SHLDQ - Sears Holdings Corp

[ItsAValueTrap]

Berkowitz told us he sees this as a replay of Berkshire hathaway.

Buffett explains in one of his old shareholder letters why Berkshire Hathaway was a mistake.

 

He should have bought a high-quality insurance business than a declining textiles business that he didn't have the heart to liquidate.

[wknecht]

Not saying this will def happen, but just curious as to what happened to Berkshire Hathaway Textile shareholders once Buffett shuddered operations and began building the BRK of today?  Did he do a tender? What were the mechanics of that transition for the shareholders of the textile mill?

Don't believe there were any tenders, spins, or other such corporate actions.

 

He took control of the company and the textile operations remained in operations for many years after that (maybe a decade). The cash generated by textiles was used to diversified into insurance, banking, and other companies.

[CorpRaider]

Yeah but this guy made a killing in auto parts.  Honestly, if they shuttered K-mart and got rid of the soft lines they would be be pretty competitive in appliances, hardware and electronics. 

[Buckeye]

In my opinion ESL knows all of this but has a few obligations to take care of before he could really run this into his vehicle. And he seems to be cashing out all his partners and buying their SHLD stock, and getting rid of partnerships over time. The only thing constant is SHLD. It makes no sense that he would unwind the partnership he built since 1988 to wind up with a few billion dollars worth of stock in Sears, without him saying he has the ability to continue investing within the SHLD structure, either by acquisition, asset sales or vanilla stocks to increase the intrinsic value of Sears. There simply is no argument for ESL to continue building Sears into a retail comeback story. He is shifting a few things around, selling stores, making a membership rewards program to keep things afloat. And the longer he waits on things the closer he gets to seeing the general housing economy turn in his stores' favor. People will still buy appliances and hardwares at Sears which would improve many metrics like cash flow! He would not be foolish to take that future cash flow and put it back into the business that sucked wind the past ten years, when he can just find better businesses like WEB did.

 

Thats basically my thesis/idea about how ESL views this. I'd do the same thing he is doing if I were CEO.

 

That sounds great, but unlike Buffett, ESL doesn't seem to be very good at communicating his intentions to his partners. Do you believe that's because he first wants to gain control, and then he'll be more open, or just because it's in his nature to be more opaque?

 

In your opinion, his plan is to eventually close his funds, redistribute SHLD shares to his hedge fund investors, and keep his own personal stake to control SHLD and just use that as his permanent capital vehicle?

 

Liberty-

 

I have been rereading Berkshire's Shareholder Letters in order from the beginning and Mr Buffett was never completely clear on what his future plans were.  He was quick at diverting resources into higher return companies and stocks but he did continue to reinvest in the textile industry.  He never mentions (at least in the first 6-7 years) "I am going to liquidate the textile mill and reinvest the proceeds into what will become one of the most respected, profitable companies in the world! :)

 

I wish Mr Lampert would be more fourth coming in his plans, however it does not benefit anyone.  Shareholders can only hope (or trust) that Mr Lampert ,like Buffett at the time, is doing the best with what he has and him divulging anything more would only open him up to being further questioned (or ridiculed) when something didn't go as planned.

 

Just my 2 cents.

 

 

[abitofvalue]

I am confused as to why so many people are convinced that ESL will diversify away from SHLD.  In the past, he has used FCF to buyback shares, increasing his concentration in the business.  Why would he suddenly abandon this strategy? 

 

Maybe like Ackman, he is convinced that a well run retailer is the best compounding machine and he is going to give it a go? I am just curious as to why everyone just assumes that ESL is doing a slow liquidation of the business.  Just because Businessweek had a cover 10 yrs ago that proclaimed him the next Buffet? That doesnt mean he is or will follow the exact same strategy. 

 

Bruce may think that's the best course for ESL to take with SHLD cash-flows but has he actually said that ESL agrees? 

 

 

 

 

 

[krazeenyc]

I own some SHLD.  My take on the situation is that lampert is doing things almost exactly as planned - might feel a bit slow -- but i think he had to wait for real estate to recover. Watch what he is does more than what he says. He's not pouring money into the stores or promoting Sears like crazy to generate sales. He knows that Sears as a department store is dead.  His efforts are almost exclusively focused on the online business  as well as an attempt to get the current Sears customer to shop there more -- rather than to get new occasional shoppers.

