SHLDQ - Sears Holdings Corp

[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.

[texual]

Perhaps the real truth ESL is trying to discover/learn with time is that pure online retail isn't so profitable (amazon). And neither is pure brick & mortar (sears, jcp) going forward. But a hybrid, that might be something. Something in the middle of being successful and makes us all happy. And whoever gets that combination right first, could have a nice outcome.

 

Target doesn't have it. Walmart is trying but so far not looking so smart. In fact I think the only retailer that is taking a serious look at how they can incorporate their physical stores and online presence is Nordstrom. They snapped up a few startups that were nimble and focused on flash-sales and Pinterest/social sharing. So far I think it may work for their niche (higher end fashion), which tends to be a really good business for sharing among friends on social networks.

 

So ESL purchased a startup in 2009 (Delver) who worked on the original social network which eventually became SHOP YOUR WAY. Now I still think its a bit premature. But when it first came out, it was strictly online-only. It was a site that kind of hooked up into the Sears.com domain and kind of felt like you weren't getting any interaction with the store. Today they've changed it to become a physical brand. You get a card that works on the site and store, you see the benefits in store, you get rewards that transfer between your store experience and on the site. It still isn't anything special but it now has millions more members. And the stores matter a lot for this to work. It didn't take a lot of money to create this rewards program and I think they'll have a good set of data to work with.

 

As Fairholme said: if the retail works on its own merit its a grand slam home run.

 

But if you ask ESL he would say if the online part wins its a grand slam home run startup. He would add that it requires the physical stores to make it a really powerful combination of logistics, speed and enhances customer options. 

 

BOTTOM LINE: a lot of time is necessary to figure out exactly how to be as big as Amazon online, but allow customers to use the stores as a platform to bridge it all together. And to give customers a reason to shop again, using rewards and social networking to spread the brand.

[texual]

Ericopoly I would also add that while it sounds like there is less cash in the company using those buybacks, I would say ESL most likely had no intention of ever spending it on a store remodel or R&D. Ultimately his investment that he decided on was to build online capability. In fact that seems to be the only area of the company he is completely willing to invest capital in. But he also achieved what he said he wanted to do, which was building a members company. A few hundred million were spent on this effort but the remainder was available to do something like a buyback.

 

We think it was foolish to buy back stock at inflated prices. But he also knows this and doesn't feel too badly because someday the stock prices will be much higher than his average buyback. He pretty much alluded to this when I was at 2010's meeting.

 

Bottom line on this issue: Sears doesn't need much capital to run itself. They actually benefit by selling those underperforming stores as a consequence, in the long run too. I would be much less pleased with a dividend or a store remodel or anything aside from the buyback. If only he had kept buying back shares the past two years...

 

However I will give you 100% credit on your last paragraph - he SHOULD have invested that capital in other businesses. I would have much liked Restoration Hardware as part of holdings. He also took a look at JCrew. That would have been sweet. I'd be really happy knowing he was going to invest capital on smaller retailers that he could grow, or integrate over time. Instead we have a few less shares. Shame.

[ERICOPOLY]

As Fairholme said: if the retail works on its own merit its a grand slam home run.

 

But if you ask ESL he would say if the online part wins its a grand slam home run startup. He would add that it requires the physical stores to make it a really powerful combination of logistics, speed and enhances customer options. 

 

That's the nail on the head.  This investment works if the retail "turnaround" happens.  Or perhaps it's a "startup" that needs to succeed.  IMHO there is no other path to glory here because as long as they are trying to do that, there won't be a liquidation.  But look, if this stock is still at $40 in 7 years I will have lost 50% (or perhaps more) relative to what I can make in Wells Fargo (IMHO) over those same 7 years.  So really, it's all about the glory or nothing.  That means the retail strategy sure as hell needs to succeed. 

 

 

[ERICOPOLY]

And I suppose that's how I differentiate an investment in SHLD vs 2011/2012 vintage BAC.

 

It was much easier to imagine BAC earnings 13% on tangible equity.  That launches BAC from $5 to $20 over lets say 3 years roughly.

 

In this case, I have to imagine SHLD retail turning around and thriving.  Fuck me. (sorry for the rude language)

 

 

[texual]

That means the retail strategy sure as hell needs to succeed. 

