SHLDQ - Sears Holdings Corp

[merkhet]

 

A Partner who hides information from his partner and buys him out on the cheap would be very happy, would it be fair or right?

 

 

All of the information in Baker Street's report is public information.  Lampert doesn't spell it out, but he doesn't hide what is needed to make a determination of what his intentions might be.  I think his intentions have been pretty clear, especially with the events taking place of the past 12 months.

 

 

Yea, I don't get this either. He's been very clear on his intentions. He's just not clear on his execution. What's wrong with that?

[merkhet]

I also have a hard time believing that someone who wouldn't shut down the stores because it would cost hundreds of thousands of people their jobs would be so cavalier about cheating his "owner-partners."

[enoch01]

Sanjeev,

 

What caused you to change your mind on Sears? Faster monetization of the real estate and faster closing of stores?

 

Yup, especially when details of Seritage Realty Trust started to come out, and they announced the redevelopment plan of the store and property here in Burnaby.  I realized Eddie was getting serious about liquidating or monetizing the real estate when you started to see these core properties in the news. 

 

I don't care about the retail business...they are a dying model that just keeps eating cash, but as long as he can get them to breakeven, we're good.  But if they moved fast enough to monetize the other assets, and then redeploy those assets, then you've got the possibility of making this investment work.  Combined with the doubling of the short position in the last four months, I figured now was a pretty good time to buy some SHLD or LEAPs.  Cheers! 

 

We all know that there's several lenses we can use to help figure out the value of a company: assets, GAAP earnings, cash flow, etc.  All are meaningful, some are more important than others.

 

I think recent events simply have come down to the fact that significant momentum built up on the story of cash flow and GAAP earnings, and the asset story got lost in the shuffle.  Obviously this is not to say the first two metrics aren't important, just that they aren't the complete picture.

 

But given the asset base, the momentum of the earnings and cash flow story could only build up for so long.  When Sears didn't announce bankruptcy a couple of weeks ago, all that was needed was for the momentum of that story to slow down, and things could have started to get interesting.  In fact, that is what happened.

 

Some were willing to bet that there was a good chance of it playing out like that.

[ap1234]

What are your thoughts on the Credit Suisse analyst report which critique's Baker Street's analysis? I have my personal thoughts (my money is on Eddie!) but would be intrigued to hear other people on the board who follow SHLD more closely. According to the CS report (see attached, these are the major discrepancies:

 

1) The most important variable - what is the real estate worth? CS thinks the real estate appraisals by Baker are much too high. For example, the 'A' properties from JCP (which were independently appraised) were valued at $55/sq. feet vs. $133-168/sq. feet for SHLD. In total, Baker Street values the real estate at $7-10 billion vs. CS analysis of $3 billion.

 

2) Baker Street assumes that they can liquidate all of their real estate today. But let's say it takes 5 years to liquidate the real estate. The stores on the highly valued properties are likely contributing a disproportionate  % of EBITDA. So as you sell the highly valued real estate, the EBITDA declines could be significant (i.e. if you sell 1% of real estate, you lose much more as a % of EBITDA). What is the negative cash drag from the bleeding retailing operations over the next 5 years on a /share basis? Did Baker Street include negative operating losses in their analysis or did they assume all of the real estate can be liquidated today?

 

3) Baker Street assumed that you can liquidate inventory/receivables arnd receive 100 cents on the dollar. CS thinks you need to haircut A/R and inventory liquidation values.

 

Any thoughts from the board?

SHLD_credit_suisse_note_Sept_11_2013.pdf

[Luke 532]

For what it's worth, Baker Street report was just mentioned on CNBC.

[merkhet]

 

What are your thoughts on the Credit Suisse analyst report which critique's Baker Street's analysis? I have my personal thoughts (my money is on Eddie!) but would be intrigued to hear other people on the board who follow SHLD more closely. According to the CS report (see attached, these are the major discrepancies:

 

1) The most important variable - what is the real estate worth? CS thinks the real estate appraisals by Baker are much too high. For example, the 'A' properties from JCP (which were independently appraised) were valued at $55/sq. feet vs. $133-168/sq. feet for SHLD. In total, Baker Street values the real estate at $7-10 billion vs. CS analysis of $3 billion.

 

2) Baker Street assumes that they can liquidate all of their real estate today. But let's say it takes 5 years to liquidate the real estate. The stores on the highly valued properties are likely contributing a disproportionate  % of EBITDA. So as you sell the highly valued real estate, the EBITDA declines could be significant (i.e. if you sell 1% of real estate, you lose much more as a % of EBITDA). What is the negative cash drag from the bleeding retailing operations over the next 5 years on a /share basis? Did Baker Street include negative operating losses in their analysis or did they assume all of the real estate can be liquidated today?

