SHLDQ - Sears Holdings Corp

[CorpRaider]

Happy holidays!  I'm a shld agnostic. 

[merkhet]

I'm not sure if someone has posted this article here before, but I found it interesting since we get to hear from Mr. Lampert himself.

 

(http://articles.chicagotribune.com/2013-11-24/business/ct-biz-1124-phil-lampert--20131124_1_sears-and-kmart-stores-edward-lampert)

 

"With $30 billion-plus in sales, we don't have a customer problem," Lampert said by phone after the company's latest subpar earnings report. "We don't have a sales problem. What we have is a profit problem, and that's what we're intending to address. … We need to demonstrate that if we serve people well, we can actually make an acceptable amount of money."

 

When I read this, my immediate thought was that Eddie was well aware of the bloated cost structure of the consolidated entities.  He sees the same consolidated numbers that we see, and he has a much better sense of the underlying cost structure of the various subsidiaries.

 

A quick listing of the operating subsidiaries is as follows:

(1) Sears Canada

(2) Sears Auto Centers

(3) Sears Home Services

(4) Lands End

(5) Sears Hometown (inclusion will make sense eventually)

 

http://www.sec.gov/Archives/edgar/data/799288/000119312513464144/d632333dex991.htm#fin632333_21

 

Take a look at page 42 of the Lands End filing.  Their operating expense is about 95% with costs split 55.6% in COGS and 37.8% in SG&A.  Macy's has an operating expense of about 91% or thereabouts.

 

Now take a look at page F-25 of the Lands End filing.  Their cost structure for the Direct business is comparable to Macy's with an operating expense of about 91% or so.  The Retail and Corporate expenses are what kills their profitability.  Additionally, compare 2010 to 2012, and you'll see that stubbornly high costs of sales are what's cutting into the Direct business' profitability.  You can find 5% of margin in the COGS and maybe 1% in the SG&A between 2010 and 2012.

 

Page F-13 says the following

 

Cost of Sales

 

Cost of sales are comprised principally of the costs of merchandise, in-bound freight, duty, warehousing and distribution (including receiving, picking, packing and store delivery costs), customer shipping and handling costs and physical inventory losses.

 

The Company participates in Sears Holdings’ Shop Your Way member loyalty program. The expenses for this program are recorded in Cost of sales, as described in Note 11—Related Party.

 

If you'll search for commentary, you'll notice the following things: (1) some of the stuff Sears Holdings is charging Lands End can be found in the COGS and some in the SG&A, (2) that markdowns have been responsible for a bit of the margin degradation and (3) for some reason, there is information technology project expense in the SG&A of Lands End.

 

And this got me thinking -- what if Sears is offloading certain cost-structures off on its subsidiaries?  We've had a bit of talk on this thread about Sears offloading some debt to dividend back up to the HoldCo, but less thoughts about what else Sears might be offloading on its subs.  Basically, push as much cost structure off on the subsidiaries as economically possible without regard necessarily to accounting profitability so that what's left over looks pretty darn good.

 

Since appliances are a low gross margin business, send that business off to Sears Hometown and extract some economic benefit from that business in the form of royalties, sourcing fees, etc.  Throw out Lands End but make sure to charge them for Related Party transactions (starting on page F-21) to account for salaries, rental income, supply chain costs, etc.  If the Auto Centers are really as unprofitable as Chad believes them to be then load them up with as much cost structure and debt as possible before selling to get it off the Sears Holdings consolidated balance sheet.  Etc.

 

"It doesn't make sense to have millions or tens of millions of dollars invested in a property that doesn't make money," he said. "What real estate affords us: It's a footprint to serve members, first. It also (gives) us the ability to afford a transformation and to be able to withstand, one, a financial crisis, which we went through, and two, withstand a period of poor operating performance, which hopefully will come to an end soon."

 

"The honest answer is we certainly had plans (for a turnaround) and forecasts for this year that it would have happened already, and we haven't delivered against that," Lampert said. "The Shop Your Way membership metrics that we measure, and there are many of them, almost uniformly they've been going in the right direction. Many have exceeded what our expectations were at the beginning of the year. So we see these behaviors that are foundational to the transformation and foundational to restoring profitability. But we haven't been able to connect those behaviors to the actual results."

 

The part that's the most interesting to me is the very last quoted paragraph where he says that Sears hasn't been able to connect SYW behaviors to the actual underlying results.  I might be reading into it, but I view this as a refutation of the SYW incinerator theory.  My guess is that since he is able to identify that SYW behavior hasn't been connected to the results so far, he is unlikely to chase good money after bad if a reasonable length of testing period has passed and his SYW thesis doesn't pan out.

