SHLDQ - Sears Holdings Corp

[Grenville]

The reason I thought the guarantor/non guarantor structure was interesting is that it gives you some insight into how the company could be divided. When you look at the cash flow statement from operations in the 10Ks, you see 1bln in cash flow consistently from the non guarantor sub while the non guarantor has most of the losses.

 

This could be interesting if in some scenario you split off the guarantor sub into its own entity. It also looks like a majority of the pension liabilities are in the guarantor sub. However, it's hard to determine how much of the 1bln number is dependent on the guarantor sub. In addition, when the company was buying back stock, it was doing it through the guarantor sub.

 

In my mind, its hard to see a split of the two. People have pointed to the split financials as a source of value that resides hidden.

 

You mean most of the losses in the guarantor, right?

 

 

Yes. I fixed my earlier post.

[Kraven]

The reason I thought the guarantor/non guarantor structure was interesting is that it gives you some insight into how the company could be divided. When you look at the cash flow statement from operations in the 10Ks, you see 1bln in cash flow consistently from the non guarantor sub while the non guarantor has most of the losses.

 

This could be interesting if in some scenario you split off the guarantor sub into its own entity. It also looks like a majority of the pension liabilities are in the guarantor sub. However, it's hard to determine how much of the 1bln number is dependent on the guarantor sub. In addition, when the company was buying back stock, it was doing it through the guarantor sub.

 

In my mind, its hard to see a split of the two. People have pointed to the split financials as a source of value that resides hidden.

 

You mean most of the losses in the guarantor, right?

 

But yeah, it's a way of seeing where the value perhaps resides. On the one hand you have all the retail in the guarantor while the non guarantor has some trophy properties (maybe), but has Kenmore, Craftsman and Diehard. Now that I think of it though the guarantor would seem to have Lands End, tons of other real estate plus about $27/share in DTAs with a valuation allowance against them.

 

I think at the end of the day it won't really matter how they are split up.

 

The interesting thing to me would be to start with TBV and work from that to come up with some kind of baseline valuation. Add in the DTAs, Lands End, KCD, real estate, etc and its quite possible there is good value here.

 

Good posts, Kraven. I've been trying to explain the guarantor/non-guarantor myth for a while, but I'm mostly just ignored.

 

I am watching SHLD but I currently have no position in any of the securities. I do think that some of the people on this thread have an irrational bias in favor of the company.

 

It's hard for me to tell how much it matters. I think as a going concern matter it makes it easier to sell or do something with the non guarantor entities. From a bankruptcy standpoint I think it doesn't matter at all to an equity holder. If there ever was a bankruptcy from the debt standpoint it would be a mess trying to figure out who stands where. That is beyond me, but doesn't matter to the equity anyway.

[CorpRaider]

That squares with my quick and dirty analysis.  If it matters to an equity investor in a bankruptcy scenario; I missed it.  Here's what has changed recently from my view (I'm still kicking the tires)....the formation of this puppy:

 

http://www.seritage.com

 

[Luke 532]

That squares with my quick and dirty analysis.  If it matters to an equity investor in a bankruptcy scenario; I missed it.  Here's what has changed recently from my view (I'm still kicking the tires)....the formation of this puppy:

 

http://www.seritage.com

 

and this...

http://www.ubiquityce.com/

[muscleman]

That squares with my quick and dirty analysis.  If it matters to an equity investor in a bankruptcy scenario; I missed it.  Here's what has changed recently from my view (I'm still kicking the tires)....the formation of this puppy:

 

http://www.seritage.com

 

SERITAGE Realty Trust, LLC is a nationwide developer of commercial real estate. Our portfolio contains over 200 properties, located in 33 states and totals over 18 Million SF.

 

I am wondering why SHLD needs SERITAGE as well as SHC realty to do the REIT business. Why not just focus on one brand and make it well known?

It seems like SERITAGE owns the trophy properties for redevelopment and SHC realty is for subleasing the not so great properties?

[muscleman]

Here is something for your entertainment.

I randomly clicked a property for leasing in my state, and then put that address into google, and looked at the satellite view.

18600 Alderwood Mall Parkway, Lynnwood, WA

 

If you compare the number of cars in front of Sears, you could tell that the density is way less than the Macy's nearby.

But this seems to be a good location. If they redevelop this store and convert it to office+condo, I think it will be quite nice, as it is right next to Macy's, which is almost like a downtown location.