 

At least you have somehow come to terms with what I also had to wake up to. This is not pie in the sky investing anymore. This is real no-guts-no-glory stuff. I've seen lots of people throw their hands up on this investment in particular. They have a totally different and almost fantastic idea of what should happen here. They forgot this is like Google. 98% advertising, and Android/Google glass and self driving cars get all the spotlight. Real investors know the truth. Google is an advertising company.

 

Sears is a retailer.

 

I like to warn everyone who gets interested in SHLD of that. Its important that we stop discussing real estate as an exit. It never was for ESL, and it can really harm your investment strategy thinking that way!

[ERICOPOLY]

ERICOPOLY loving your comments, you are showing why many consider you one of the great analyst on the board.

You are asking all of the right questions.

 

Well, I hope I was right about Australia -- sounds like you find it a great value.  I think it's a gem, it's just that they would tax me all to hell because of the Roth IRA. 

[plato1976]

Australia is a great value and a gem ?

 

ERICOPOLY loving your comments, you are showing why many consider you one of the great analyst on the board.

You are asking all of the right questions.

 

Well, I hope I was right about Australia -- sounds like you find it a great value.  I think it's a gem, it's just that they would tax me all to hell because of the Roth IRA.

[goldfinger]

I like to warn everyone who gets interested in SHLD of that. Its important that we stop discussing real estate as an exit. It never was for ESL, and it can really harm your investment strategy thinking that way!

 

What about the non guarantor structure?

[ERICOPOLY]

I like to warn everyone who gets interested in SHLD of that. Its important that we stop discussing real estate as an exit. It never was for ESL, and it can really harm your investment strategy thinking that way!

 

What about the non guarantor structure?

 

I think what he meant is that you'll suffer large opportunity costs if the retail doesn't work out.  They intend to plug away at the retail results until it turns around.  So lets say that instead you have more than doubled your money over that same period invested in WFC.  Well that's effectively a 50% loss if you take a chance on SHLD and only walk away with your same original $40.  Or at least the guy who instead invests in WFC could then lose 50% of it and be right back to where he would have been if he bought SHLD.  So it's either do very well in SHLD or you effectively lose.  In that sense SHLD is risky even with the non guarantor structure -- probably a greater chance of not doubling that WFC.  And WFC has effectively very tiny risk of total wipeout, so might as well think of it as non guarantor type safety.

 

 

 

[goldfinger]

I think what he meant is that you'll suffer large opportunity costs if the retail doesn't work out.  They intend to plug away at the retail results until it turns around.  So lets say that instead you have more than doubled your money over that same period invested in WFC.  Well that's effectively a 50% loss if you take a chance on SHLD and only walk away with your same original $40.  Or at least the guy who instead invests in WFC could then lose 50% of it and be right back to where he would have been if he bought SHLD.  So it's either do very well in SHLD or you effectively lose.  In that sense SHLD is risky even with the non guarantor structure -- probably a greater chance of not doubling that WFC.  And WFC has effectively very tiny risk of total wipeout, so might as well think of it as non guarantor type safety.

 

I was just probing for estimates of the value of the real gems...

[CorpRaider]

Didn't someone just quote ESL a couple pages up saying something like:  we are first a real estate company and secondly a retailer? 

[Luke 532]

That means the retail strategy sure as hell needs to succeed. 

 

At least you have somehow come to terms with what I also had to wake up to. This is not pie in the sky investing anymore. This is real no-guts-no-glory stuff. I've seen lots of people throw their hands up on this investment in particular. They have a totally different and almost fantastic idea of what should happen here. They forgot this is like Google. 98% advertising, and Android/Google glass and self driving cars get all the spotlight. Real investors know the truth. Google is an advertising company.

 

Sears is a retailer.

 

I like to warn everyone who gets interested in SHLD of that. Its important that we stop discussing real estate as an exit. It never was for ESL, and it can really harm your investment strategy thinking that way!

 

With all due respect, I don't think this is accurate.  SHLD is both a retailer and a real estate company... with the margin of safety being found in the real estate and the highest upside in the retail (but still very good upside in the real estate when monetized).  I believe my viewpoint is confirmed by what Lampert himself has said.  He has talked a lot about wanting to make retail work, but he also admitted the following as early as one year ago:

 

http://www.memphisdailynews.com/news/2012/may/3/sears-execs-say-retailer-financially-strong//print

"We can't deny that we're, one, a real estate company, and two, a customer company," Lampert said.

 

No company that views themselves as a retail company first and foremost would say that customers are our #2 priority.  Lampert is trying to make the retail work (and I think he'll succeed with ShopYourWay), but he knows that real estate is where SHLD's value currently resides.  If ShopYourWay is wildly successful, awesome.  But the value is in the real estate currently (and the brands, inventory, etc).