 

3) Baker Street assumed that you can liquidate inventory/receivables arnd receive 100 cents on the dollar. CS thinks you need to haircut A/R and inventory liquidation values.

 

Any thoughts from the board?

 

 

I'll take a swing.

 

I think that the Credit Suisse report manifests a complete lack of critical reading skills. I don't think the Baker Street presentation is indicating that Sears is going to liquidate all of their Class A locations and/or even the non-Class A locations. Instead, they are saying that, with the online initiatives, Sears no longer needs the large retail footprint that it previously held in order to serve its customers. That's the whole anchor padding portion of the presentation. By reducing its retail footprint, Sears will be able to transition portions of any or all of their properties to a better higher use without having to sacrifice much, if any, of their retail operations.

 

It's telling that the Credit Suisse report does not address any of the conference call transcripts from SPG, GGP, et. al. while focusing only on their own internal numbers. Nor does Credit Suisse address the very interesting documents released from the merger back in the mid-2000s. Based on those documents, it seems that the real estate might have been worth $100 a share almost ten years ago.

 

I would further add two things:

 

(1) I think it's funny that they don't refer to Baker Street by name. ("they who must not be named")

 

(2) I've never seen a bank's research arm respond to something like this before. Does anyone else have precedence that they can provide? I've heard of banks responding when they're challenged directly on their analysis, etc. but I don't recall any instance of a bank responding to a general presentation like this.

[Kraven]

Given that for any service business like investment banking everyone and anyone is a potential client, CS must be very confident they will never do business with Sears.  Likely means they pissed someone off there and have been told or otherwise know that they are in the penalty box or worse, got the death penalty.  Could be for anything from a botched deal at some point to some drunk MD hitting on a senior guy's wife while at some shindig in the Hamptons.

[gr33ngi4nt]

I haven't followed JCP. Does anyone know how CS first derived that $55/sq ft number? Does anyone have this report?

 

I thought it was interesting that CS used a blanket $55/sq ft to value all 200 of the top leased/owned properties. In addition, there is no bear/bull case with their real estate valuation. Yet, their valuation for KCD, Home Services, LE, etc. would imply that the real estate should in fact be worth more in the bull scenario compared to the bear scenario.

[muscleman]

 

What are your thoughts on the Credit Suisse analyst report which critique's Baker Street's analysis? I have my personal thoughts (my money is on Eddie!) but would be intrigued to hear other people on the board who follow SHLD more closely. According to the CS report (see attached, these are the major discrepancies:

 

1) The most important variable - what is the real estate worth? CS thinks the real estate appraisals by Baker are much too high. For example, the 'A' properties from JCP (which were independently appraised) were valued at $55/sq. feet vs. $133-168/sq. feet for SHLD. In total, Baker Street values the real estate at $7-10 billion vs. CS analysis of $3 billion.

 

2) Baker Street assumes that they can liquidate all of their real estate today. But let's say it takes 5 years to liquidate the real estate. The stores on the highly valued properties are likely contributing a disproportionate  % of EBITDA. So as you sell the highly valued real estate, the EBITDA declines could be significant (i.e. if you sell 1% of real estate, you lose much more as a % of EBITDA). What is the negative cash drag from the bleeding retailing operations over the next 5 years on a /share basis? Did Baker Street include negative operating losses in their analysis or did they assume all of the real estate can be liquidated today?

 

3) Baker Street assumed that you can liquidate inventory/receivables arnd receive 100 cents on the dollar. CS thinks you need to haircut A/R and inventory liquidation values.

 

Any thoughts from the board?

 

 

I'll take a swing.

 

I think that the Credit Suisse report manifests a complete lack of critical reading skills. I don't think the Baker Street presentation is indicating that Sears is going to liquidate all of their Class A locations and/or even the non-Class A locations. Instead, they are saying that, with the online initiatives, Sears no longer needs the large retail footprint that it previously held in order to serve its customers. That's the whole anchor padding portion of the presentation. By reducing its retail footprint, Sears will be able to transition portions of any or all of their properties to a better higher use without having to sacrifice much, if any, of their retail operations.

 

It's telling that the Credit Suisse report does not address any of the conference call transcripts from SPG, GGP, et. al. while focusing only on their own internal numbers. Nor does Credit Suisse address the very interesting documents released from the merger back in the mid-2000s. Based on those documents, it seems that the real estate might have been worth $100 a share almost ten years ago.