 

I expect him to continue doing the same things regarding the real estate -- sell off the best properties -- especially the ones that are extremely valuable to the mall operators and not so valuable to Sears.  I expect them also to continue as quickly as they can close/or redevelop the other stores.

 

As far as the operations of retail I "think" he's trying to change sears such that it can survive with a much smaller footprint (I expect that they'll sell land's end to private equity).

[heth247]

Liberty-

 

I have been rereading Berkshire's Shareholder Letters in order from the beginning and Mr Buffett was never completely clear on what his future plans were.  He was quick at diverting resources into higher return companies and stocks but he did continue to reinvest in the textile industry.  He never mentions (at least in the first 6-7 years) "I am going to liquidate the textile mill and reinvest the proceeds into what will become one of the most respected, profitable companies in the world! :)

 

I wish Mr Lampert would be more fourth coming in his plans, however it does not benefit anyone.  Shareholders can only hope (or trust) that Mr Lampert ,like Buffett at the time, is doing the best with what he has and him divulging anything more would only open him up to being further questioned (or ridiculed) when something didn't go as planned.

 

Just my 2 cents.

 

 

Maybe there was never a clear plan to communicate in the first place, not with ESL, neither with WEB. They all learn and adapt.

 

Yes, retail is very hard to turnaround, but if you did it, it will make a killing for you, especially with a scale like Sears. I would be surprised that a smart man and expert in retail like ESL will not give it a try.  If he tried everything and still cannot make it work, he should have a backup plan and have planted his downside protection planted long before. I believe we are getting very close to that point now with the sharp increase of closed stores recently.

 

[Guest wellmont]

one way esl differs from web is the way he treats his partners. web believes in transparency. he wants everybody he partners with to understand what he is buying and selling and know what it's value is. esl believes in opaqueness. he does not want his partners to know the value of the assets they own.He can then take advantage of them by buying when they sell without complete understanding of the underlying value. web created value by taking cash flow from decaying businesses and buying fabulous business. esl took cash flow and reinvested in his decaying business at more than double the current price. those may well turn out to be smart purchases, but not something web would have done.

[Liberty]

Liberty-

 

I have been rereading Berkshire's Shareholder Letters in order from the beginning and Mr Buffett was never completely clear on what his future plans were.  He was quick at diverting resources into higher return companies and stocks but he did continue to reinvest in the textile industry.  He never mentions (at least in the first 6-7 years) "I am going to liquidate the textile mill and reinvest the proceeds into what will become one of the most respected, profitable companies in the world! :)

 

I wish Mr Lampert would be more fourth coming in his plans, however it does not benefit anyone.  Shareholders can only hope (or trust) that Mr Lampert ,like Buffett at the time, is doing the best with what he has and him divulging anything more would only open him up to being further questioned (or ridiculed) when something didn't go as planned.

 

That's a good point. I've read the early letters, but it's easy to forget how much time passed between each of them... By that count, I suppose that Eddie's strategy might not be as slow to unfold as it might seem when looking at it in real-time.

 

It'll definitely be interesting to see where he goes.

[Myth465]

I think you guys give Eddie far too much of a free pass.

WEB didnt know what Berkshire would turn into, but he kept you informed about what was going on and what the short term plan was.

 

No one knows what Lampert is thinking, all I have read here is speculation for the last 3-4 years.

You may make money here, but you are not a partner inmo. Just a holder of shares.

[racemize]

I think you guys give Eddie far too much of a free pass.

WEB didnt know what Berkshire would turn into, but he kept you informed about what was going on and what the short term plan was.

 

No one knows what Lampert is thinking, all I have read here is speculation for the last 3-4 years.

You may make money here, but you are not a partner inmo. Just a holder of shares.