[T-bone1]

The reason I thought the guarantor/non guarantor structure was interesting is that it gives you some insight into how the company could be divided. When you look at the cash flow statement from operations in the 10Ks, you see 1bln in cash flow consistently from the non guarantor sub while the non guarantor has most of the losses.

 

This could be interesting if in some scenario you split off the guarantor sub into its own entity. It also looks like a majority of the pension liabilities are in the guarantor sub. However, it's hard to determine how much of the 1bln number is dependent on the guarantor sub. In addition, when the company was buying back stock, it was doing it through the guarantor sub.

 

In my mind, its hard to see a split of the two. People have pointed to the split financials as a source of value that resides hidden.

 

You mean most of the losses in the guarantor, right?

 

But yeah, it's a way of seeing where the value perhaps resides. On the one hand you have all the retail in the guarantor while the non guarantor has some trophy properties (maybe), but has Kenmore, Craftsman and Diehard. Now that I think of it though the guarantor would seem to have Lands End, tons of other real estate plus about $27/share in DTAs with a valuation allowance against them.

 

I think at the end of the day it won't really matter how they are split up.

 

The interesting thing to me would be to start with TBV and work from that to come up with some kind of baseline valuation. Add in the DTAs, Lands End, KCD, real estate, etc and its quite possible there is good value here.

 

Good posts, Kraven. I've been trying to explain the guarantor/non-guarantor myth for a while, but I'm mostly just ignored.

 

I am watching SHLD but I currently have no position in any of the securities. I do think that some of the people on this thread have an irrational bias in favor of the company.

 

Let's ignore a bankruptcy scenario for a minute and consider the separation of assets.  It appears that Lampert could sell Lands End tomorrow and either dividend all of the cash to shareholders, or use it to buy back stock.  It appears he could do the same with most of the real estate as well as the brands. 

 

I think this makes bankruptcy very very unlikely.  There are a lot of ways to raise cash if they ever needed it. 

 

That being said, if there was a bankruptcy, I think it is worth bearing in mind that Lampert is a restructuring expert and structured this entire company to his (and other shareholders) advantage.

[Myth465]

Personally I think far too much focus is being placed on the jockey.

 

I completely agree.  Sears is like the investment equivalent of battered wife syndrome.  Every year the company beats up investors more yet every year the investors make bigger and bigger excuses.

 

Oh, is that a bruise on your cheek? It's ok - look at his historic hedge-fund returns!

Is that a cracked rib you're nursing? He didn't mean it.  Besides, look at all that vacant real estate!

Now your arm is broken?!?! You don't know him like I do! He's got all these valuable brands!

 

Since Eddie took over Sears in 2004, the stock is down about 50%.  That's nine years.  Other than a tiny position in total return swaps years ago, Eddie has made no investment outside of the retailer.  This is not been the story of Eddie becomes Warren through SHLD.  This is a case of Eddie trying to steer a sinking ship in the right direction.  He's been a slow-motion Ron Johnson up to this point.

 

Could he suddenly channel Warren tomorrow? Sure, anything is possible.  But there has been NOTHING in Eddie's SHLD history to justify the optimism around this stock.

 

Great post, and great response. I thought I was the only one reading this thread and shaking my head.

It may work, it may not. But I always go back to calling a spade a spade, and this has been dead directionless money for quite a while.

[Luke 532]

Sears Canada cuts 245 jobs, some work moves overseas

 

http://www.cbc.ca/news/canada/toronto/story/2013/08/20/toronto-sears-canada-job-cuts.html?autoplay=true

Sears said the workload will be transferred to "external third-party providers whose business expertise includes updated systems and processes that can more efficiently perform the work involved."

[alertmeipp]

Personally I think far too much focus is being placed on the jockey.

 

I completely agree.  Sears is like the investment equivalent of battered wife syndrome.  Every year the company beats up investors more yet every year the investors make bigger and bigger excuses.

 

Oh, is that a bruise on your cheek? It's ok - look at his historic hedge-fund returns!

Is that a cracked rib you're nursing? He didn't mean it.  Besides, look at all that vacant real estate!

Now your arm is broken?!?! You don't know him like I do! He's got all these valuable brands!

 

Since Eddie took over Sears in 2004, the stock is down about 50%.  That's nine years.  Other than a tiny position in total return swaps years ago, Eddie has made no investment outside of the retailer.  This is not been the story of Eddie becomes Warren through SHLD.  This is a case of Eddie trying to steer a sinking ship in the right direction.  He's been a slow-motion Ron Johnson up to this point.