 

I would further add two things:

 

(1) I think it's funny that they don't refer to Baker Street by name. ("they who must not be named")

 

(2) I've never seen a bank's research arm respond to something like this before. Does anyone else have precedence that they can provide? I've heard of banks responding when they're challenged directly on their analysis, etc. but I don't recall any instance of a bank responding to a general presentation like this.

 

I think we all know how dirty the WS banks are. I am thinking if their sell side was asked to write a negative report so that their buy side guys can load up with SHLD.

This is such an easy short squeeze target. Since vultures like Soros is long JCP, I can't see any reason why he wouldn't notice SHLD and Baker Street's report and long SHLD, just to grill the shorts.

 

Actually, I think the more likely case is that their buy side asked their sell side to do them a favor so that the buy side can cover their short at a slightly lower price. :)

[krazeenyc]

I'm still very long SHLD (although I did sell a very small sliver in the AH yesterday right b4 8 pm at 58.80 and 59.15 -- yeah that was me lol - I couldn't resist trying to sell some after seeing 200 shares trade at $59.00 and whoah they sold).  While it's nice to have this squeeze -- Sears does still have a lot of issues if they they're going to extract value.

 

It's going to be very very expensive to re-develop these properties. For the subleases, other than a handful of deals I've read about (whole foods x4, a gym in SF, Forever 21, and some CA grocers  -- I haven't seen any major movement on this front).  It's not like Sears owns a bunch of treasury notes they can just sell tomorrow and as quickly as they are closing stores, monetizing these assets is going to done slowly.

 

I've actually done research on about 15-20 of there top properties -- and have my own value estimates.  There is one property if someone give me some help that would be great. Sears has a store in South Coast Plaza in Costa Mesa (they claim $800+ per square foot of sales in the mall not including anchors) it is 377,000 sq ft. Sears subleased some of it to Forever 21. I know Sears owns their store there. But -- according to the following article:

 

http://www.cbsnews.com/8301-505123_162-42440348/how-forever-21-can-cash-in-on-sears-real-estate-scheme/

 

Sears actually owns 850,000 sq ft in that mall -- is this right? Sears is on government records as part owner of the mall/real estate. I'm trying to understand what kind of deal they have going on with the Segerstroms (who own the rest of that mall).  Anyone who knows more I'd love to hear from you . Thanks in advance.

[CorpRaider]

The deals where they "right size" the location like the anecdote in my town (and a number of the examples in the Baker street report), where they subdivide and throw in a Wholefoods (or other "growth" retailer) probably don't correlate at all to a decrease in SHLD retail EBITDA generated the location.  In fact, it is probably more likely it would have a positive impact in terms of traffic and overall value of the parcel, even if it doesn't result in increased retail EBITDA generation by the SHLD retail ops remaining in place on the property.  The ones where they shut down the location entirely may decrease the EBITDA generation overall but Eddie is nothing if not cash flow focused and completely rational and I have zero doubt those decisions will be made more rationally even than if another retail management group or even a sell side analyst from a second tier investment bank, brilliant though they may be, were making the decisions.  Heh.

[Guest hellsten]

What are your thoughts on the Credit Suisse analyst report which critique's Baker Street's analysis? I have my personal thoughts (my money is on Eddie!) but would be intrigued to hear other people on the board who follow SHLD more closely. According to the CS report (see attached, these are the major discrepancies:

 

1) The most important variable - what is the real estate worth? CS thinks the real estate appraisals by Baker are much too high. For example, the 'A' properties from JCP (which were independently appraised) were valued at $55/sq. feet vs. $133-168/sq. feet for SHLD. In total, Baker Street values the real estate at $7-10 billion vs. CS analysis of $3 billion.

 

2) Baker Street assumes that they can liquidate all of their real estate today. But let's say it takes 5 years to liquidate the real estate. The stores on the highly valued properties are likely contributing a disproportionate  % of EBITDA. So as you sell the highly valued real estate, the EBITDA declines could be significant (i.e. if you sell 1% of real estate, you lose much more as a % of EBITDA). What is the negative cash drag from the bleeding retailing operations over the next 5 years on a /share basis? Did Baker Street include negative operating losses in their analysis or did they assume all of the real estate can be liquidated today?

 

3) Baker Street assumed that you can liquidate inventory/receivables arnd receive 100 cents on the dollar. CS thinks you need to haircut A/R and inventory liquidation values.

 

Any thoughts from the board?