 

The following is my own personal musings, so don't give it too much weight!  In any event, I kind of wonder if Lampert is just taking a different path than Bilgari to do the same thing.  By that, I mean, it seems like Bilgari is paying himself a lot of money so that he can get full control of BH, and perhaps then go the route of Buffett (or maybe not, perhaps he'll just keep paying himself a lot the whole time).  If we assume that Lampert similarly wants to have full control, the actions that make the most sense is to keep everyone in the dark, try to keep share price low, and keep buying until you've got everything you can get or have enough shares to make sure it is completely your baby.  Then, perhaps he could go the route of Buffett, be more open, and start compounding away.

 

Or perhaps we just want everyone to be Buffett and keep looking at it through that lens...

[bargainman]

one way esl differs from web is the way he treats his partners. web believes in transparency. he wants everybody he partners with to understand what he is buying and selling and know what it's value is. esl believes in opaqueness. he does not want his partners to know the value of the assets they own.He can then take advantage of them by buying when they sell without complete understanding of the underlying value. web created value by taking cash flow from decaying businesses and buying fabulous business. esl took cash flow and reinvested in his decaying business at more than double the current price. those may well turn out to be smart purchases, but not something web would have done.

 

WEB does now.. but apparently when he was running his hedge fund he didn't even tell them his positions, IIRC..  He wasn't always as transparent as he is today...

[arbcon]

I remember some of the old BPL partners selling Berkshire during the 4 year period after they received shares because they couldn't figure out what WB was going to do with the company. Same thing here, but I think the recent increased trend of store closings is important to watch.

[Guest wellmont]

one way esl differs from web is the way he treats his partners. web believes in transparency. he wants everybody he partners with to understand what he is buying and selling and know what it's value is. esl believes in opaqueness. he does not want his partners to know the value of the assets they own.He can then take advantage of them by buying when they sell without complete understanding of the underlying value. web created value by taking cash flow from decaying businesses and buying fabulous business. esl took cash flow and reinvested in his decaying business at more than double the current price. those may well turn out to be smart purchases, but not something web would have done.

 

WEB does now.. but apparently when he was running his hedge fund he didn't even tell them his positions, IIRC..  He wasn't always as transparent as he is today...

 

his investors didn't care. His BPL he is very clear. crystal clear on what the objectives are. And he also gave examples of what he was doing. His investors knew exactly how he was making money for them. He had a plan. They understood it. He was transparent. ESL, otoh, is opaque, and thus creates many situations that are advantageous to him. He is also waiting out his "partners". he is making owning this company so unbearable and so pointless that they just give up and sell shares at $41 because he isn't doing anything to create value for them. esl is draining the swamp. And when esl or shld has capital, they will take those shares at advantageous prices. If you figure out this game, and stay for the ride with esl, you will probably make money in the end. but you have to understand that he doesn't necessarily want you to win imo.

[Myth465]

Why does everyone assume that people who arent Buffett and dont behave like Buffett, will build a Buffett like empire (SHLD, Biglari). Isnt it safer to assume that people doing there own thing, will simply do there own thing.

 

Just because a guy talks about FCF, ROIC, Moats, and shareholders as partners doesnt make him Buffett.

 

Running a hedge fund and not telling your positions, because your partners would nag you or cash you out is one thing. When you tell them you will give them a letter once a year, and dont want to talk to them outside of that, and they agree to it thats one thing. Running a private company with pretty much no direction given to what the plan is is something completely different.

[Liberty]

Anyone know off the top of their head what's the most recent interview in which Berkowitz talks about SHLD?

[tripleoptician]

I always thought the slow liquidation made sense given the sheer size of Sears. If ESL made it clear his intentions to liquidate the brands and real estate (both expensive and cheap properties)as fast as possible, would this not affect his negotiating power with Asset sales? It seems similar to Chesapeake's situation who is definitely getting lower asset sale prices given that everyone knows they need to service their debt and don't have the luxury to be patient for optimal pricing. Is there a liquidation of a big box retail property assets that has occurred quickly on a comparable size to Sears? Were the asset sales done at firesale or reasonable pricing?

 

To continue attempting to modify the retail strategy would also make sense to slow cash burn as much as possible so acquirers don't feel Sears is in total desperation mode. The added benefit that ESL gets to acquire a greater controlling stake is his potential permanent asset vehicle. The online strategy and "shop your way" strategy seem to be a bridge being established to help continue sales and slow cash burn once square footage begins to decrease from property sales. This doesn't imply ESL is hell bent on a retail turnaround but may be optimizing strategy to ensure acquirers don't see him as desperate.

