SHLDQ - Sears Holdings Corp

[constructive]

If LE issued a dividend after the spinoff, he would have to share the money with the new LE shareholders. He wants it for himself.

[Luke 532]

what does he do with the cash? it's simply replacing the cash his business incinerates. go back and track all the financial engineering he is doing. He was forced into this strategy because he needed to raise cash. His bond ratings were marked down. His credit line was in jeopardy. He had to raise cash to keep the doors open. And the stock price confirms this. In fact the value destruction of his core business has far exceeded the cash he has raised from asset sales and financial engineering. Just look at a long term chart of the stock and cross reference it against his financial engineering. So I don't worry about "what is he going to do with the cash". that question has an obvious answer.

 

He has $3.6B of liquidity, no?  Market cap of $3.9B.

 

$1B cash, $300M from Sears Canada, $500M from Lands' End, $1.8B domestic facility = $3.6B.  Even if we entirely exclude the domestic facility, that's still $1.8B of cash. 

 

Of course it depends on how much cash continues to burn, but I wouldn't be at all surprised if he was able to utilize some of this cash for purposes over and above just replacing cash that has been lost.  So I don't think the answer as to what he is going to do with it is as obvious as it might seem.

[Guest wellmont]

his last balance sheet on 11/2/13 shows $599m of cash. total debt of $4.7b and other liabilities of $4.4b. in the last 4 quarters shareholders equity has been essentially cut in half to $1.9b. btw his bond prices for SRAC tell the tale. mine trade at way less than 50c on the dollar.

[Luke 532]

btw his bond prices for SRAC tell the tale. mine trade at way less than 50c on the dollar.

 

I wasn't aware the bond market was completely efficient  ;)

[Guest wellmont]

btw his bond prices for SRAC tell the tale. mine trade at way less than 50c on the dollar.

 

I wasn't aware the bond market was completely efficient  ;)

 

bonds have been in a massive bull market and most bonds are trading at all time highs. except for sears. :)

[Luke 532]

his last balance sheet on 11/2/13 shows $599m of cash.

 

Includes the RE transactions since then... so roughly $1B cash.

[Guest wellmont]

where is this $400m of increased cash you are referring to disclosed?

[ERICOPOLY]

Buy Trader Joe's and roll out new stores into a big chunk of the SHLD real estate across the country.

[krazeenyc]

where is this $400m of increased cash you are referring to disclosed?

 

Press Release 1/9/2014

 

As of January 4, 2014, we had total cash of approximately $1.0 billion and availability under our credit facilities of $2.3 billion ($1.8 billion under our domestic facility and $0.5 billion under our Sears Canada facility, prior to taking into consideration possible reserves) and $6 million in commercial paper outstanding, with commercial paper capacity of $500 million. The cash balance does not include $300 million Canadian in proceeds from the Sears Canada real estate transactions announced on November 11, 2013, which are expected to be received January 10, 2014.

[krazeenyc]

what does he do with the cash? it's simply replacing the cash his business incinerates. go back and track all the financial engineering he is doing. He was forced into this strategy because he needed to raise cash. His bond ratings were marked down. His credit line was in jeopardy. He had to raise cash to keep the doors open. And the stock price confirms this. In fact the value destruction of his core business has far exceeded the cash he has raised from asset sales and financial engineering. Just look at a long term chart of the stock and cross reference it against his financial engineering. So I don't worry about "what is he going to do with the cash"? that question has an obvious answer.

 

How many times do I have to say it - the business is incinerating inventory/net inventory (if you value these as cash then yes it's burning cash -- but if you're trying to shrink your store count/inventory... i digress...) -- of course retails sucks and is not generating enough cash. The almost ALL the cash that has been "burned" has gone directly to pension and retirement benefits over the last 3 years.

[muscleman]

what does he do with the cash? it's simply replacing the cash his business incinerates. go back and track all the financial engineering he is doing. He was forced into this strategy because he needed to raise cash. His bond ratings were marked down. His credit line was in jeopardy. He had to raise cash to keep the doors open. And the stock price confirms this. In fact the value destruction of his core business has far exceeded the cash he has raised from asset sales and financial engineering. Just look at a long term chart of the stock and cross reference it against his financial engineering. So I don't worry about "what is he going to do with the cash"? that question has an obvious answer.

 

How many times do I have to say it - the business is incinerating inventory/net inventory (if you value these as cash then yes it's burning cash -- but if you're trying to shrink your store count/inventory... i digress...) -- of course retails sucks and is not generating enough cash. The almost ALL the cash that has been "burned" has gone directly to pension and retirement benefits over the last 3 years.

