peridotcapital Posted February 25, 2014 Share Posted February 25, 2014 I don't think Eddie is going to just repeat what Buffett did (maybe there just can be one Buffett). He is more likely to be another "Outsider CEO". Honestly, neither matters to me as long as he manages to generate a compounded return of 20% over the next 20 years for me. Btw, it is unfair to say that "SHLD kept loosing". As Eddie indicated in his letters, adjusted EBITDA is the best metric to measure. They have earned pretty stable adjusted EBITDA and generated lots of cash before 2011. Then the dramatic decline started... Using adjusted EBITDA as a core metric proves Eddie is not going to mimic Warren Buffett. Buffett hates managers who use adjusted EBITDA. I would suggest looking at free cash flow instead, especially when the two are wildly different, which is quite often unfortunately. You mean like Buffett suggests we ignore the effect of the long term derivatives contracts on Earnings(aka adjusted earnings)? I agree with Buffett that we should ignore the effects of those Derivatives contracts on Berkshire earnings just like I agree with Lampert that his Adjusted EBITDA is a better measure for SHLD. To me there's a difference because BRK does not have to put up any additional cash even if the mark-to-market position of the derivatives goes the wrong way in the short-term (I believe he made sure of that), so they don't have any impact on cash flow. The problem with adjusted EBITDA is that is ignores actual cash that is going out the door, as well as the awarding of things that have actual value... in the case of stock-based compensation for example. Link to comment Share on other sites More sharing options...
heth247 Posted February 25, 2014 Share Posted February 25, 2014 Using adjusted EBITDA as a core metric proves Eddie is not going to mimic Warren Buffett. Buffett hates managers who use adjusted EBITDA. I would suggest looking at free cash flow instead, especially when the two are wildly different, which is quite often unfortunately. While I agree that FCF is important too, they are all just metrics, not a single one is sufficient, and it depends on purpose. Adjusted EBITDA not only makes it easier to compare SHLD to other retailers in terms of profitability, but also to itself year over year. And actually in the book, one of the 7 "Outsiders CEO" in that book (John Malone or Tom Murphy?) is among the first to use EBITDA as a key metric for business aquisition at a time Wall street has not accepted yet. Link to comment Share on other sites More sharing options...
Liberty Posted February 25, 2014 Share Posted February 25, 2014 And actually in the book, one of the 7 "Outsiders CEO" in that book (John Malone or Tom Murphy?) is among the first to use EBITDA as a key metric for business aquisition at a time Wall street has not accepted yet. It was Malone. iirc, his mentor used to say "It's better to pay interest than taxes". Link to comment Share on other sites More sharing options...
heth247 Posted February 25, 2014 Share Posted February 25, 2014 heth247, that's an interesting thought. I think it might be a lot harder for Eddie to do, though. What supercharged the returns of the Outsiders CEOs was a combination of good businesses that threw off lots of cash and great capital allocators who knew how to deploy that cash at very high returns (mostly a mix of acquisitions and buybacks). Eddie might be a great capital allocator, but his business definitely doesn't throw off lots of cash for him to deploy. He has a pile of assets and liabilities that are probably worth more than the market cap, but there's a step missing for him to be able to use the Outsiders model and for this not to be just a melting ice cube liquidation play. My view on SHLD is that if it really is going to turn into a great compounder that will do well for the next 10-20 years, then I don't mind waiting until year 3 or 5 (or whatever) to get in, after the new model has been demonstrated. People who got in before that, during the past decade, hoping for an investment vehicle, have so far been disappointed. Maybe there will be a huge spike in the early years when it starts, and I don't mind missing it because there's also always the chance that ESL will keep only doing his Ayn Rand retail experiment to the bitter end and results won't be as good as people expect. But if he stabilizes things, converts assets into cash and redeploys it into good businesses that provide lots of FCF for him to play with, then I'll certainly consider it. If not, there are other good Outsiders-style CEOs out there... Hi, Liberty, thanks for your comments. First, not all of the Outsider CEOs were in "great business" (e.g. Chapter 3, Bill Anders of General Dynamics took over at the worse time for the defense industry). Second, retailer like SHLD did generate lots of cash before 2011. Even JCP once (2004?) achieved EBITDA margin of 9%, overshadows SHLD's peak EBITDA margin of 6.9%. Regarding whether one should jump onto the ship now or later, I think it depends on individual's risk tolerance and how comfortable you feel with the downside. It is more of a personal choice. Link to comment Share on other sites More sharing options...
Liberty Posted February 25, 2014 Share Posted February 25, 2014 Hi, Liberty, thanks for your comments. First, not all of the Outsider CEOs were in "great business" (e.g. Chapter 3, Bill Anders of General Dynamics took over at the worse time for the defense industry). Second, retailer like SHLD did generate lots of cash before 2011. Even JCP once (2004?) achieved EBITDA margin of 9%, overshadows SHLD's peak EBITDA margin of 6.9%. Hi heth, Correct me if I'm wrong, but my impression was that General Dynamics was a good business, just in a cyclical downturn and with some bloat that could be cut out. I see high-cost brick and mortar department stores much more in a secular decline in this world of Amazon and Walmart (there's also opportunity at the higher end, but Sears seems to be stuck in the middle), kind of like how Kay Graham probably couldn't have done what she did at the Post in today's newspaper world. But I could very well be wrong. I don't know that much about retailing, except that it's incredibly hard and that aside from having the lowest costs or very desirable exclusive products, competitive advantages are hard to come by. Link to comment Share on other sites More sharing options...
heth247 Posted February 25, 2014 Share Posted February 25, 2014 heth247, that's an interesting thought. Eddie might be a great capital allocator, but his business definitely doesn't throw off lots of cash for him to deploy. He has a pile of assets and liabilities that are probably worth more than the market cap, but there's a step missing for him to be able to use the Outsiders model and for this not to be just a melting ice cube liquidation play. What I feel Eddie lack of is that, he has not find "THE" second guy that "executes" well so that he can focus on capital allocation. Most of the "Outsider CEOs" had such a guy... Link to comment Share on other sites More sharing options...