 

Could he suddenly channel Warren tomorrow? Sure, anything is possible.  But there has been NOTHING in Eddie's SHLD history to justify the optimism around this stock.

 

Great post, and great response. I thought I was the only one reading this thread and shaking my head.

It may work, it may not. But I always go back to calling a spade a spade, and this has been dead directionless money for quite a while.

 

The sole reason Eddie is still around is because he is Eddie.

[Luke 532]

Let's ignore a bankruptcy scenario for a minute and consider the separation of assets.  It appears that Lampert could sell Lands End tomorrow and either dividend all of the cash to shareholders, or use it to buy back stock.  It appears he could do the same with most of the real estate as well as the brands. 

 

The last I read they were trying to sell Lands End for $2B.  Let's say they sell it for $1B (not sure what costs might be associated with selling it).  With 106M shares outstanding that would be a $9.43 special dividend.  Or if they buy back shares one could assume the demand would send the stock price up... to be conservative on the impact (measured by shares bought back) let's assume the average stock price for buybacks would be $50 (in reality it could be much lower, but I like to be conservative).  That would be 20M shares bought back.

 

Could this be right?  Either scenario would be very bullish.

[Luke 532]

The sole reason Eddie is still around is because he is Eddie.

 

Owning 55% of the company might have something to do with it!  ;)

[alertmeipp]

The sole reason Eddie is still around is because he is Eddie.

 

Owning 55% of the company might have something to do with it!  ;)

 

and seems other major shareholders are agreeing.

[Parsad]

Here is something for your entertainment.

I randomly clicked a property for leasing in my state, and then put that address into google, and looked at the satellite view.

18600 Alderwood Mall Parkway, Lynnwood, WA

 

If you compare the number of cars in front of Sears, you could tell that the density is way less than the Macy's nearby.

But this seems to be a good location. If they redevelop this store and convert it to office+condo, I think it will be quite nice, as it is right next to Macy's, which is almost like a downtown location.

 

I agree!  That is actually a very good location.  With the redevelopment of Alderwood Mall, and the surrounding area over the years, I think they will find it relatively easy to lease much of that space at higher market rates.  Cheers!

[Myth465]

Hey alert, its the equivalent of me saying Tom Ward has a master plan and is creating valuing, even though after 9 years we have no appreciation in the stock price.

[king888]

Let's ignore a bankruptcy scenario for a minute and consider the separation of assets.  It appears that Lampert could sell Lands End tomorrow and either dividend all of the cash to shareholders, or use it to buy back stock.  It appears he could do the same with most of the real estate as well as the brands. 

 

The last I read they were trying to sell Lands End for $2B.  Let's say they sell it for $1B (not sure what costs might be associated with selling it).  With 106M shares outstanding that would be a $9.43 special dividend.  Or if they buy back shares one could assume the demand would send the stock price up... to be conservative on the impact (measured by shares bought back) let's assume the average stock price for buybacks would be $50 (in reality it could be much lower, but I like to be conservative).  That would be 20M shares bought back.

 

Could this be right?  Either scenario would be very bullish.

How is that possible ? SHLD still have a lot of debt to pay .  Debt/Equity ratio is ~5.3x . Even if they sell all brands ,I doubt that there will cash left to equity holder . Most of you might be correct to say the real estate and brands has a lot of value .But on the other side of balance sheet , SHLD still has a lot liabilities to cover.

[Guest hellsten]

JSArbitrage, ScottHall and Myth465… I fully agree that it is irrational to invest in Sears, if you look at the numbers and view Sears as a retailer. I also agree that Eddie Lampert's track record of running Sears, the retailer, is really bad.

 

IMHO, I think we should revisit the words of men who have great track records of finding hidden value, and who are better at expressing the investment thesis for SHLD than 30 pages of forum posts, which at this point probably contain irrational arguments for owning SHLD, including some posted by me:

 

Everyone knows Sears, no one likes it. I mean it; I’ve met no one outside of Horizon Kinetics who likes

Sears. Nearly every person in this country of driving age has had an opportunity to be dismayed by the

shopping experience (there are probably a few square feet of Sears floor space for every U.S.

household). As an aside, let it be stated that we don’t love or even like Sears either; it is an investment

and is judged on its investment merits. It is one of many investments, nothing more, nothing less. There

has been much said and written about the company, some of it scathing, some witty, all of it negative.

