SHLDQ - Sears Holdings Corp

[alertmeipp]

He very nearly accepted responsibility here for what is going on as a result of low store investment... but then it turned into an excuse.  He didn't blame the lack of cash from the$6b of buybacks, as that would be his fault, instead he blamed something out of his control.

I didn't like that either. :(

 

I wish Lampert communicated this through a quarter conference call, would love to hear his view on the buyback  ;)

[ERICOPOLY]

Free cash flow may be much closer than people think.

 

I sort of think Eddie is going to invest more in the stores now after commenting that: "It was the pensions, yeah, the pensions that kept me from doing it.  That's the ticket!"

[FCharlie]

 

 

Or the 10 yr goes to 1% (which might happen) in a bad upcoming recession (perhaps next year) and then what?  Their sales are falling right now without a recession... what a bad combination that could be.

 

 

That is a very real possibility. However, I don't think it will happen. I think we are at the absolute end of a 30 year bull market in bonds and it's ending with QE and nearly everyone on the planet dumping all of their treasuries onto the Federal Reserve.

 

A recession could happen. Hard for me to imagine though when housing starts are still so far below normal.

 

What if a recession happens and the national debt rises to $25 Trillion? Will people really want 1% bonds issued by what is essentially an insolvent country?

 

How much can the Federal Reserve buy? They already appear to own about 1/3 of the entire bond market. You would think it would be easier to move rates where they want as the pie gets smaller. It's not happening. The market wants higher rates in my opinion.

[alertmeipp]

So here's my going theory on Sears.

 

https://docs.google.com/spreadsheet/pub?key=0ArX667iB-WCRdFZRMEl4T29EQnRmUTZueE1XY09nSWc&single=true&gid=0&output=html

 

I used the Bloomberg screenshot from earlier in the thread to put those numbers together.  I don't think I need to explain to anyone on here that RBS/ESL, Fairholme & Tisch are in it for the long haul. If you search around, you'll also find Horizon Kinetics, Old West Investments & Chou Associates have all similarly stated they are or acted as long haul investors -- so I would think they can safely be called non-float shares.

 

Baker Street & Force Capital Management, I think, are more opportunistic in that they're holding it sort of for the long haul, but at the very least, I think that they're not the types to trade in and out of the position.

 

If you add all that up, the short interest of 14 million shares is 85% of the float of 16.5 million shares.

 

Now, the interesting thing is that both Baker Street & Force Capital have a lot of interest via call options. We've discussed previously that it looks like they've bought 2015 calls @ $60 and sold 2015 calls @ $70.  Baker Street has 7 million shares via calls and Force Capital has 4.7 million shares via calls. And oddly enough, Baker Street owned the 700,00 calls first.

 

So, I have to make one leap of faith here. I don't think that anyone on that list is selling calls to get called out of their shares @ $70 a pop. Therefore, I think that the extra 11.7 million shares via calls is coming from the 16.5 million shares of float.

 

What happens if either or both of those funds ends up exercising their options? You'd suck 4.7 million, 7 million or 11.7 million of shares out of a float of 16.5 million shares. Keep in mind that the average volume is 870,000 shares a day and there are 14 million shares sold short.  If the "true" float is only about 4.8 million shares, and you're short the name, then you're in some serious trouble...

 

Just some thoughts.

 

Are you suggestion those 11.7 million calls are naked calls? Hard to imagine people would sell naked call on Sears. Very dangerous move IMO.

The obvious question would be what the trigger would be?

[muscleman]

The Kim Kardashian Kollection?  I guess Sears needed something to combat the JCP tea kettle?

 

I'm seriously surprised that people on this board didn't know that Sears exclusively sells that Kardashian Kolleciton.  This was big news and is a big reason why apparel sales have increased the last 8 quarters. 

 

People can make fun of it as much as they want, but I guarantee the awareness of Kim Kardashian vs. Ted Williams to the under 21 female crowd (future core U.S. spenders) is probably 100 to 1.  I like Ted Williams as much as the next guy, but apparel shoppers don't want to be like him.  Women do think the Kardashians have style.  It'd be best to accept that.

 

Why does Kardashian Kolleciton seem important? In my local Sears store, I have never seen anyone checking out these dresses. They just sit there quietly. And that Sears store is located in an affluent area, with Microsoft headquarter just 0.5 miles away from it.