[tombgrt]

He's going to throw the towel in for the retail ops soon. He will sell off the entire thing minus whatever crap they can spin off and unload debt. There will be massive rapid firings and store closures. They'll be too busy screaming bloody murder while he cashes out the remaining partners and takes the whole thing for himself and Fairholme and whoever of us is still around.

 

Then comes the part where they figure out what Sears Holdings is really all about for the next 50 years.

 

In 2010 I attended the meeting and I wrote this down in my notebook and even had ESL for a minute to chat with - he told the group that 'five years from now this company, to some will be completely unrecognizable.'

 

2014 is upon us. I think it will undergo massive transformation very fast and the market will be unable to react to it. That or they will just be too confused. ESL is many years ahead and will have personal control of 30% of holdings.

 

Uh yeah he was thinking about SYW, downsizing on RE assets, spinning off certain assets, ... That's pretty unrecognizable already. There is NO hint that he is going to stop trying to turn this retail operation around (as merkhet's latest post shows btw).

 

This company is play by play the next Berkshire hathaway.

 

All you need to do is roll back the tape as Berkowitz says.

 

The entire thing reeks of an insurance and asset heavy company utilizing buybacks and run by an allocator who knows what he is doing when it comes to the track record. He runs a hedge fund thats basically closing before our eyes. He only owns SHLD and will continue to hold shares while he cashes out. I expect him to sell AN to buy more SHLD.

 

The ops suck. The market understands nothing. Fairholme gets it, Chou funds gets it. Some of us get it. Its very simple to mask the permanent capital vehicle behind the failing operations. The owner and allocator is much too smart to let the retail operations continue or to try to really save it when he has proven to compound at rates as good if not better than WEB.

 

Why run Sears when he can really just be who he is, a investor?

 

 

 

Yes exactly... Why waste 1/10th of his life (partly) so far on Sears while he could have just started something from the ground up? You're just guessing and ignoring the fact that he was and still is trying to turn around Sears.

[Luke 532]

 

The part that's the most interesting to me is the very last quoted paragraph where he says that Sears hasn't been able to connect SYW behaviors to the actual underlying results.  I might be reading into it, but I view this as a refutation of the SYW incinerator theory.  My guess is that since he is able to identify that SYW behavior hasn't been connected to the results so far, he is unlikely to chase good money after bad if a reasonable length of testing period has passed and his SYW thesis doesn't pan out.

 

Interesting quotes indeed.  Most of the SYW metrics are pointing in the right direction and exceeding expectations (awesome) but the only one that really matters, profits, is not (not awesome).

 

It does seem that he might be nearing his "last reasonable moment" (Bob Rubin).

 

 

"The honest answer is we certainly had plans (for a turnaround) and forecasts for this year that it would have happened already, and we haven't delivered against that," Lampert said. [/u]

 

 

This was the most interesting quote to me.  He expected the turnaround to be completed in 2013.  Either it happens soon or he might get very aggressive in monetizing SHLD.  Makes me think the end-game will be upon us soon.  Holding my shares for whatever fireworks may come in the near future.

[merkhet]

Also, recent short interest has come out a bit lower than last time. (13,542,866)

[FCharlie]

EPS estimates for Q4 are negative!!!  How terrible do your operations have to be to lose money at Christmas? Or, to turn it around, how terrible of an analyst do you have to be to assume that even a shitty retailer cannot make money at Christmas?

 

This will be a very interesting update assuming they provide one in the next week or two. 

 

 

 

 

[ERICOPOLY]

I went into the Santa Barbara Sears store yesterday in La Cumbre Plaza.  There were some customers, and there was a line at the checkout.  But the store is huge.

 

There was a much bigger and longer line next door at Williams Sonoma, and the store is relatively puny by comparison.

[yadayada]

I went into the Santa Barbara Sears store yesterday in La Cumbre Plaza.  There were some customers, and there was a line at the checkout.  But the store is huge.

 

There was a much bigger and longer line next door at Williams Sonoma, and the store is relatively puny by comparison.

I would be carefull reasoning like this tho. You could have said the same when best buy was trading at like 3x FCF. And they clearly arent going anywhere. Unless you went to like 50 stores on 10 different times each, I wouldnt think too much of this.

[merkhet]

Sears should try to capitalize on this:

 

http://online.wsj.com/news/articles/SB10001424052702304753504579280194287430208?mod=WSJ_hpp_LEFTTopStories

 

On Christmas Eve, Brandon Scott was still waiting for a 46-inch Samsung TV and Kate Spade watch he ordered from Amazon on Saturday.