And, applied to Sears as a retail store business, it is all true; virtually every successive management

decision over the course of six years has been either naïve, misguided, incompetent, or arrogant—if

Sears is viewed as a department store company.

…

Yet, if viewed as a real estate company, virtually every management decision has been logical. This was

the initial investment thesis when the position was established: that the ultimate value of the real estate

was worth more than the market capitalization of the company, and that the realization of that value

would be a long-term prospect, since it appeared that the controlling shareholder, Eddie Lampert, was

intent on first maximizing the cash flow available from the retail business.

…

If Sears has been engaged in a long-term end game of capitalizing the real estate, then

there would necessarily have to come a time when the stores would begin to reach a point of

diminishing returns. Eight years after Mr. Lampert became chairman, this appears to be happening to at

least some of the stores, and those are being closed; they are not being supported with additional

spending. What might seem to be a manifestation of failure, and of an uglier and uglier picture as a

retailer, is simply one step in a long end game as a realtor. If I were the controlling shareholder of Sears,

…

We will certainly continue to evaluate events as they unfold and monitor this holding.

~Horizon Kinetics

 

http://www.horizonkinetics.com/docs/2011Q4_commentary.pdf

 

 

Sears Holdings (SHLD): Sears Holdings, the operator of Sears and Kmart stores, is also the owner of

proprietary brands such as Lands End, Craftsman, DieHard and Kenmore. Owner-operator Ed

Lampert owns over 60% of SHLD shares outstanding between his personal holdings and those of

his investment company. Since becoming Chairman following the merger of Kmart and Sears,

Mr. Lampert has retired 78% of shares outstanding. These share repurchases, combined with cost

reductions and acquisitions have contributed to a dramatic increase in book value per share

since 2003 and, perhaps more importantly, have increased the number of square feet of real

estate per share at a double digit annual rate. In addition to the widely-known retail outlets and

brands, Sears owns over 90 million square feet of retail real estate space. In our view, the value

of this real estate space is not reflected in current market valuations of the company. In order to

maximize cash flows through the sale or lease of underperforming properties, the company

created the SHC Realty division. SHC Realty not only leases and sells full lots, but also maximizes

each property through the lease of off lots, demised space and separated in-line retail lots.

Considering the current uncertainty with regard to the economy, particularly the real estate

market, investors have failed to properly recognize this endeavor which is likely to produce

exceptional long-term value. Sears is currently trading at less than .90 times stated book value

which, as evidenced by the low real estate carrying value, is a significant discount to intrinsic

value, in our view. A variety of exercises that assign an appropriate value to the real estate will

suggest that the proper share price is vastly higher

 

 

people are acting as if it's a company that's bleeding to death. People aren't looking at it in the right way. They are measuring it based as a retailer, and they are measuring it based on short-term net income profitability. But there are many more dimensions to Sears. Real estate can have a higher and best use. Today's anchor to a mall can be tomorrow's multipurpose, multiuse building where you can have office buildings, retail, and residential spaces.

…

Of course, the best thing that could happen would be that he turns around Sears and Kmart and it's a grand-slam home run. The worst thing that happens is he gives it his best shot and starts to find higher and better uses for all of the assets, from land to trademarks to online. If you can see three or four different ways where you can make an awful lot of money with a guy who has a record of making an awful lot of money, it's not such a bad thing.

~Bruce Berkowitz

 

http://money.usnews.com/money/business-economy/articles/2008/02/29/a-portfolio-warren-buffett-would-love?page=2

 

[Kraven]

The reason I thought the guarantor/non guarantor structure was interesting is that it gives you some insight into how the company could be divided. When you look at the cash flow statement from operations in the 10Ks, you see 1bln in cash flow consistently from the non guarantor sub while the non guarantor has most of the losses.

 

This could be interesting if in some scenario you split off the guarantor sub into its own entity. It also looks like a majority of the pension liabilities are in the guarantor sub. However, it's hard to determine how much of the 1bln number is dependent on the guarantor sub. In addition, when the company was buying back stock, it was doing it through the guarantor sub.

 

In my mind, its hard to see a split of the two. People have pointed to the split financials as a source of value that resides hidden.

 

You mean most of the losses in the guarantor, right?