[Luke 532]

Didn't someone just quote ESL a couple pages up saying something like:  we are first a real estate company and secondly a retailer?

 

Whoa, I was just copying that quote into the post I just made and you submitted this at the same time. :-)

[Luke 532]

This is what I recall from reading Snowball.

 

In the early days of Berkshire Buffett used part of the cash he squeezed out of the textile business to repurchase shares.  Buffett first invested in Berkshire in 1962 and assumed control in 1965.  From 1962 to 1975 Berkshire reduced its shares outstanding from about 1.6 million to slightly under 1 million.  Many of the shares were repurchased from Buffett's previous partners.  Warren gave them enough information about the business, but just enough. 

 

Currently re-reading some old message board posts.  The quote above speaks to the theory that SHLD is Lampert's mini-Berkshire.

 

Do the actions in the above quote sound familiar?  Who has repurchased a good chunk of shares?  Who is repurchasing shares from partners?  Who is giving information and making moves to show what he is doing, but stops short of spelling-it-out?

[texual]

"We still have the paradigm of trying to improve our operations but realizing we have a (real estate) asset base that deserves a return."

 

That's the following line after the quote. In context he made a blunt statement to a question directed at him about how the real estate can be used to assist the value proposition for shareholders. His answer is right but only addresses the real estate and not the aim of his efforts. He says the paradigm is to bring Sears into a better operational situation. It is unlikely he can do that without selling some stores and so yes Sears is a retailer with a real estate component but they are diametrically opposed after you sell off the unprofitable stores.

 

Think of it this way, when he sells the last of the bad stores he's left with good ones. If he wants to fix the retailer he can't sell the good ones and so the real estate thesis only lasts up to a certain point. He can't sell all the stores and can't sell the great ones without damaging the operations. I believe if one day he says that's it the retailer can't be salvaged then I will agree he's got a real estate company. Right now the reality is he's got a lot of retailing to figure out.

 

Love the investment potential but also grounding myself with how hard this balancing act is.

 

 

[Luke 532]

Real investors know the truth... Sears is a retailer.

 

I like to warn everyone who gets interested in SHLD of that. Its important that we stop discussing real estate as an exit. It never was for ESL, and it can really harm your investment strategy thinking that way!

 

I agree, real investors know the truth.  Would we classify Lampert and Berkowitz as real investors?  I would think so, given they are arguably the best hedge fund manager and best mutual fund manager (both definitely in the top 5 of their respective industries).

 

Berkowitz: "My largest real estate play is Sears."

 

Lampert:"We can't deny that we're, one, a real estate company, and two, a customer company," Lampert said.

http://www.memphisdailynews.com/news/2012/may/3/sears-execs-say-retailer-financially-strong//print

 

And these comments weren't made 5 years ago.  Berkowitz's was November 2012, Lampert's was May 2012.

 

And they both have some very serious conviction in their positions.  SHLD is Lampert's #1 holding.  As of September 2012, SHLD is Berkowitz's #2 holding (haven't checked in awhile but I would imagine it has dropped to #3 based on BAC value increasing in the past year).

[Luke 532]

I believe if one day he says that's it the retailer can't be salvaged then I will agree he's got a real estate company. Right now the reality is he's got a lot of retailing to figure out.

 

Love the investment potential but also grounding myself with how hard this balancing act is.

 

Yes, retailing is a challenge.  But isn't it nice to have a real estate company in your back pocket if the retailing fails?  That's the margin of safety in this investment.  That's why guys like Berkowitz have gone on record saying I can't see how I lose on this long-term.  It points to the real estate as a real and tangible asset that serves as a safety net of sorts.

 

Lampert is positioning for both outcomes.  He's got the good stores and ShopYourWay on the retail side, and he's got Seritage and others on the real estate side.  Not to mention the brands, inventory, auto service business, home service business, etc.  I might be wrong in the end but I view this as heads I win big, tails I still win.

[jeffmori7]

I believe if one day he says that's it the retailer can't be salvaged then I will agree he's got a real estate company. Right now the reality is he's got a lot of retailing to figure out.

 

Love the investment potential but also grounding myself with how hard this balancing act is.