 

"I'm frustrated because these items could have easily been purchased at various retailers in my area, something I would have gladly done had Amazon not ‘guaranteed' their arrival before Christmas," said Mr. Scott of Ann Arbor, Mich.

 

"To ease pressures on possible shipping bottlenecks, many retail chains have promoted the option to pick up items purchased online inside stores. That plan might have backfired for companies like Wal-Mart, where dozens of customers complained that items weren't available for pickup in stores by the promised date."

 

Assuming, of course, that they're not equally culpable.

[muscleman]

Does anyone know the record date for the LE spin off?

[BTShine]

Does anyone know the record date for the LE spin off?

 

The SEC filing left that part blank.  No guidance was given. 

 

http://www.sec.gov/Archives/edgar/data/799288/000119312513464144/d632333dex991.htm

[sampr01]

I don't have access, but If anyone has access to WSJ, please post a summary

 

http://online.wsj.com/news/articles/SB10001424053111903791504576587141377384636?utm_content=buffer4940c

 

Thanks

[BTShine]

I don't have access, but If anyone has access to WSJ, please post a summary

 

http://online.wsj.com/news/articles/SB10001424053111903791504576587141377384636?utm_content=buffer4940c

 

Thanks

 

It's an article from 2011.  Basically just covers how Sears is offering to lease it's real estate at the right price.

[FCharlie]

Interest rates on the ten year are about 15bps higher than they were when Sears released it's Q2 numbers and updated pension guidance.

 

In addition, the S&P 500 is higher also. Up huge for the year.

 

Sears pension should show a gigantic improvement YOY when the 10K is released.

 

Would love to see them get close to fully funded, take a one time charge and dump a pile of cash into the pension while also dumping the pension assets into an annuity like product from an insurance company... Walk away from the whole thing. The pension has been a nightmare for too long.

 

 

 

 

[adesigar]

I don't have access, but If anyone has access to WSJ, please post a summary

 

http://online.wsj.com/news/articles/SB10001424053111903791504576587141377384636?utm_content=buffer4940c

 

Thanks

 

You don't need access to WSJ. Copy the title and paste it in google.

Links to WSJ from googles search engine get access to the page. (Not sure about other search engines)

[rohitc99]

Earlier this month, Sears began selling its Craftsman line through warehouse clubs operated by  Costco Wholesale Corp. Kenmore appliances appear headed to Costco as well, based on the job description for a marketing chief Sears is looking to hire for the brand

 

from the article

[fareastwarriors]

Sears Holdings Corp. SHLD +0.97%  , whose sprawling stores are laden with extra space, is aggressively marketing itself as a place for other retailers to set up shop.

 

Through its real-estate arm, Sears, which has been losing business for the past several years, has listed on its website nearly 4,000 of its namesake and Kmart stores that have space for other merchants or retail operations to lease. That is close to the total number of stores Sears and Kmart operate in the U.S.

 

On Thursday, the retailer said it had struck two lease deals. Western Athletic Clubs Inc. has signed a contract to take over 69,000 square feet of a 273,000-square-foot Sears store in Cupertino, Calif. The health club is expected to open in December 2012.

 

A Gonzalez Grocery Store will take over 41,000 square feet of a 104,000-square-foot Kmart in San Diego. The specialty grocery store is expected to open in November.

 

Last year, Sears leased about 15% of the space in its Costa Mesa, Calif., store to women's fashions retailer Forever 21.

 

It declined to disclose terms of any of the deals.

 

Sears also said Thursday that five of the 12 Edwin Watts Golf Shops that have operated in Sears stores for the past year have closed. The shops took up roughly 3,000 square feet inside each store.

 

Sears spokeswoman Kimberly Freely declined to discuss the reason for the closings.

 

The new deals and Sears' stepped-up marketing show how serious it is about sopping up extra space as demand for its products and its need for expansive sales floors have waned. "Take advantage of this unique offering and enjoy all the benefits that proximity to our store has to offer," the Sears website says.

 

Space for outside retailers "is based on availability and what makes good business sense," Ms. Freely said. The average size of a full-line Sears store is 133,000 square feet, according to the retailer's annual report.

 

The retailer offers potential lessees a number of choices, including space carved out of the center of a store or adjacent space it has vacated. It is also leasing auto shops located in store parking lots. In addition, Sears is advertising an aircraft hangar in the Chicago area that it uses for corporate travel by executives at its Hoffman Estates, Ill., headquarters.

 

Last year, the retailer, which is controlled by hedge fund investor Edward Lampert, had sales of $43 billion, down from $53 billion in 2006.