 

But yeah, it's a way of seeing where the value perhaps resides. On the one hand you have all the retail in the guarantor while the non guarantor has some trophy properties (maybe), but has Kenmore, Craftsman and Diehard. Now that I think of it though the guarantor would seem to have Lands End, tons of other real estate plus about $27/share in DTAs with a valuation allowance against them.

 

I think at the end of the day it won't really matter how they are split up.

 

The interesting thing to me would be to start with TBV and work from that to come up with some kind of baseline valuation. Add in the DTAs, Lands End, KCD, real estate, etc and its quite possible there is good value here.

 

Good posts, Kraven. I've been trying to explain the guarantor/non-guarantor myth for a while, but I'm mostly just ignored.

 

I am watching SHLD but I currently have no position in any of the securities. I do think that some of the people on this thread have an irrational bias in favor of the company.

 

Let's ignore a bankruptcy scenario for a minute and consider the separation of assets.  It appears that Lampert could sell Lands End tomorrow and either dividend all of the cash to shareholders, or use it to buy back stock.  It appears he could do the same with most of the real estate as well as the brands. 

 

I think this makes bankruptcy very very unlikely.  There are a lot of ways to raise cash if they ever needed it. 

 

That being said, if their was a bankruptcy, I think it is worth bearing in mind that Lampert is a restructuring expert and structured this entire company to his (and other shareholders) advantage.

 

I don't think anyone thinks bankruptcy is likely, at least not anytime soon.  Some posters though were worried about what would happen IF there was a bankruptcy and I was trying to respond to that question.  It never hurts to understand your place in the world and where you stand. 

 

I am not sure the point about Eddie being a restructuring expert matters at all in the context of this discussion.  I am telling you that from my reading of just the 10-K it seems clear that in the event of a bankruptcy of Holdings (the parent co) that the 2 structured subs would be collapsed in and their assets made available to creditors of Holdings. 

 

Why do I think this?  The assets have never gone anywhere outside of the family.  Real estate was dropped into a REMIC and securitized, the securities "sold" to Sears Re.  How was Sears Re initially capitalized?  I am sure some on this board know this better than I (all I know is what was in that paragraph), but these properties are not free and clear.  They were mortgaged and I have to assume that those funds were dropped into Sears Re somehow (perhaps dividended back to Holdings who then dropped them into Sears Re, I don't know.  I assume these amounts were used to pay for the KCD securities too.).  So REMIC issues securities.  Those securities are sold to Sears Re and the payments on those securities are made from payments received by the REMIC from amounts in respect of the properties - leases, etc.  In terms of KCD, asset backed securities were issued and sold to Sears Re.  Payments in respect of them are derived from royalty payments both from Sears entities and 3rd parties. 

 

But in terms of the assets (real estate and brands), they never left the Sears family.  It's all contained and those assets would almost certainly be available to creditors of Holdings.  In any case, I don't see how they benefit shareholders in the event of a bankruptcy.

 

Absent a bankruptcy where Sears remains as a going concern, we are not talking about restructuring in the same sense.  It would seem that this arrangement makes it much more likely that certain of these assets could be sold, although at least in the case of the real estate it's already been mortgaged so I don't know how much gain there is in excess of that.  Note too that Sears Re needs to remain funded.  So how much of any sale of these 125 properties and KCD would need to make it's way to Sears Re to cover it's obligations?  I have no idea.

[value-is-what-you-get]

Just received our Christmas Wish Book 2013 yesterday.  About 88 deg. F and sunny outside here in Ontario.  Wife and I both thumbed through it out by the pool and chucked it in the recycle bin.  Same reaction every year.  See it on the doorstep and get a sinking feeling that summer is almost over, then chuck it in the recycle bin.  How much does it cost them to make me feel lousy for a few minutes every year when I see that book?  We buy appliances at Sears and they're great at that, but this is a good example of retailer money poorly spent.

[T-bone1]

The reason I thought the guarantor/non guarantor structure was interesting is that it gives you some insight into how the company could be divided. When you look at the cash flow statement from operations in the 10Ks, you see 1bln in cash flow consistently from the non guarantor sub while the non guarantor has most of the losses.

 

This could be interesting if in some scenario you split off the guarantor sub into its own entity. It also looks like a majority of the pension liabilities are in the guarantor sub. However, it's hard to determine how much of the 1bln number is dependent on the guarantor sub. In addition, when the company was buying back stock, it was doing it through the guarantor sub.

 

In my mind, its hard to see a split of the two. People have pointed to the split financials as a source of value that resides hidden.