 

That is right. But as pension liability gap has narrowed, why is he raising so much cash so aggressively right now? Let's see what he will do with this much cash.

[bmichaud]

Jos. A. Bank in talks to acquire Eddie Bauer:

 

http://online.wsj.com/news/articles/SB10001424052702304428004579357222939405300

 

Will be interesting to track this and what price and multiple is ultimately paid for the asset, as a comp for Lands end. I thought I heard on CNBC this morning the price was $1B, but now I can't confirm that via any article. So not sure yet.

 

Attached is a 2008 10K for Eddie Bauer. Preliminarily, the numbers look pretty hideous for EB...

Eddie_Bauer_2008_10K.pdf

[bmichaud]

Ok just read another wsj article that repeated the $1B price tag.

 

If that's true - that's highly supportive of the $12 to $15 per share valuation chad dismissed the other day. EB had/has worse margins than EL and generated/generates say $1.1B in sales. That purchase price is .9x sales....

 

1x EL's $1.6B is $14.95 per share. Using $1.7B in sales is $15.89 per share.

[DCG]

Not sure about EB's current sales, but EB is a much more respected and prominent brand than Lands End. not sure how to put a number on brand equity but I think it's tough to value Lands End based on this purchase.

[bmichaud]

Good article on the difficulty of transforming a retailer into a REIT:

 

http://nreionline.com/reits/turning-stores-reits-no-easy-feat-analysts-warn

 

 

[krazeenyc]

Not sure about EB's current sales, but EB is a much more respected and prominent brand than Lands End. not sure how to put a number on brand equity but I think it's tough to value Lands End based on this purchase.

 

based on what is Eddie Bauer more "respected" than Land's End.

[peridotcapital]

Ok just read another wsj article that repeated the $1B price tag.

 

If that's true - that's highly supportive of the $12 to $15 per share valuation chad dismissed the other day. EB had/has worse margins than EL and generated/generates say $1.1B in sales. That purchase price is .9x sales....

 

1x EL's $1.6B is $14.95 per share. Using $1.7B in sales is $15.89 per share.

 

Eddie Bauer was bought out of bankruptcy by a private equity firm, has likely been restructured about as much as possibly could be expected, and is now being prepped for sale (a likely IPO if not a sale to Jos A Bank). Conversely, Lands End has yet to go through that process. Though I agree with those who have pointed out that LE is a prime candidate for the same type of PE attention, those firms passed on Eddie's asking price, likely because he wanted to sell it to them for close to the amount they would likely sell it for after taking it private and fixing it up. As a result, I think you will see that LE (pre-PE) will trade at a discount to a post-PE situation like Eddie Bauer. Buying a marginal company like EB for ~$1B after Golden Gate (I think that's who bought them) has scrubbed them clean seems like a terrible idea for Jos A Bank, but they are evidently desperate.

 

In addition, I doubt an EB buyout would come with $500M in debt, so I think an EV/EBITDA multiple comp would be more accurate than straight price to sales.

[bmichaud]

Ok just read another wsj article that repeated the $1B price tag.

 

If that's true - that's highly supportive of the $12 to $15 per share valuation chad dismissed the other day. EB had/has worse margins than EL and generated/generates say $1.1B in sales. That purchase price is .9x sales....

 

1x EL's $1.6B is $14.95 per share. Using $1.7B in sales is $15.89 per share.

 

Eddie Bauer was bought out of bankruptcy by a private equity firm, has likely been restructured about as much as possibly could be expected, and is now being prepped for sale (a likely IPO if not a sale to Jos A Bank). Conversely, Lands End has yet to go through that process. Though I agree with those who have pointed out that LE is a prime candidate for the same type of PE attention, those firms passed on Eddie's asking price, likely because he wanted to sell it to them for close to the amount they would likely sell it for after taking it private and fixing it up. As a result, I think you will see that LE (pre-PE) will trade at a discount to a post-PE situation like Eddie Bauer. Buying a marginal company like EB for ~$1B after Golden Gate (I think that's who bought them) has scrubbed them clean seems like a terrible idea for Jos A Bank, but they are evidently desperate.

 

In addition, I doubt an EB buyout would come with $500M in debt, so I think an EV/EBITDA multiple comp would be more accurate than straight price to sales.

 

Agreed it will be interesting to see what the post-scrub EB looks like. But just looking at the history of the two companies, even a post-scrub EB is likely worse than EL.