 

I hope they are right about the target price ($20). I'm speculating that the Baker Street report was overly optimistic and the Credit Suisse report is overly pessimistic because of their respective incentives.

 

This was interesting:

in Sears' second quarter slides, the company said that of the stores it closed, it lost only 4% of sales but 36% of EBITDA.

 

the fact that the operating businesses are losing between $8-$10 of value a year by operating is not included in the shareholder's analysis. So time may not be on the side of the liquidation.

 

1) Nobody knows what the real estate is worth, yet everyone seems to have an opinion. This is what I've found so far:

 

$3.6 billion (2012) http://www.turnaround.org/cmaextras/15-Sears-Holding.pdf

$8.5 billion (2007, Bill Ackman) http://online.barrons.com/article/SB119283873785565563.html

$16-60/share (2013, Credit Suisse) http://www.institutionalinvestorsalpha.com/Article/3207208/Lamperts-ESL-Boasts-Soaring-Stock-Portfolio.html

$20.4 billion (2006, Morgan Stanley) http://www.chicagobusiness.com/article/20051231/ISSUE01/100025084/is-sears-chief-set-to-tap-real-estate

$31-39 billion (2013) http://seekingalpha.com/article/1509142-sears-holdings-valuation-between-berkshire-hathaway-and-bankruptcy

$80-90/share (2009, Bruce Berkowitz) http://www.grahamanddoddsville.net/wordpress/Files/Gurus/Bruce%20Berkowitz/OID%20-%20Bruce%20Berkowitz%20-%203-17-2009.pdf

$3.2 billion or $30/share (2013, Credit Suisse) Research report 11 September, 2013

$8,6 billion (2013, Baker Street) Research report, September 2013

$7.6-10.8 billion Sears and Kmart ~3 billion (2004, Morgan Stanley) Baker Street research report, September 2013

 

Is the single JCP report the best and does it apply to Sears?

the values ascribed per square foot are significantly higher than the values that JC Penney received from a third party real estate company evaluating its sites

 

It still sounds like they expect Sears to be liquidated, and that it's almost impossible to do.

[T-bone1]

Short interest numbers were reported after the close (these are the numbers for the end of last month - they are reported with a delay):

 

Short interest: 16,601,380

 

This is an increase of 862,173 from the middle of last month . . .  and I think it implies that the large long holders likely added after earnings was reported.

[Luke 532]

Short interest numbers were reported after the close (these are the numbers for the end of last month - they are reported with a delay):

 

Short interest: 16,601,380

 

This is an increase of 862,173 from the middle of last month . . .  and I think it implies that the large long holders likely added after earnings was reported.

 

This doesn't account for any shorts that may have covered in the past 11 calendar days, but it is still interesting to see the short interest increase.  I like that.

[merkhet]

 

Short interest numbers were reported after the close (these are the numbers for the end of last month - they are reported with a delay):

 

Short interest: 16,601,380

 

This is an increase of 862,173 from the middle of last month . . .  and I think it implies that the large long holders likely added after earnings was reported.

 

 

This doesn't account for any shorts that may have covered in the past 11 calendar days, but it is still interesting to see the short interest increase.  I like that.

 

 

The Credit Suisse report specifically recommends shorting the company. Hopefully, people are convinced that this is a slam dunk short and piled in to replace any shorts that covered.

[fareastwarriors]

http://blogs.wsj.com/corporate-intelligence/2013/09/11/does-sears-have-a-future-reality-may-trump-numerical-analysis/?mod=WSJBlog&mod=WSJ_corp_intel

 

Does Sears Have a Future? Reality May Trump Numerical Analysis.

[AchilliesValue]

 

This was interesting:

in Sears' second quarter slides, the company said that of the stores it closed, it lost only 4% of sales but 36% of EBITDA.

 

 

Anyone else having trouble reconciling these numbers?  No knock on Hellsten it's in the CS report I just went through the slides though and can't match. I can get closed stores reducing sales 4% if you count the SHOS spin as closed but I feel that's misleading or I'm missing something.

[muscleman]

 

Short interest numbers were reported after the close (these are the numbers for the end of last month - they are reported with a delay):

 

Short interest: 16,601,380

 

This is an increase of 862,173 from the middle of last month . . .  and I think it implies that the large long holders likely added after earnings was reported.

 

 

This doesn't account for any shorts that may have covered in the past 11 calendar days, but it is still interesting to see the short interest increase.  I like that.

 

 

The Credit Suisse report specifically recommends shorting the company. Hopefully, people are convinced that this is a slam dunk short and piled in to replace any shorts that covered.