 

Giving up large chunks of space in an operating store is unusual for a retailer. Store traffic and loyalty comes from retailers' own offerings, not pass-through business from an outside retailer that space has been leased to, analysts say.

 

Still, the line may be getting a bit blurred. big-box consumer electronics chain Best Buy Co. BBY +2.04%  has said it plans to lease out space in at least some of its stores.

 

"This is the canary in the coal mine for all big-box retailing, saying that this type of operation is carrying too much space," said Michael Dart, retail strategist at consulting firm Kurt Salmon.

 

For one thing, online buying and comparison shopping have grown so rapidly that consumers are spending less time in stores.

 

J.C. Penney Co. has set up Sephora cosmetics departments inside its stores. It makes a significant investment to install and staff the Sephora departments with its own people.

 

At some retailers "a specialty business moves in—like an eyeglass seller—that the retailer would never do itself," said Paul Swinand, equity analyst at Morningstar Inc. "But in [sears's] case, it's sort of admitting your real estate is the valuable side of the business and your merchandise is not."

 

At the same time Sears is looking to fill its space with outside retailers, the company is farming out its marquee products. Earlier this month, Sears began selling its Craftsman line through warehouse clubs operated by Costco Wholesale Corp. Kenmore appliances appear headed to Costco as well, based on the job description for a marketing chief Sears is looking to hire for the brand. The responsibilities include working with Costco, the job notice says.

 

Last year, Sears announced a licensing deal with a maker of battery accessories to sell DieHard-brand battery chargers, jump starters and other accessories to outside retailers. The accord didn't include DieHard batteries themselves.

[texual]

I now believe after five years (and more) that I've invested in SHLD, that my investment fully rests on the outcome ESL dictates for the remainder of his life. It will be his legacy regardless of however great his past record was. It will mean nothing unless Sears makes headway.

 

He can no longer sit and fiddle as a side job to his hedge fund. He is chairman AND CEO and has to remove himself from his hedge fund and be full time at Sears to make this work.

 

I don't care if he partners with build-a-bear workshop or says hes going to put everything into SYW. I remember Edwin Watts golf shops and when we put some Craftsman tool sets in Costco. Meant nothing big scale to move the needle. All this talk about some property redev is also too small and slow to make me believe its how we're making cash. Speaking of cash, I'll tell ya what ESL needs to do, start making cash for the parent company soon because I just want to make some money. Whatever it takes, however he knows best, it must be in the best interest of all shareholders.

 

Step one - close the hedge fund completely! Blows my mind why he didn't do this years ago. SHLD is dead money until he has cashed out all his partners and works for SHLD shareholders only.

[merkhet]

Interest rates on the ten year are about 15bps higher than they were when Sears released it's Q2 numbers and updated pension guidance.

 

In addition, the S&P 500 is higher also. Up huge for the year.

 

Sears pension should show a gigantic improvement YOY when the 10K is released.

 

Would love to see them get close to fully funded, take a one time charge and dump a pile of cash into the pension while also dumping the pension assets into an annuity like product from an insurance company... Walk away from the whole thing. The pension has been a nightmare for too long.

 

I agree. I think the pension liability will decrease significantly, and I would also love to see them offload the pension to someone the way GM did a while back.

[Luke 532]

Interesting given the square footage Sears has within SPG.  From Todd Sullivan...

 

Simon spokesman Les Morris said Sears has 119 stores with the company, and trails in the company’s portfolio only by Macy’s. “Sears has 18 1/2 million square feet with us,” Morris said.

 

Sears is just under 8% of $SPG total square footage.  Simon has a market cap of $47B so $SHLD ‘s 8% of that comes to $3.7B. now one can discount as they wish due to the upcoming spin of $SPG that will cause some of these properties to enter into either mall portfolio. This exercise is not to give a hard number on valuation but to illustrate what the market thinks (or the mall owners might) this space is worth based on its position in these portfolios.

http://www.valueplays.net/2013/12/27/sears-real-estate/

[ERICOPOLY]

Interesting given the square footage Sears has within SPG.  From Todd Sullivan...

 

Simon spokesman Les Morris said Sears has 119 stores with the company, and trails in the company’s portfolio only by Macy’s. “Sears has 18 1/2 million square feet with us,” Morris said.