[Liberty]

On Sears' pension, does anyone know if Eddie is managing how the pension money is invested? If he really can compound at really high rates (even if pension investing is limiting), shouldn't that help?

 

Sorry if question has already been asked, but reading Buffett's memo made me wonder..

 

http://www.scribd.com/mobile/doc/160301289/embed?access_key=key-zcgkzjhsy2fzhxnohm9

[alertmeipp]

>>Microsoft headquarter just 0.5 miles away from it.

 

;D maybe that's why.

[txlaw]

He very nearly accepted responsibility here for what is going on as a result of low store investment... but then it turned into an excuse.  He didn't blame the lack of cash from the$6b of buybacks, as that would be his fault, instead he blamed something out of his control.

I didn't like that either. :(

 

Haha, you took the words right out of my mouth.  I was gonna ask whether ESL also blames himself for the cash that he distributed to exiting shareholders at nosebleed prices -- or just the socialist pension plan that his predecessors put in place?  ;D

 

Seriously, the fact that appliance sales went down is very bad.  But I do think we need to see what the SHOS results are like before jumping to any conclusions.  I would not be surprised if it turns out that SHOS appliance sales are up in a manner comparable to HD and LOW.  That would fit with the thesis that the full line stores are destined to go extinct like the dodo, but that there is room for small format Sears stores.

[ERICOPOLY]

The Kim Kardashian Kollection?  I guess Sears needed something to combat the JCP tea kettle?

 

I'm seriously surprised that people on this board didn't know that Sears exclusively sells that Kardashian Kolleciton.  This was big news and is a big reason why apparel sales have increased the last 8 quarters. 

 

People can make fun of it as much as they want, but I guarantee the awareness of Kim Kardashian vs. Ted Williams to the under 21 female crowd (future core U.S. spenders) is probably 100 to 1.  I like Ted Williams as much as the next guy, but apparel shoppers don't want to be like him.  Women do think the Kardashians have style.  It'd be best to accept that.

 

Why does Kardashian Kolleciton seem important? In my local Sears store, I have never seen anyone checking out these dresses. They just sit there quietly. And that Sears store is located in an affluent area, with Microsoft headquarter just 0.5 miles away from it.

 

I don't think Bellevue girls would touch the class of Kardashians with a 10 foot pole.  Nordstrom is more the pulse of the area.

[BTShine]

The Kim Kardashian Kollection?  I guess Sears needed something to combat the JCP tea kettle?

 

I'm seriously surprised that people on this board didn't know that Sears exclusively sells that Kardashian Kolleciton.  This was big news and is a big reason why apparel sales have increased the last 8 quarters. 

 

People can make fun of it as much as they want, but I guarantee the awareness of Kim Kardashian vs. Ted Williams to the under 21 female crowd (future core U.S. spenders) is probably 100 to 1.  I like Ted Williams as much as the next guy, but apparel shoppers don't want to be like him.  Women do think the Kardashians have style.  It'd be best to accept that.

 

Why does Kardashian Kolleciton seem important? In my local Sears store, I have never seen anyone checking out these dresses. They just sit there quietly. And that Sears store is located in an affluent area, with Microsoft headquarter just 0.5 miles away from it.

 

I don't think Bellevue girls would touch the class of Kardashians with a 10 foot pole.  Nordstrom is more the pulse of the area.

 

For sure!  +1

 

[treasurehunt]

Look in the 10Q that was filed today. Regarding the liability of $2.539 billion

 

In accordance with U.S. GAAP, we recognize on the balance sheet actuarial gains and losses for defined benefit pension plans annually in the fourth quarter of each fiscal year and whenever a plan is determined to qualify for a remeasurement during a fiscal year.

 

 

So..... this is a number that isn't adjusted until the 10K comes out. What the presentation did today was give an update as to where things are if the year closed out today.

 

They still will make large contributions for now. Next year everything can change and what's exciting is to look back over the years and see how much smaller SHLD's contributions were back when the pension liability was $1.6 billion and below. Free cash flow may be much closer than people think.

 

Okay. Now the numbers make more sense to me.