 

Yes, retailing is a challenge.  But isn't it nice to have a real estate company in your back pocket if the retailing fails?  That's the margin of safety in this investment.  That's why guys like Berkowitz have gone on record saying I can't see how I lose on this long-term.  It points to the real estate as a real and tangible asset that serves as a safety net of sorts.

 

Lampert is positioning for both outcomes.  He's got the good stores and ShopYourWay on the retail side, and he's got Seritage and others on the real estate side.  Not to mention the brands, inventory, auto service business, home service business, etc.  I might be wrong in the end but I view this as heads I win big, tails I still win.

 

Head i wing big, maybe, but when? As Eric pointed out, we don't know when this could happen, so it affects our return in a big way. Sure we won't loose a lot, but this could stay flat for a while and Eddy isn't buying back share anymore.

[Luke 532]

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.

 

Let's say we have a $10,000,000 company with 10,000,000 shares outstanding ($1/share).  A $500,000 dividend is issued ($0.05/share).  Lampert owns 2,000,000 (ownership is 20%) shares so he receives $100,000 as a dividend.  He reinvests at $1/share and his share count is now 2,100,000.  Ownership is now 21% (up from 20%).

 

On the other hand, let's say they repurchase shares at $1 using that $500,000.  Share count decreases to 9,500,000.  Lampert still owns 2,000,000 shares but now his ownership percentage is 21.05% (instead of 21.00% with dividends reinvested).  I know 0.05% seems insignificant, but why choose 21.00% ownership when you can just as easily choose 21.05%?  I'd certainly take the latter.  And this doesn't even factor in tax advantages, reducing the share count for a potential short squeeze, etc.

 

I believe Lampert cares most about the shareholders that want to hold this for the next few decades, not the shareholders that need cash in their pockets today.  Repurchasing shares instead of issuing dividends attracts the investors he wants in his permanent capital vehicle as it makes the most sense, and provides the most value, on a long-term basis.

 

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.

 

But Lampert effectively IS buying more businesses with the share repurchase.  Since SHLD already has a handful of businesses under its umbrella when shares are repurchased he is buying a larger concentration of each company within SHLD as his personal holdings increase in ownership percentage.  Some might say, "yeah, but the businesses aren't profitable and aren't solid companies."  I would argue that he is basically buying them for ZERO cost.  On a sum-of-the-parts valuation Seritage, ShopYourWay, home service business, auto business, etc. all have a price of ZERO. 

 

I sure as heck am interested in buying the #3 online retailer for zero.  And the $3B/sales per year auto business for zero.  And an 18M square foot REIT for zero.

[Luke 532]

I believe if one day he says that's it the retailer can't be salvaged then I will agree he's got a real estate company. Right now the reality is he's got a lot of retailing to figure out.

 

Love the investment potential but also grounding myself with how hard this balancing act is.

 

Yes, retailing is a challenge.  But isn't it nice to have a real estate company in your back pocket if the retailing fails?  That's the margin of safety in this investment.  That's why guys like Berkowitz have gone on record saying I can't see how I lose on this long-term.  It points to the real estate as a real and tangible asset that serves as a safety net of sorts.

 

Lampert is positioning for both outcomes.  He's got the good stores and ShopYourWay on the retail side, and he's got Seritage and others on the real estate side.  Not to mention the brands, inventory, auto service business, home service business, etc.  I might be wrong in the end but I view this as heads I win big, tails I still win.

 

Head i wing big, maybe, but when? As Eric pointed out, we don't know when this could happen, so it affects our return in a big way. Sure we won't loose a lot, but this could stay flat for a while and Eddy isn't buying back share anymore.

 

Agreed, the timing aspect is a negative as we don't know when.  But when I can't kill a company and one of the biggest reasons to not own it, in my opinion, is I will have to be patient and possibly suffer opportunity cost of other investments, well, that's something I can live with.  As Berkowitz says, "I don't predict, I price."  I don't know when, but to me it speaks volumes if the worst thing that can happen is the stock sits for 10 years at this price and I effectively only lose purchasing power of my money not growing and keeping up with inflation... with the upside that can be several multiples of the current stock price?  To me, that's almost "margin of safety" defined in a single sentence.

[Liberty]

Think of it this way, when he sells the last of the bad stores he's left with good ones. If he wants to fix the retailer he can't sell the good ones and so the real estate thesis only lasts up to a certain point. He can't sell all the stores and can't sell the great ones without damaging the operations.