 

My P/S was an EV/Sales multiple. So the $500MM dividend would be taken out of the $1.6B valuation.

[krazeenyc]

Ok just read another wsj article that repeated the $1B price tag.

 

If that's true - that's highly supportive of the $12 to $15 per share valuation chad dismissed the other day. EB had/has worse margins than EL and generated/generates say $1.1B in sales. That purchase price is .9x sales....

 

1x EL's $1.6B is $14.95 per share. Using $1.7B in sales is $15.89 per share.

 

Eddie Bauer was bought out of bankruptcy by a private equity firm, has likely been restructured about as much as possibly could be expected, and is now being prepped for sale (a likely IPO if not a sale to Jos A Bank). Conversely, Lands End has yet to go through that process. Though I agree with those who have pointed out that LE is a prime candidate for the same type of PE attention, those firms passed on Eddie's asking price, likely because he wanted to sell it to them for close to the amount they would likely sell it for after taking it private and fixing it up. As a result, I think you will see that LE (pre-PE) will trade at a discount to a post-PE situation like Eddie Bauer. Buying a marginal company like EB for ~$1B after Golden Gate (I think that's who bought them) has scrubbed them clean seems like a terrible idea for Jos A Bank, but they are evidently desperate.

 

Value investors often look only at the numbers -- and don't consider a host of other factors. Land's End has been stuck under the SHLD umbrella and has obviously not been invested in at all. Land's End does $1.3 Billion in direct sales. Land's End loses money in Sears stores b/c there is absolutely no synergy -- the leases basically end in 5 years.  Under  VF Corp or Sycamore they could rapidly grow the brand and increase profitability by opening stand alone stores, and investing in the business the way SHLD never has. If you want to believe the "rumors" they wanted $1.5 Billion plus for LE -- I can see PE not wanting to buy in at those numbers. I would not be a buyer of LE at EV of 1.5 billion.  Being that I believe LE will garner a lot of interest (at $1.2B)  -- if the equity is at $200-300M with a $700-800M EV there is multibagger potential in the LE equity.

[constructive]

Eddie Bauer was bought out of bankruptcy by a private equity firm, has likely been restructured about as much as possibly could be expected, and is now being prepped for sale (a likely IPO if not a sale to Jos A Bank). Conversely, Lands End has yet to go through that process. Though I agree with those who have pointed out that LE is a prime candidate for the same type of PE attention, those firms passed on Eddie's asking price, likely because he wanted to sell it to them for close to the amount they would likely sell it for after taking it private and fixing it up. As a result, I think you will see that LE (pre-PE) will trade at a discount to a post-PE situation like Eddie Bauer. Buying a marginal company like EB for ~$1B after Golden Gate (I think that's who bought them) has scrubbed them clean seems like a terrible idea for Jos A Bank, but they are evidently desperate.

 

In addition, I doubt an EB buyout would come with $500M in debt, so I think an EV/EBITDA multiple comp would be more accurate than straight price to sales.

 

Agree with your comments. If they pay $1B it will just prove JOSB are idiots. The market won't pay that much attention to that transaction when valuing LE.

[peridotcapital]

Ok just read another wsj article that repeated the $1B price tag.

 

If that's true - that's highly supportive of the $12 to $15 per share valuation chad dismissed the other day. EB had/has worse margins than EL and generated/generates say $1.1B in sales. That purchase price is .9x sales....

 

1x EL's $1.6B is $14.95 per share. Using $1.7B in sales is $15.89 per share.

 

Eddie Bauer was bought out of bankruptcy by a private equity firm, has likely been restructured about as much as possibly could be expected, and is now being prepped for sale (a likely IPO if not a sale to Jos A Bank). Conversely, Lands End has yet to go through that process. Though I agree with those who have pointed out that LE is a prime candidate for the same type of PE attention, those firms passed on Eddie's asking price, likely because he wanted to sell it to them for close to the amount they would likely sell it for after taking it private and fixing it up. As a result, I think you will see that LE (pre-PE) will trade at a discount to a post-PE situation like Eddie Bauer. Buying a marginal company like EB for ~$1B after Golden Gate (I think that's who bought them) has scrubbed them clean seems like a terrible idea for Jos A Bank, but they are evidently desperate.