 

Looking back to 2005 - 2008, contributions to the pension plan ranged from 184 million to 355 million. Also, last year Sears reduced its pension liabilities by 1.4 billion by buying out a bunch of pensioners. So perhaps the normalized contribution level is under 200 million dollars? That's a pretty big difference from today although not quite enough to get Sears to cash flow positive, I think.

[alertmeipp]

Look in the 10Q that was filed today. Regarding the liability of $2.539 billion

 

In accordance with U.S. GAAP, we recognize on the balance sheet actuarial gains and losses for defined benefit pension plans annually in the fourth quarter of each fiscal year and whenever a plan is determined to qualify for a remeasurement during a fiscal year.

 

 

So..... this is a number that isn't adjusted until the 10K comes out. What the presentation did today was give an update as to where things are if the year closed out today.

 

They still will make large contributions for now. Next year everything can change and what's exciting is to look back over the years and see how much smaller SHLD's contributions were back when the pension liability was $1.6 billion and below. Free cash flow may be much closer than people think.

 

Okay. Now the numbers make more sense to me.

 

Looking back to 2005 - 2008, contributions to the pension plan ranged from 184 million to 355 million. Also, last year Sears reduced its pension liabilities by 1.4 billion by buying out a bunch of pensioners. So perhaps the normalized contribution level is under 200 million dollars? That's a pretty big difference from today although not quite enough to get Sears to cash flow positive, I think.

 

 

that plus 200million cost saving, if they can improve the margin abit?

 

btw, anything restricted ESL from buying more SHLD?

[Luke 532]

Here’s another way to look at the value of the real estate.  It's a quick-and-dirty valuation.  Take it for what it’s worth…

 

Market cap: 4.256B (at $40/share)

Liabilities: 16.454B

$16.454 liab + $4.256 market cap = $20.71B – $3.75B inventory – $4B brands = $12.96B / 241M sq ft = $53.77/sq ft.  What’s the most comparable city in America where retail real estate is selling for $50-$55/sq ft?  Detroit ($100+ average in America… $250 in very high-end areas like Northern Virginia and Northern California).

 

At $40/share, the stock market is assuming a 50% haircut on liquidating all inventory*, selling the brands for just $4B, and all of SHLD’s real estate is located in Detroit.  Clearly it’s not all in Detroit or in locations like Detroit… a dozen properties in Northern California, bunch of stores where I live in Northern Virginia, and they received $287M in proceeds on $46M book value year-to-date (a 6-bagger on book), sold the 11 properties to GGP in 2012 for $270M (270M / 1.8M sq feet = $150/sq ft), etc.

 

The market is offering you SHLD’s real estate portfolio at Detroit real estate prices.

*inventory when closing a store, “always able to sell it at more than they pay for it” (Lou D’Ambrosio).

 

[treasurehunt]

On Sears' pension, does anyone know if Eddie is managing how the pension money is invested? If he really can compound at really high rates (even if pension investing is limiting), shouldn't that help?

 

Sorry if question has already been asked, but reading Buffett's memo made me wonder..

 

http://www.scribd.com/mobile/doc/160301289/embed?access_key=key-zcgkzjhsy2fzhxnohm9

 

From the last Sears 10-K:

 

<i>

The Sears Holdings Corporation Investment Committee is responsible for the investment of the assets of Holdings' domestic pension plan. The Investment Committee, made up primarily of select members of senior management, has appointed a non-affiliated third party professional to advise the Investment Committee with respect to the SHC domestic pension plan assets. The plan's overall investment objective is to provide a long-term return that, along with Company contributions, is expected to meet future benefit payment requirements. A long-term horizon has been adopted in establishing investment policy such that the likelihood and duration of investment losses are carefully weighed against the long-term potential for appreciation of assets. The plan's investment policy requires investments to be diversified across individual securities, industries, market capitalization and valuation characteristics. In addition, various techniques are utilized to monitor, measure and manage risk.

</i>

 

So Lampert is probably involved in managing the pension assets, but not by himself, it appears. Also, there is a diversification constraint. Here are the returns on the pension assets for the last few years, calculated from the 10-Ks:

 

2012:  9.7%

2011:  1.0%

2010:  11.4%

2009:  16.4%

2008: -19.5%

2007:  4.8%

 

That's an annualized return of 3.3% for the last six years. A tiny bit better than the S&P 500 over the same period, I think.