 

You mean most of the losses in the guarantor, right?

 

But yeah, it's a way of seeing where the value perhaps resides. On the one hand you have all the retail in the guarantor while the non guarantor has some trophy properties (maybe), but has Kenmore, Craftsman and Diehard. Now that I think of it though the guarantor would seem to have Lands End, tons of other real estate plus about $27/share in DTAs with a valuation allowance against them.

 

I think at the end of the day it won't really matter how they are split up.

 

The interesting thing to me would be to start with TBV and work from that to come up with some kind of baseline valuation. Add in the DTAs, Lands End, KCD, real estate, etc and its quite possible there is good value here.

 

Good posts, Kraven. I've been trying to explain the guarantor/non-guarantor myth for a while, but I'm mostly just ignored.

 

I am watching SHLD but I currently have no position in any of the securities. I do think that some of the people on this thread have an irrational bias in favor of the company.

 

Let's ignore a bankruptcy scenario for a minute and consider the separation of assets.  It appears that Lampert could sell Lands End tomorrow and either dividend all of the cash to shareholders, or use it to buy back stock.  It appears he could do the same with most of the real estate as well as the brands. 

 

I think this makes bankruptcy very very unlikely.  There are a lot of ways to raise cash if they ever needed it. 

 

That being said, if their was a bankruptcy, I think it is worth bearing in mind that Lampert is a restructuring expert and structured this entire company to his (and other shareholders) advantage.

 

I don't think anyone thinks bankruptcy is likely, at least not anytime soon.  Some posters though were worried about what would happen IF there was a bankruptcy and I was trying to respond to that question.  It never hurts to understand your place in the world and where you stand. 

 

I am not sure the point about Eddie being a restructuring expert matters at all in the context of this discussion.  I am telling you that from my reading of just the 10-K it seems clear that in the event of a bankruptcy of Holdings (the parent co) that the 2 structured subs would be collapsed in and their assets made available to creditors of Holdings. 

 

Why do I think this?  The assets have never gone anywhere outside of the family.  Real estate was dropped into a REMIC and securitized, the securities "sold" to Sears Re.  How was Sears Re initially capitalized?  I am sure some on this board know this better than I (all I know is what was in that paragraph), but these properties are not free and clear.  They were mortgaged and I have to assume that those funds were dropped into Sears Re somehow (perhaps dividended back to Holdings who then dropped them into Sears Re, I don't know.  I assume these amounts were used to pay for the KCD securities too.).  So REMIC issues securities.  Those securities are sold to Sears Re and the payments on those securities are made from payments received by the REMIC from amounts in respect of the properties - leases, etc.  In terms of KCD, asset backed securities were issued and sold to Sears Re.  Payments in respect of them are derived from royalty payments both from Sears entities and 3rd parties. 

 

But in terms of the assets (real estate and brands), they never left the Sears family.  It's all contained and those assets would almost certainly be available to creditors of Holdings.  In any case, I don't see how they benefit shareholders in the event of a bankruptcy.

 

Absent a bankruptcy where Sears remains as a going concern, we are not talking about restructuring in the same sense.  It would seem that this arrangement makes it much more likely that certain of these assets could be sold, although at least in the case of the real estate it's already been mortgaged so I don't know how much gain there is in excess of that.  Note too that Sears Re needs to remain funded.  So how much of any sale of these 125 properties and KCD would need to make it's way to Sears Re to cover it's obligations?  I have no idea.

 

Thanks for the reply Kraven and I apologize that I wasn't more clear.  I don't think anyone who has seriously studied the company is worried about a bankruptcy of SHLD ("Sears Holdings") . . . as you point out, all the assets would be available to creditors of Sears Holdings.

 

However,  most of the liabilities are not liabilities of Sears Holdings, but rather liabilities of K-Mart (the retailer) or Sears (the retailer).  If either of these subsidiaries were to go bankrupt, the creditors to these subsidiaries would not have a claim on a number of valuable assets (basically the non-guarantor assets).

 

This is why I make the point that Lampert is a restructuring expert.  I believe he will meet all of the obligations of Sears (the retailer) and K-Mart (the retailer), including pensions.  However, I think he has covered his downside by structuring the company in such a way that if things really went south, he could let either or both of these subsidiaries slip into Chapter 11 without destroying a lot of the value within SHLD (Sears Holdings)

 

I hope this is more clear.