 

Value investors often look only at the numbers -- and don't consider a host of other factors. Land's End has been stuck under the SHLD umbrella and has obviously not been invested in at all. Land's End does $1.3 Billion in direct sales. Land's End loses money in Sears stores b/c there is absolutely no synergy -- the leases basically end in 5 years.  Under  VF Corp or Sycamore they could rapidly grow the brand and increase profitability by opening stand alone stores, and investing in the business the way SHLD never has. If you want to believe the "rumors" they wanted $1.5 Billion plus for LE -- I can see PE not wanting to buy in at those numbers. I would not be a buyer of LE at EV of 1.5 billion.  Being that I believe LE will garner a lot of interest (at $1.2B)  -- if the equity is at $200-300M with a $700-800M EV there is multibagger potential in the LE equity.

 

I agree with you, depending on the price. I don't think Sycamore would pay very much (more than 8x EV/current EBITDA would not seem justifiable to me for a PE firm). If you assume $125M in EBITDA and $500M net debt, that would be $500M equity in a best case scenario. Still a good return though, if it comes out at $300M, even though you would be hoping for a buyout and taking a little gamble on current management without one. I also think the fact that Eddie is loading it up with debt already means PE would have a hard time leveraging it up a lot more to boost their returns, which could be a factor.

 

A strategic buyer like VF is different... they could pay more because of the operational synergies. I wonder if VF would be in on EB as well, or is there too much overlap with North Face.

[krazeenyc]

Ok just read another wsj article that repeated the $1B price tag.

 

If that's true - that's highly supportive of the $12 to $15 per share valuation chad dismissed the other day. EB had/has worse margins than EL and generated/generates say $1.1B in sales. That purchase price is .9x sales....

 

1x EL's $1.6B is $14.95 per share. Using $1.7B in sales is $15.89 per share.

 

Eddie Bauer was bought out of bankruptcy by a private equity firm, has likely been restructured about as much as possibly could be expected, and is now being prepped for sale (a likely IPO if not a sale to Jos A Bank). Conversely, Lands End has yet to go through that process. Though I agree with those who have pointed out that LE is a prime candidate for the same type of PE attention, those firms passed on Eddie's asking price, likely because he wanted to sell it to them for close to the amount they would likely sell it for after taking it private and fixing it up. As a result, I think you will see that LE (pre-PE) will trade at a discount to a post-PE situation like Eddie Bauer. Buying a marginal company like EB for ~$1B after Golden Gate (I think that's who bought them) has scrubbed them clean seems like a terrible idea for Jos A Bank, but they are evidently desperate.

 

Value investors often look only at the numbers -- and don't consider a host of other factors. Land's End has been stuck under the SHLD umbrella and has obviously not been invested in at all. Land's End does $1.3 Billion in direct sales. Land's End loses money in Sears stores b/c there is absolutely no synergy -- the leases basically end in 5 years.  Under  VF Corp or Sycamore they could rapidly grow the brand and increase profitability by opening stand alone stores, and investing in the business the way SHLD never has. If you want to believe the "rumors" they wanted $1.5 Billion plus for LE -- I can see PE not wanting to buy in at those numbers. I would not be a buyer of LE at EV of 1.5 billion.  Being that I believe LE will garner a lot of interest (at $1.2B)  -- if the equity is at $200-300M with a $700-800M EV there is multibagger potential in the LE equity.

 

I agree with you, depending on the price. I don't think Sycamore would pay very much (more than 8x EV/current EBITDA would not seem justifiable to me for a PE firm). If you assume $125M in EBITDA and $500M net debt, that would be $500M equity in a best case scenario. Still a good return though, if it comes out at $300M, even though you would be hoping for a buyout and taking a little gamble on current management without one. I also think the fact that Eddie is loading it up with debt already means PE would have a hard time leveraging it up a lot more to boost their returns, which could be a factor.

 

A strategic buyer like VF is different... they could pay more because of the operational synergies. I wonder if VF would be in on EB as well, or is there too much overlap with North Face.

 

Looking at LTM Ebitda is only the tip of the iceberg. What Sycamore and VF Corp will be doing is mainly trying to figure out what their value added bring to the business (of course they want to pay a good price). FWIW, Sycamore paid about 15x LTM Ebitda for Talbots. Even Lands End of 2-3 years ago was run very poorly (with 0 synergies with SHLD) and had 200 million in ebitda. I think VF will be drooling to acquire LE.

[bmichaud]

Some interesting information out of SPG's SpinCo.