[alertmeipp]

Here’s another way to look at the value of the real estate.  It's a quick-and-dirty valuation.  Take it for what it’s worth…

 

Market cap: 4.256B (at $40/share)

Liabilities: 16.454B

$16.454 liab + $4.256 market cap = $20.71B – $3.75B inventory – $4B brands = $12.96B / 241M sq ft = $53.77/sq ft.  What’s the most comparable city in America where retail real estate is selling for $50-$55/sq ft?  Detroit ($100+ average in America… $250 in very high-end areas like Northern Virginia and Northern California).

 

At $40/share, the stock market is assuming a 50% haircut on liquidating all inventory*, selling the brands for just $4B, and all of SHLD’s real estate is located in Detroit.  Clearly it’s not all in Detroit or in locations like Detroit… a dozen properties in Northern California, bunch of stores where I live in Northern Virginia, and they received $287M in proceeds on $46M book value year-to-date (a 6-bagger on book), sold the 11 properties to GGP in 2012 for $270M (270M / 1.8M sq feet = $150/sq ft), etc.

 

The market is offering you SHLD’s real estate portfolio at Detroit real estate prices.

*inventory when closing a store, “always able to sell it at more than they pay for it” (Lou D’Ambrosio).

 

How could you account for closing cost such as severance package?

[FCharlie]

 

Haha, you took the words right out of my mouth.  I was gonna ask whether ESL also blames himself for the cash that he distributed to exiting shareholders at nosebleed prices -- or just the socialist pension plan that his predecessors put in place?  ;D

 

 

 

I believe at the annual meeting a couple of years ago Eddie did admit that the share repurchases were not the optimal use of capital. He said they were too early and regretted the fact that they didn't have more cash to buy more stock when the stock was lower. He said that had they waited they may have had 90 million shares instead of 110 million.

 

He also added that in hindsight he felt that the only superior use of capital would have been holding cash but that often when you hold a lot of cash, people don't like that either.

[hyten1]

this from lampert don't make me happy actually

 

"It is not just in isolation what we want to do. We have got to manage a business with obligations to pensioners, obligations to our employees, obligations to vendors," Lampert said.

 

i thought shareholder would be first by far, it doesn't seem like it base on this comment.

 

 

[alertmeipp]

this from lampert don't make me happy actually

 

"It is not just in isolation what we want to do. We have got to manage a business with obligations to pensioners, obligations to our employees, obligations to vendors," Lampert said.

 

i thought shareholder would be first by far, it doesn't seem like it base on this comment.

 

 

no worries, after all, he is the Shareholder.

[FCharlie]

 

 

Okay. Now the numbers make more sense to me.

 

Looking back to 2005 - 2008, contributions to the pension plan ranged from 184 million to 355 million. Also, last year Sears reduced its pension liabilities by 1.4 billion by buying out a bunch of pensioners. So perhaps the normalized contribution level is under 200 million dollars? That's a pretty big difference from today although not quite enough to get Sears to cash flow positive, I think.

 

 

Remember that most of the people that took the buyout were not currently drawing off of the pension. They were the younger people who will receive benefits in the future. This is why Sears managed to buy out 33% of people in the plan yet the liability and cash drain didn't really change short term.

[hyten1]

alertmeipp,

 

i hear ya, i guess what i am trying to get at is, shld for lampert is not just about making money. (via JCP with ackeman, i guess considering what happen to jcp, this might be a good thing)

 

lampert has all the money he will ever need. i think for lampert shld is more about doing something that makes a difference, about building something lasting.

 

hmm, i mean it almost make me feel like to lampert as long as he doesn't lose money or even if he loses a little, he will be ok with, if he can make something out of this, build something lasting, and do something that makes a difference. which for him is no big deal he already has his billions, but for us, not so great.

 

i could be barking up the wrong tree.

 

 

 

hy

 

 

this from lampert don't make me happy actually

 

"It is not just in isolation what we want to do. We have got to manage a business with obligations to pensioners, obligations to our employees, obligations to vendors," Lampert said.

 

i thought shareholder would be first by far, it doesn't seem like it base on this comment.

 

 

no worries, after all, he is the Shareholder.