 

Best,

 

t-bone1

[Luke 532]

Thanks for the reply Kraven and I apologize that I wasn't more clear.  I don't think anyone who has seriously studied the company is worried about a bankruptcy of SHLD ("Sears Holdings") . . . as you point out, all the assets would be available to creditors of Sears Holdings.

 

However,  most of the liabilities are not liabilities of Sears Holdings, but rather liabilities of K-Mart (the retailer) or Sears (the retailer).  If either of these subsidiaries were to go bankrupt, the creditors to these subsidiaries would not have a claim on a number of valuable assets (basically the non-guarantor assets).

 

This is why I make the point that Lampert is a restructuring expert.  I believe he will meet all of the obligations of Sears (the retailer) and K-Mart (the retailer), including pensions.  However, I think he has covered his downside by structuring the company in such a way that if things really went south, he could let either or both of these subsidiaries slip into Chapter 11 without destroying a lot of the value within SHLD (Sears Holdings)

 

I hope this is more clear.

 

Best,

 

t-bone1

 

If the above analysis is correct, the margin of safety is that much stronger.

 

Parsad hinted at the attractiveness of the guarantor vs. non-guarantor structure in this thread: http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/for-all-of-you-sears-holdings-longs!/msg68797/#msg68797

[Luke 532]

Atrium Outlets trademark has been "withdrawn before publication" as of two weeks ago (August 9th).

 

http://www.trademarkia.com/atrium-outlets-85818138.html

[Grenville]

Thanks for the reply Kraven and I apologize that I wasn't more clear.  I don't think anyone who has seriously studied the company is worried about a bankruptcy of SHLD ("Sears Holdings") . . . as you point out, all the assets would be available to creditors of Sears Holdings.

 

However,  most of the liabilities are not liabilities of Sears Holdings, but rather liabilities of K-Mart (the retailer) or Sears (the retailer).  If either of these subsidiaries were to go bankrupt, the creditors to these subsidiaries would not have a claim on a number of valuable assets (basically the non-guarantor assets).

 

This is why I make the point that Lampert is a restructuring expert.  I believe he will meet all of the obligations of Sears (the retailer) and K-Mart (the retailer), including pensions.  However, I think he has covered his downside by structuring the company in such a way that if things really went south, he could let either or both of these subsidiaries slip into Chapter 11 without destroying a lot of the value within SHLD (Sears Holdings)

 

I hope this is more clear.

 

Best,

 

t-bone1

 

If the above analysis is correct, the margin of safety is that much stronger.

 

Parsad hinted at the attractiveness of the guarantor vs. non-guarantor structure in this thread: http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/for-all-of-you-sears-holdings-longs!/msg68797/#msg68797

 

How do you reconcile the stock buybacks in the guarantor?

[Kraven]

The reason I thought the guarantor/non guarantor structure was interesting is that it gives you some insight into how the company could be divided. When you look at the cash flow statement from operations in the 10Ks, you see 1bln in cash flow consistently from the non guarantor sub while the non guarantor has most of the losses.

 

This could be interesting if in some scenario you split off the guarantor sub into its own entity. It also looks like a majority of the pension liabilities are in the guarantor sub. However, it's hard to determine how much of the 1bln number is dependent on the guarantor sub. In addition, when the company was buying back stock, it was doing it through the guarantor sub.

 

In my mind, its hard to see a split of the two. People have pointed to the split financials as a source of value that resides hidden.

 

You mean most of the losses in the guarantor, right?

 

But yeah, it's a way of seeing where the value perhaps resides. On the one hand you have all the retail in the guarantor while the non guarantor has some trophy properties (maybe), but has Kenmore, Craftsman and Diehard. Now that I think of it though the guarantor would seem to have Lands End, tons of other real estate plus about $27/share in DTAs with a valuation allowance against them.

 

I think at the end of the day it won't really matter how they are split up.

 

The interesting thing to me would be to start with TBV and work from that to come up with some kind of baseline valuation. Add in the DTAs, Lands End, KCD, real estate, etc and its quite possible there is good value here.

 

Good posts, Kraven. I've been trying to explain the guarantor/non-guarantor myth for a while, but I'm mostly just ignored.

 

I am watching SHLD but I currently have no position in any of the securities. I do think that some of the people on this thread have an irrational bias in favor of the company.

 

Let's ignore a bankruptcy scenario for a minute and consider the separation of assets.  It appears that Lampert could sell Lands End tomorrow and either dividend all of the cash to shareholders, or use it to buy back stock.  It appears he could do the same with most of the real estate as well as the brands. 