 

This is really weird. I have never seen a sell side analyst writing a report to specifically rebuttal a buy side report, and I have never seen a sell side report that recommends shorting a company.

I think CS buy side may be doing some long/short strategy, like long Walmart/short Sears, and is getting burned, and they asked the sell side to help them out.

[Parsad]

 

Short interest numbers were reported after the close (these are the numbers for the end of last month - they are reported with a delay):

 

Short interest: 16,601,380

 

This is an increase of 862,173 from the middle of last month . . .  and I think it implies that the large long holders likely added after earnings was reported.

 

 

This doesn't account for any shorts that may have covered in the past 11 calendar days, but it is still interesting to see the short interest increase.  I like that.

 

 

The Credit Suisse report specifically recommends shorting the company. Hopefully, people are convinced that this is a slam dunk short and piled in to replace any shorts that covered.

 

This is really weird. I have never seen a sell side analyst writing a report to specifically rebuttal a buy side report, and I have never seen a sell side report that recommends shorting a company.

I think CS buy side may be doing some long/short strategy, like long Walmart/short Sears, and is getting burned, and they asked the sell side to help them out.

 

We've seen it before.  I remember when positive reports on FFH used to come out.  There would be another negative one quickly thereafter to rebut.  I remember Morgan Keegan's Gwynn putting out a rebuttal right after another analyst criticized their numbers for being off exponentially.  Cheers!

[meiroy]

Given that for any service business like investment banking everyone and anyone is a potential client, CS must be very confident they will never do business with Sears.  Likely means they pissed someone off there and have been told or otherwise know that they are in the penalty box or worse, got the death penalty.  Could be for anything from a botched deal at some point to some drunk MD hitting on a senior guy's wife while at some shindig in the Hamptons.

 

Very interesting insight. Thanks.

[muscleman]

 

Short interest numbers were reported after the close (these are the numbers for the end of last month - they are reported with a delay):

 

Short interest: 16,601,380

 

This is an increase of 862,173 from the middle of last month . . .  and I think it implies that the large long holders likely added after earnings was reported.

 

 

This doesn't account for any shorts that may have covered in the past 11 calendar days, but it is still interesting to see the short interest increase.  I like that.

 

 

The Credit Suisse report specifically recommends shorting the company. Hopefully, people are convinced that this is a slam dunk short and piled in to replace any shorts that covered.

 

This is really weird. I have never seen a sell side analyst writing a report to specifically rebuttal a buy side report, and I have never seen a sell side report that recommends shorting a company.

I think CS buy side may be doing some long/short strategy, like long Walmart/short Sears, and is getting burned, and they asked the sell side to help them out.

 

We've seen it before.  I remember when positive reports on FFH used to come out.  There would be another negative one quickly thereafter to rebut.  I remember Morgan Keegan's Gwynn putting out a rebuttal right after another analyst criticized their numbers for being off exponentially.  Cheers!

 

Oh, wow... That was way before my investing activity started.

 

There is supposed to be a firewall between sell side and buy side, but CS's activities can almost tell by itself that it is helping someone on the buy side who is getting burned shorting sears. Won't SEC step in for it?

[muscleman]

http://www.4-traders.com/SEARS-HOLDINGS-CORP-9814/news/Sears-Holdings-Corp--ServiceLive-Introduces-Enhanced-Free-Online-Home-Improvement-Matchmaking-Ser-17262403/

 

This is getting interesting. Once the SYW network is built, they can add a lot of this kind of staff in with minimum running cost, and then charge some ad fee.

[Kraven]

There is supposed to be a firewall between sell side and buy side, but CS's activities can almost tell by itself that it is helping someone on the buy side who is getting burned shorting sears. Won't SEC step in for it?

 

Honestly, there is not a shred of evidence this is what is occurring and I don't believe for a second that this is in fact true.  Moronic would be a step up for any analyst who did this to help some guy on the buy side out of losing a few bucks on a short.  I can't imagine that the Chinese wall was breached for something blatant like this.

[JAllen]

You can see in disclosure section at the end of the CS report what interests it has in SHLD and JCP.

 

There's also this "Provided for the exclusive use of Frank Mullen at EdgePoint Investment Group on 11-Sep-2013 08:33 AM." in small grey font at the bottom of each page. 

[Guest wellmont]

the timing of the CS piece is important. he was trying to slow short squeeze momentum. his bias is to be negative. he probably had a negative bias all along and cultivated a number of clients who are short the stock. a hatchet job report to counter an extremely bullish analysis that has the stock running is a tried and true tactic for these people.