[Liberty]

If Lampert wants to do something else than make money, he should probably let Berkowitz know  ;)

 

I think he probably initially expected Sears to go like Kmart and make a bunch of money quickly, but it all went wrong and now he's doubling down and biding his time... No idea if he'll be proven right or if value will keep eroding as fast or faster than he can unlock it, but it's a fun show to watch from the sidelines...

[constructive]

Here's my take on the real estate value.

 

                                                        2012    2011    2010

Total stores closed                            60        247      26   

High value stores closed                  17          3          1      (large transactions which were individually identified in the 10Ks)

Lower value stores closed                43          244      25    (all other transactions which were not individually identified)

 

Gain on sale of assets                      468        64        67

Gain on sale of HV stores                419        33        35

Gain on sale of LV stores                  49          31        32

 

Cash closing costs                            140        254      26

 

Net gain on closing stores                328      (190)      41

Net gain on HV stores                      379          30        34

Net gain on LV stores                      (51)      (220)      7

 

Net gain on closing average HV store: $21.1M

Net gain on closing average LV store: (-$846K)

 

Assuming all REMIC stores are higher value, that's $2.6B not shown on the balance sheet. Plus, if the mix of closed stores is representative of the remaining stores outside the REMIC, that's an extra $1.3B.

[treasurehunt]

Here’s another way to look at the value of the real estate.  It's a quick-and-dirty valuation.  Take it for what it’s worth…

 

Market cap: 4.256B (at $40/share)

Liabilities: 16.454B

$16.454 liab + $4.256 market cap = $20.71B – $3.75B inventory – $4B brands = $12.96B / 241M sq ft = $53.77/sq ft.  What’s the most comparable city in America where retail real estate is selling for $50-$55/sq ft?  Detroit ($100+ average in America… $250 in very high-end areas like Northern Virginia and Northern California).

 

At $40/share, the stock market is assuming a 50% haircut on liquidating all inventory*, selling the brands for just $4B, and all of SHLD’s real estate is located in Detroit.  Clearly it’s not all in Detroit or in locations like Detroit… a dozen properties in Northern California, bunch of stores where I live in Northern Virginia, and they received $287M in proceeds on $46M book value year-to-date (a 6-bagger on book), sold the 11 properties to GGP in 2012 for $270M (270M / 1.8M sq feet = $150/sq ft), etc.

 

The market is offering you SHLD’s real estate portfolio at Detroit real estate prices.

*inventory when closing a store, “always able to sell it at more than they pay for it” (Lou D’Ambrosio).

 

How could you account for closing cost such as severance package?

 

Since we are doing quick and dirty valuations... :-)

 

Sears had 295K employees at the end of 2011 and 274K at the end of 2012. They had severance and store-closing costs of 140 million in 2012. Assuming that 21K employees were laid off and assuming that severance is the bulk of the store-closing costs, 140 million implies a cost of about 6,700 per employee. Multiplying by 274K employees gives us a cost of about 1.8 billion for closing all the remaining stores. So maybe you can add 2 billion or so to Sears' liabilities to account for closing stores.

 

I think a bigger issue with Luke's real estate valuation is that two-thirds of the stores are leased and not owned. A lot of the leases seem to be operating leases and therefore not represented as a liability on the balance sheet (based on my rudimentary understanding of lease accounting). Are the leased stores also worth much more that $50 per square foot? Maybe, but that depends on the terms of the lease.

 

 

[ERICOPOLY]

I think a bigger issue with Luke's real estate valuation is that two-thirds of the stores are leased and not owned. A lot of the leases seem to be operating leases and therefore not represented as a liability on the balance sheet (based on my rudimentary understanding of lease accounting). Are the leased stores also worth much more that $50 per square foot? Maybe, but that depends on the terms of the lease.

 

Most of the KMart stores are leased and they lost money shutting down the KMart stores both in 2012 and 2011.  Sure, supposedly the KMart leases are below market as they weren't required to revalue them in the merger.  Nevertheless, they recorded a loss when shutting them down in each of the past two years. 

[alertmeipp]

I think certainly Sears worth more than what it's currently trading at. What scares the market is ESL is actually trying to turn this around rather than liquidating the assets quickly. He is shooting for a home run (higher risk - he does not look like a retail expert AT ALL) rather than a quick double (lower risk) kind of thing.

 

I spent sometime on SYW website.. can't say I like it.