has been holding on in hopes that with a stronger economy, he could lock in leases for $7/foot.  He's a businessman, there has to be a reason why he's kept open loser stores. At the meeting last year he made it pretty clear that there was lots of potential in subleasing stores.

 

Yes. SHLD is doing terribly. Could SHLD fix their problems? I think so. If the problems can be fixed, we'll most likely see share repurchases in the near future. If the problems are too much, we won't. Either way, I think the pessimism on SHLD has hit an extreme here, the same way it usually does with any stock that moves in the same direction for 9 days in a row. At some point, it's priced in.

[Parsad]

The more Sears drops in price, the more I'm intrigued, but let me ask you this:

 

How is the decline in Sears business any different than Office Depot?  There is a fundamental, qualitative change in the shopping habits of the consumers that used to be regular shoppers at Sears.  Can that be fixed by a value investor, who has strategically reduced the amount of capital spent on the retail experience?  I don't think so. 

 

You need a retailer to fix Sear's problems, but allow Lampert to redistribute "excess" cash that isn't used in maintaining the business and making the retail environment appealing to shoppers.  Not excess cash by reducing necessary capital expenditures...Sardar should learn this lesson now, rather than 10 years from now!

 

Another thing is that Sears has been far too slow in making changes...they've been moving the same speed as Europe!  They need to engage in continental shifts in their model, not slow, plodding iceberg moves like the recent announcement of 120 store closures.  They need to close 500-700 stores!  Cheers!   

[Kraven]

The more Sears drops in price, the more I'm intrigued, but let me ask you this:

 

How is the decline in Sears business any different than Office Depot?  There is a fundamental, qualitative change in the shopping habits of the consumers that used to be regular shoppers at Sears.  Can that be fixed by a value investor, who has strategically reduced the amount of capital spent on the retail experience?  I don't think so. 

 

You need a retailer to fix Sear's problems, but allow Lampert to redistribute "excess" cash that isn't used in maintaining the business and making the retail environment appealing to shoppers.  Not excess cash by reducing necessary capital expenditures...Sardar should learn this lesson now, rather than 10 years from now!

 

Another thing is that Sears has been far too slow in making changes...they've been moving the same speed as Europe!  They need to engage in continental shifts in their model, not slow, plodding iceberg moves like the recent announcement of 120 store closures.  They need to close 500-700 stores!  Cheers! 

 

These are good points, especially about there being a fundamental change in shopping habits.  Speaking for myself, it has taken some time to fully recognize and appreciate that.  Perhaps I didn't want to as I grew up at the bookstore, the record store, etc.  Who remembers Tower Records?  Great store that you could spend hours in.  It's hard to give these things up.

 

But for those of us of a certain age, is it really so different then when ATMs became widespread?  Who remembers older people being afraid to use them?  My dad didn't trust an ATM until probably 10 years ago.  But of course we just used it and couldn't imagine having to go into the bank to get cash.  Who also remembers having something like Sprint or MCI and having to dial what seemed like a 50 digit number before you could make your long distance call (try that on a rotary phone). 

 

The point being that things change.  If you can't recognize the future is coming, it will pass you before you know it.

[Parsad]

Sorry, when I said "redistribute", I meant buying back shares, reinvesting in other investments or paying dividends.  I have no problem with anything he does with excess cash, but by not reinvesting in the business cost-effectively, you end up signing its death warrant...and that's what we've seen over the last few years. 

 

Retail is incredibly fickle, and it is very much either a value proposition (Walmart, Target, etc) or experiential (Macy's, Apple Retail Stores, Saks, etc).  When you aren't providing either one, you tend to start losing your market share.  And that loss tends to accelerate the longer the experience or value proposition deteriorates.  The restaurant business is similar.  People excuse the lack of capital costs Steak'n Shake is investing because the value proposition is so damn good.  If Sardar ever raises his prices without investing in the restaurants, you'll see the same thing happen.  Cheers!