 

I think this makes bankruptcy very very unlikely.  There are a lot of ways to raise cash if they ever needed it. 

 

That being said, if their was a bankruptcy, I think it is worth bearing in mind that Lampert is a restructuring expert and structured this entire company to his (and other shareholders) advantage.

 

I don't think anyone thinks bankruptcy is likely, at least not anytime soon.  Some posters though were worried about what would happen IF there was a bankruptcy and I was trying to respond to that question.  It never hurts to understand your place in the world and where you stand. 

 

I am not sure the point about Eddie being a restructuring expert matters at all in the context of this discussion.  I am telling you that from my reading of just the 10-K it seems clear that in the event of a bankruptcy of Holdings (the parent co) that the 2 structured subs would be collapsed in and their assets made available to creditors of Holdings. 

 

Why do I think this?  The assets have never gone anywhere outside of the family.  Real estate was dropped into a REMIC and securitized, the securities "sold" to Sears Re.  How was Sears Re initially capitalized?  I am sure some on this board know this better than I (all I know is what was in that paragraph), but these properties are not free and clear.  They were mortgaged and I have to assume that those funds were dropped into Sears Re somehow (perhaps dividended back to Holdings who then dropped them into Sears Re, I don't know.  I assume these amounts were used to pay for the KCD securities too.).  So REMIC issues securities.  Those securities are sold to Sears Re and the payments on those securities are made from payments received by the REMIC from amounts in respect of the properties - leases, etc.  In terms of KCD, asset backed securities were issued and sold to Sears Re.  Payments in respect of them are derived from royalty payments both from Sears entities and 3rd parties. 

 

But in terms of the assets (real estate and brands), they never left the Sears family.  It's all contained and those assets would almost certainly be available to creditors of Holdings.  In any case, I don't see how they benefit shareholders in the event of a bankruptcy.

 

Absent a bankruptcy where Sears remains as a going concern, we are not talking about restructuring in the same sense.  It would seem that this arrangement makes it much more likely that certain of these assets could be sold, although at least in the case of the real estate it's already been mortgaged so I don't know how much gain there is in excess of that.  Note too that Sears Re needs to remain funded.  So how much of any sale of these 125 properties and KCD would need to make it's way to Sears Re to cover it's obligations?  I have no idea.

 

Thanks for the reply Kraven and I apologize that I wasn't more clear.  I don't think anyone who has seriously studied the company is worried about a bankruptcy of SHLD ("Sears Holdings") . . . as you point out, all the assets would be available to creditors of Sears Holdings.

 

However,  most of the liabilities are not liabilities of Sears Holdings, but rather liabilities of K-Mart (the retailer) or Sears (the retailer).  If either of these subsidiaries were to go bankrupt, the creditors to these subsidiaries would not have a claim on a number of valuable assets (basically the non-guarantor assets).

 

This is why I make the point that Lampert is a restructuring expert.  I believe he will meet all of the obligations of Sears (the retailer) and K-Mart (the retailer), including pensions.  However, I think he has covered his downside by structuring the company in such a way that if things really went south, he could let either or both of these subsidiaries slip into Chapter 11 without destroying a lot of the value within SHLD (Sears Holdings)

 

I hope this is more clear.

 

Best,

 

t-bone1

 

T-Bone, good points.  I think that's right, however at the end of the day I'm not sure how much it matters.  I think the organization of the Hold Co structure is pretty basic stuff.  I am not sure it's all that different from many other hold co's.

 

Here's the problem as I see it.  I will fully admit I don't know enough about it yet, but these are my initial impressions.  You are right that many of the obligations are held at the Sears and K-Mart subs.  However, which of the "prime" assets are there too?  If one of those subs were to go under, while it doesn't directly implicate the Holdings debt (although it might depending on whether any covenants are tripped), now Holdings won't receive whatever income it gets from that sub.  Forgetting that it might trip a covenant, it now might also not be able to meet its interest payments and thus the inevitable might occur anyway.

 

To me, the optimal situation would be to monetize some of these assets like KCD and Lands End.  What that means to Sears Re, I'm not sure.  Maybe they can collapse that structure and simply stop self insuring and just pay for insurance and free up all that capital.

[jeffmori7]

Kraven, you have a good point. Why do they need Sears Re? What is the benefit of this self-insurance company to Sears holdings?