 

People talk a lot about "good" and "bad" Sears stores as if they were static, but the question is, are "good" stores stable or improving, or are they also getting worse over time? Is the low reinvestment into stores combined with general shopping trends hurting the retail operations and slowly turning even good stores into bad ones? Is the improvement in the economy/housing market going to be enough to push back the needle far enough in the other direction and more than compensate, especially if it's slow?

 

Maybe what ESL did with KMart in the early 2000s couldn't be done as easily today because e-commerce/Walmart/Costco/Target/etc are all stronger, and department stores are weaker.

[fareastwarriors]

What is that famous saying?

 

"Turnarounds seldom turn."

[Luke 532]

What is that famous saying?

 

"Turnarounds seldom turn."

 

It's not a turnaround in the traditional sense.  It's transitioning to a lighter footprint and more focused online model.  And if that's successful it's all gravy.  Worst case is they go the monetize real estate route, which is a bargain at today's price all by itself.

 

And I can think of one turnaround in particular that "failed" and the company is now arguably the most well-respected company in the entire investment world. 

 

SHLD isn't Sears.  It's a conglomerate of companies that are priced to all die (#3 online retailer, #1 appliance brand, $3B sales/year auto business, 18M sq ft REIT, etc.).

[texual]

Some might say, "yeah, but the businesses aren't profitable and aren't solid companies."  I would argue that he is basically buying them for ZERO cost.  On a sum-of-the-parts valuation Seritage, ShopYourWay, home service business, auto business, etc. all have a price of ZERO. 

 

I sure as heck am interested in buying the #3 online retailer for zero.  And the $3B/sales per year auto business for zero.  And an 18M square foot REIT for zero.

 

Level with me here man. I'm playing devils advocate with everyone because I think that helps us think clearly, and make better investment choices. Don't take anything I write here as inflammatory or personal. I'm a shareholder for many years in SHLD and agree with your underlying concept but I would like to challenge them and find holes to see if they can be plugged.

 

I'd like to tell you I've found a way to kill the company. I know everyone believes that this is just not possible because Bruce Berkowitz said so. And they buy more shares. But theres actually one really good way I can see this company getting killed and its that the reputation of Sears remains negative among the public. The stores continue to look bad, the merchandise doesn't sell, and less people visit the stores. Each quarter the same store sales go down, the customer traffic declines, less people return. More of the customer base dies. Eventually they can't keep up with the decline and the stores have to be closed faster, some at even a loss to the overall 'network' effect of having a store in the community go away.

 

Yes its true. The company can die. It can be a slower version of JCP too if ESL starts investing in store upgrades, a 'store within a store' model he earlier was a fan of. He could just wind up in the same position as JCP even if it takes longer and isn't so dramatic. The company can wind up in bankruptcy or worse, just spend a decade getting worse before its too late for any of us to see the thesis play out.

 

As for buying all those parts of the company at ZERO cost. Listening to that sounds great but you ignored the elephant in the room. This is like saying you want to buy into Google because they are the future of self driving cars and wearable tech. You can even argue they are spending such little money on those pieces of the future too. In fact it doesnt move the dial. If/when wearable tech is available, Google may not be the benefactor or take a lot of marketshare. They proved that with Android, its the market leader but makes little money for them. ShopYourWay may not even make them any money. You also have to attach that to the overall company which is many many times greater. We are talking 40bn a year sales to Seritage/a few pieces that look promising to you? I always look to tech blogs that showcase Google products and launches as being significant when in truth their money is made in something very bread/butter. Its advertising. For Sears it isn't going to be a real estate venture, its going to be same store sales, sales per square foot, customer traffic, online sales.

 

I also have my reservations about the ESL/Buffet Partnership comparison with BRK/SHLD. If ESL is a student of history and I am certain he is, he would know by now that he is literally copying WEB's journey. But if he was aware of what happened to the mills, and how Sears is equally likely to fail as a store, why is he doing this? Is he planning to hold onto the core operation for 10, 20 years and then giving it up? And then he decides to invest in other stuff? ESL isn't a big enough owner to be as concentrated as WEB who owned about 33% of BRK, but if that is the only reason ESL is still running this company, hes made a foolish 10 year bet that he could have fixed by sacking the company and allowing its shares to plunge and he could buy all he wanted and then invest to his hearts content. It makes no sense in the history of BRK that ESL would do the same thing Buffett later lamented.

 

But theres always the moral aspect of keeping the company and employees around, and to do the right thing. I don't know if ESL really anticipated that he may have to do this for 20 years before he can finally say he gave it a shot...