 

Sears is just under 8% of $SPG total square footage.  Simon has a market cap of $47B so $SHLD ‘s 8% of that comes to $3.7B. now one can discount as they wish due to the upcoming spin of $SPG that will cause some of these properties to enter into either mall portfolio. This exercise is not to give a hard number on valuation but to illustrate what the market thinks (or the mall owners might) this space is worth based on its position in these portfolios.

http://www.valueplays.net/2013/12/27/sears-real-estate/

 

Doesn't the Sears square footage need to be converted to suitably sized mall space first before getting leased out at similar rates to what SPG is getting across it's portfolio?  I mean, presumably you don't just get full market lease rates in existing Sears big-box format.  It has to go renovation -- planning, permitting, construction, etc...  So if that process takes a couple of years (planning, permitting and construction)  you would want to discount the real estate for a couple of years.  Then if it takes dollars to pay the people for the planning, permitting and construction, then you'll need to knock those dollars off of the value as well.

 

 

[Luke 532]

Interesting given the square footage Sears has within SPG.  From Todd Sullivan...

 

Simon spokesman Les Morris said Sears has 119 stores with the company, and trails in the company’s portfolio only by Macy’s. “Sears has 18 1/2 million square feet with us,” Morris said.

 

Sears is just under 8% of $SPG total square footage.  Simon has a market cap of $47B so $SHLD ‘s 8% of that comes to $3.7B. now one can discount as they wish due to the upcoming spin of $SPG that will cause some of these properties to enter into either mall portfolio. This exercise is not to give a hard number on valuation but to illustrate what the market thinks (or the mall owners might) this space is worth based on its position in these portfolios.

http://www.valueplays.net/2013/12/27/sears-real-estate/

 

Doesn't the Sears square footage need to be converted to suitably sized mall space first before getting leased out at similar rates to what SPG is getting across it's portfolio?  I mean, presumably you don't just get full market lease rates in existing Sears big-box format.  It has to go renovation -- planning, permitting, construction, etc...  So if that process takes a couple of years (planning, permitting and construction)  you would want to discount the real estate for a couple of years.  Then if it takes dollars to pay the people for the planning, permitting and construction, then you'll need to knock those dollars off of the value as well.

 

Yes, of course.  It just gives an idea that there is real value in SHLD's portfolio, not a precise value.  Exact weight vs the guy is fat.

[heth247]

Step one - close the hedge fund completely! Blows my mind why he didn't do this years ago. SHLD is dead money until he has cashed out all his partners and works for SHLD shareholders only.

 

Bishop Research has pointed out in his second SA article an important role of ESL in helping Sears. I don't think Eddie will close it anytime soon. This is unfortunately a retail turnaround story, not another Berkshire story....yet.

 

"ESL are providing substantial financing to the company through purchases of commercial paper, bonds, and by writing trade receivable puts with certain third-party vendors."

[ERICOPOLY]

Interesting given the square footage Sears has within SPG.  From Todd Sullivan...

 

Simon spokesman Les Morris said Sears has 119 stores with the company, and trails in the company’s portfolio only by Macy’s. “Sears has 18 1/2 million square feet with us,” Morris said.

 

Sears is just under 8% of $SPG total square footage.  Simon has a market cap of $47B so $SHLD ‘s 8% of that comes to $3.7B. now one can discount as they wish due to the upcoming spin of $SPG that will cause some of these properties to enter into either mall portfolio. This exercise is not to give a hard number on valuation but to illustrate what the market thinks (or the mall owners might) this space is worth based on its position in these portfolios.

http://www.valueplays.net/2013/12/27/sears-real-estate/

 

Doesn't the Sears square footage need to be converted to suitably sized mall space first before getting leased out at similar rates to what SPG is getting across it's portfolio?  I mean, presumably you don't just get full market lease rates in existing Sears big-box format.  It has to go renovation -- planning, permitting, construction, etc...  So if that process takes a couple of years (planning, permitting and construction)  you would want to discount the real estate for a couple of years.  Then if it takes dollars to pay the people for the planning, permitting and construction, then you'll need to knock those dollars off of the value as well.

 

Yes, of course.  It just gives an idea that there is real value in SHLD's portfolio, not a precise value.  Exact weight vs the guy is fat.

 

I don't want exact weight.  But is it a 30% slimming?  Oh, it might be 25%, or 35% -- roughly right is good enough.  Putting no discount at all just seems like pumping the value of the stock.

 

A 200lb woman can look fat, but if she loses 30% of bodyweight she might be hot at 140 lb.

[Luke 532]

 

I don't want exact weight.  But is it a 30% slimming?  Oh, it might be 25%, or 35% -- roughly right is good enough.  Putting no discount at all just seems like pumping the value of the stock.

 

A 200lb woman can look fat, but if she loses 30% of bodyweight she might be hot at 140 lb.

 

Sure, take 35% off.  So that $3.76B is instead $2.44B... which is 50% of the entire market cap of SHLD on that 18.5M sq ft.