 

I guess I'm wondering would current shareholders truly benefit if ESL stated in his annual Sears letter or conference call that he plans to liquidate all assets in a 1,2 or 3 year time frame? This may cause short term benefit as it may adjust the short thesis view of the company but I don't think current shareholders would end up with the maximum asset value if everyone was confident he wanted to sell assets as quick as possible. I suppose the biggest variable here would be the rate of cash burn by continuing the retail operations vs. optimizing asset sale pricing.

[texual]

The partners in Buffetts fund didn't understand why Buffett felt like cashing out. He said he couldn't find any values. But thats crap because he went on to find plenty of value for the next several decades and build his own company. What he didn't tell you was that he felt more comfortable building capital within a public company like Berkshire rather than in his hedge fund. I highly doubt he thought being the owner of a textile mill beat his earnings as a hedge fund operator. A guy who routinely made 30% a year could never in his wildest dreams come up with returns that great running a textile mill. Seriously, think about that for a moment.

 

He chose to close his fund, to run a textile mill.

 

How could he become a rich man running a textile mill?

 

Why he did that, we will never know. Actually we do. He chose to diversify exactly as his brain is wired: take cash and make it work for him. He found it wasn't working buy investing in the mills. But he still tried it, in fact the company he took over in 1965 closed the last looms in 1985. Thats twenty years, and a smart man like him most likely figured it was over many years before he finally closed them. Sears is even bigger than Berkshire mills. I expect those stores to be open for many years before the lights shut off. But until then he has the potential to capture cash as long as he controls inventory, closes stores smartly, and redeploys his investments in technology. That plus a rising tide makes this a good company to keep investing in (albeit small amounts of money).

 

ESL may have profited greatly from the hedge fund golden age, basically the 80's through the late 2000's and even today when the market is at all time highs. But that trend may be too volatile and at a disadvantage having limited partners who only care to make money within a few years. But ask yourself the same question that Buffett followers in 1965 may have asked themselves: would running the retail company Sears be BETTER than running your hedge fund? Could you be a rich man running this dying store: The answer is NO!!!

 

ESL may believe his future is tied to the public company of Sears, because its PERMANENT CAPITAL and he controls the company!

 

Using the logic I just outlined, he is in the same position as WEB except he has more to work with. So it appears hes trying a lot more harder than WEB to keep his company afloat, but he has no choice, its just so much bigger.

 

A: the market improves and his stores go back to black and generate cash flow, and each year improves considerably. or B: he sees no end in sight to the bloodbath and allows the company to just go on as is. In that case he sells off as much as he can, takes the cash and begins investing or buying other stuff. This is the logical conclusion to the story. I'm not being delusional or mythologizing the guy. I'm simply telling you that as a smart operator there are exit doors to both the textile mill and retail stores. And both these guys wanted to advertise nothing during the period where they consolidated control. To signal to the market that ESL was going to buy public stocks and run the next Berkshire (2004 Businessweek) shot the shares from 30 to 200 dollars/share in short order. He didn't want that because it makes his company too expensive to control. What he did instead was go radio silent for almost a decade and let the stock collapse. He buys millions of shares and lets Wall street write it off. Only him and Fairholme own most of the remainder, so whenever they do make a move, the market won't be able to participate in that outcome. They win, basically.

[texual]

I also want to make it clear that ESL didn't just go 'silent' and let the stock collapse - the company truly got hammered in both the investing community as well as in real life/economics. The stores were too big, dilapidated, overstocked and completely noncompetitive with their peers. Sears and Kmart got their fair licking by shoppers as well as wall street, all 100% deserved. Shame on ESL for letting things get worse because he may have been able to avoid some crunches had he not purchased that many shares. Or he should have sold more stores and closed locations faster. But that is what it is. He's accountable fully now. He sits in the chairman seat, and the CEO. The onus is on him going forward to increase the worth of the stock for both his own partners and his legacy. I don't think he will watch this collapse on him. And I believe Fairholme will help him when the time comes.