 

Summary Info:

- 53MM SF

- $400MM NOI

- $7.55 NOI/SF

- $2B of debt at spin

- Rouse Properties trades at ~$88 per SF on an EV/SF basis

 

Page 6 of Form 10:

- Sears SF: 5.605MM, 10.6% of total portfolio

- Sears share of rent: .6%

- Sears NOI/SF: $.43

- Dick's NOI/SF: $8.23

 

 

- At the $88/SF multiple, SpinCo would trade at 11.71X NOI

- Were SpinCo to buy SHLD out of its entire 5.605MM SF portfolio at 50% of its own TEV/NOI multiple at Dick's NOI/SF of $8.23, SHLD would receive $262.46MM, or $46.83 per SF

- SHLD could achieve the same result if it was able to redevelop the portfolio for $41.17/SF and it traded for $88/SF

- My guess is SpinCo would prefer to buy out SHLD, as the enormity of the under-market rents would provide strong growth to SpinCo's NOI

 

I am not sure where these SHLD properties would fall within the Baker Street RE distribution. The non-core 186MM SF is valued at $8/SF in their analysis. So if these properties are within that slug, the SPG SpinCo would provide a potential tailwind to this valuation.

 

On the other hand, if these properties are within the core 68MM SF, which Baker values between $65 and $133 per SF, then the above analysis might provide a bit of a headwind.

 

My guess is that it's somewhere in between. Using Rouse's $88/SF is probably too harsh from the beginning, plus SPG SpinCo would likely garner an even higher multiple once it redevelops under-paying tenant space. Also, I have not yet buttoned down how much it takes per SF to redevelop these types of assets. I've been using $50/SF, but I think that might be too harsh. As such, SPG SpinCo might be able to buy SHLD out for even $88/SF, which would be above the lower-end core 68MM SF valuation Baker used of $65/SF.

SPG_SpinCo_Tentants__Anchors.pdf

SPG_SpinCo_Form_10.pdf

SPG_SpinCo_Presentation.pdf

[JAllen]

Sears owns half of a city block in Oakland, right in the middle of everything, with an entrance to Bart in the basement.  The building is at least four stories (above ground). 

 

 

I couldn't find county property information so have pieced it together through other webpages. 

 

 

I post this because it I was near it Friday night and noticed how huge and in the middle of downtown it was. 

 

 

The City and developers want to redevelop it - I bet it's a matter of price and Lampert's just waiting to get an excellent one.

 

 

http://www.loopnet.com/Listing/15363526/1945-Broadway-Oakland-CA/

 

 

http://www.contracostatimes.com/news/ci_24769359/negotiations-advance-sale-sears-building-downtown-oakland

 

 

EDIT: It looks like the redevelopment has been an issue about price and terms - see attached.

[JAllen]

Some interesting information out of SPG's SpinCo.

 

Summary Info:

- 53MM SF

- $400MM NOI

- $7.55 NOI/SF

- $2B of debt at spin

- Rouse Properties trades at ~$88 per SF on an EV/SF basis

 

Page 6 of Form 10:

- Sears SF: 5.605MM, 10.6% of total portfolio

- Sears share of rent: .6%

- Sears NOI/SF: $.43

- Dick's NOI/SF: $8.23

 

 

- At the $88/SF multiple, SpinCo would trade at 11.71X NOI

- Were SpinCo to buy SHLD out of its entire 5.605MM SF portfolio at 50% of its own TEV/NOI multiple at Dick's NOI/SF of $8.23, SHLD would receive $262.46MM, or $46.83 per SF

- SHLD could achieve the same result if it was able to redevelop the portfolio for $41.17/SF and it traded for $88/SF

- My guess is SpinCo would prefer to buy out SHLD, as the enormity of the under-market rents would provide strong growth to SpinCo's NOI

 

I am not sure where these SHLD properties would fall within the Baker Street RE distribution. The non-core 186MM SF is valued at $8/SF in their analysis. So if these properties are within that slug, the SPG SpinCo would provide a potential tailwind to this valuation.

 

On the other hand, if these properties are within the core 68MM SF, which Baker values between $65 and $133 per SF, then the above analysis might provide a bit of a headwind.

 

My guess is that it's somewhere in between. Using Rouse's $88/SF is probably too harsh from the beginning, plus SPG SpinCo would likely garner an even higher multiple once it redevelops under-paying tenant space. Also, I have not yet buttoned down how much it takes per SF to redevelop these types of assets. I've been using $50/SF, but I think that might be too harsh. As such, SPG SpinCo might be able to buy SHLD out for even $88/SF, which would be above the lower-end core 68MM SF valuation Baker used of $65/SF.

 

 

The SPG spinco Sears are B, at best, malls.  You can easily look at the city names - most people have never heard of.  I don't think Baker Street included third tier malls in their 80/20 type premium properties.