[CorpRaider]

So far he's more of a Pep Boy than a Buffett...

[Sportgamma]

I don´t have a dog in this fight but come on guys...things aren't as black and white as that. Its not like your either the Second Coming or a plain deuce. He does not have to be a mini-Warren to be a good capital allocator. John Malone was not really spelling it out for his fellow shareholders when he created Liberty, did he?

http://www.forbes.com/forbes/1999/1018/6410126s1.html

 

I do agree with those saying that when Buffett was breaking up the Partnership things definitely weren't that crystal clear. And secondly, as already pointed out, perhaps its in the best interest of the shareholders that Lampert holds his cards to his chest. I mean, here we have a very capable guy who has been compounding capital at 25% for 14 years, sharp enough to negotiate himself out of a hostage situation and then suddenly he went plain dumb? If we simply follow his behaviour, we see that he is deliberately opting for Sears over everything else, time and time again. Perhaps he got overconfident, found himself in a hole but could not stop digging. I just don´t find it very probable. 

 

All I´m saying is that you can disagree with what he is doing but is Lampert really someone you would bet against?

[Myth465]

All I´m saying is that you can disagree with what he is doing but is Lampert really someone you would bet against?

 

The choice is not against or with him.

Its do you even want to bet, thats the question, inmo.

 

So far no for me. I just watch and year after year people predict a Buffett like transition.

They may be right, but its been a long wait indeed.

[krazeenyc]

Not News -- more like interesting reading.

 

http://www.businessweek.com/articles/2013-07-11/at-sears-eddie-lamperts-warring-divisions-model-adds-to-the-troubles?campaign_id=yhoo

 

 

[Liberty]

Not News -- more like interesting reading.

 

http://www.businessweek.com/articles/2013-07-11/at-sears-eddie-lamperts-warring-divisions-model-adds-to-the-troubles?campaign_id=yhoo

 

Thanks for posting. They sure do a good job of making it seem like everybody in the company disagrees/disagreed with Lampert's way of doing thing (which doesn't mean that he's wrong, but it's also different from Buffett's approach of flattering its managers and employees and making them want to work extra hard and do him favors).

 

Update:

 

Appliance maker Kenmore is a widely recognized brand sold exclusively at Sears. Under SOAR, the appliances unit had to pay fees to the Kenmore unit. Because the appliances unit could make more money selling devices manufactured by outside brands, such as LG Electronics, it began giving Kenmore’s rivals more prominent placement in stores. A similar problem arose when Craftsman, Sears’s beloved tool brand, considered selling a tool with a battery made by DieHard, also owned by Sears. Craftsman didn’t want to pay extra royalties to DieHard, so the idea was quashed. [...]

 

The bloodiest battles took place in the marketing meetings, where different units sent their CMOs to fight for space in the weekly circular. These sessions would often degenerate into screaming matches. Marketing chiefs would argue to the point of exhaustion. The result, former executives say, was a “Frankenstein” circular with incoherent product combinations (think screwdrivers being advertised next to lingerie).

 

Eventually Lampert’s advisory committee instituted a bidding system, forcing the units to pay for space in the circular. This eliminated some of the infighting but created a new problem: The wealthier business units, such as appliances, could purchase more space. Two former business unit heads recall how, for the 2011 Mother’s Day circular, the sporting-goods unit purchased space on the cover for a product called a Doodle Bug minibike, popular with young boys.

 

In the weeks leading up to Black Friday in 2011, Sears discovered that some of its rivals planned to open on Thanksgiving at midnight. Sears executives knew they should open early, too, but couldn’t get all the business unit heads on board, according to former executives. (A Sears spokesman says the decision “was not contingent on the business unit structure.”) Instead, the stores opened early the following morning. One former vice president drove to the mall that night and watched families pack into rival stores. By the time Sears opened, he says, cars were leaving the parking lot.

[enoch01]

Not News -- more like interesting reading.

 

http://www.businessweek.com/articles/2013-07-11/at-sears-eddie-lamperts-warring-divisions-model-adds-to-the-troubles?campaign_id=yhoo

 

Thanks for posting.  Shareholders today get to benefit from the many lessons learned during this attempted turnaround.