Liberty Posted February 25, 2014 Share Posted February 25, 2014 What I feel Eddie lack of is that, he has not find "THE" second guy that "executes" well so that he can focus on capital allocation. Most of the "Outsider CEOs" had such a guy... Good point. If he wants to make retail work, he certainly could use a Dan Burke to his Tom Murphy, so to speak. Link to comment Share on other sites More sharing options...
heth247 Posted February 25, 2014 Share Posted February 25, 2014 Correct me if I'm wrong, but my impression was that General Dynamics was a good business, just in a cyclical downturn and with some bloat that could be cut out. I see high-cost brick and mortar department stores much more in a secular decline in this world of Amazon and Walmart (there's also opportunity at the higher end, but Sears seems to be stuck in the middle), kind of like how Kay Graham probably couldn't have done what she did at the Post in today's newspaper world. But I could very well be wrong. I don't know that much about retailing, except that it's incredibly hard and that aside from having the lowest costs or very desirable exclusive products, competitive advantages are hard to come by. Regarding the decline being terminal or not, I would agree that people won't use film camera, or read less paper-newspapers, but for B&M mall? No, human are social animals. On a side note, actually I think Amazon' model is not sustainable, but I might very well be wrong too. Link to comment Share on other sites More sharing options...
adesigar Posted February 25, 2014 Share Posted February 25, 2014 I don't think Eddie is going to just repeat what Buffett did (maybe there just can be one Buffett). He is more likely to be another "Outsider CEO". Honestly, neither matters to me as long as he manages to generate a compounded return of 20% over the next 20 years for me. Btw, it is unfair to say that "SHLD kept loosing". As Eddie indicated in his letters, adjusted EBITDA is the best metric to measure. They have earned pretty stable adjusted EBITDA and generated lots of cash before 2011. Then the dramatic decline started... Using adjusted EBITDA as a core metric proves Eddie is not going to mimic Warren Buffett. Buffett hates managers who use adjusted EBITDA. I would suggest looking at free cash flow instead, especially when the two are wildly different, which is quite often unfortunately. You mean like Buffett suggests we ignore the effect of the long term derivatives contracts on Earnings(aka adjusted earnings)? I agree with Buffett that we should ignore the effects of those Derivatives contracts on Berkshire earnings just like I agree with Lampert that his Adjusted EBITDA is a better measure for SHLD. To me there's a difference because BRK does not have to put up any additional cash even if the mark-to-market position of the derivatives goes the wrong way in the short-term (I believe he made sure of that), so they don't have any impact on cash flow. The problem with adjusted EBITDA is that is ignores actual cash that is going out the door, as well as the awarding of things that have actual value... in the case of stock-based compensation for example. So you are saying its ok to ignore the short-term effect of derivatives in the case of Berkshire, no "actual cash that is going out the door". In the case of Sears the excess depreciation of 400 million each year is supposed to be considered as "actual cash that is going out the door"? Im also sure that Pension Expenses and Pension Settlements are recurring payments. While I remember Munger and Buffets comments on EBITDA aka Bullshit earnings, generalizations like this should not be taken at Face Value. What Buffett and Munger were talking about is companies that have recurring "one time" charges going on for 5-10 years and use EBITDA. If Buffett always ignored one time or temporary effects on a company's net income how many value investments would he have found? Link to comment Share on other sites More sharing options...
Liberty Posted February 25, 2014 Share Posted February 25, 2014 Regarding the decline being terminal or not, I would agree that people won't use film camera, or read less paper-newspapers, but for B&M mall? No, human are social animals. On a side note, actually I think Amazon' model is not sustainable, but I might very well be wrong too. To be clear, I don't think brick & mortar in general is going away. Just that it won't be nearly as profitable as before for those who have to compete on price and sell undifferentiated products. Walmart made sure of that, and now Amazon is just adding extra pressure on top. We ordered all our baby furniture on Amazon.ca and saved hundreds of dollars compared to the stuff we saw at Babies R Us... We didn't even think of going to Sears, I'll admit :-\ Link to comment Share on other sites More sharing options...
heth247 Posted February 25, 2014 Share Posted February 25, 2014 We ordered all our baby furniture on Amazon.ca and saved hundreds of dollars compared to the stuff we saw at Babies R Us... We didn't even think of going to Sears, I'll admit :-\ I don't buy anything from Sears either. :-\ Link to comment Share on other sites More sharing options...
peridotcapital Posted February 25, 2014 Share Posted February 25, 2014 I don't think Eddie is going to just repeat what Buffett did (maybe there just can be one Buffett). He is more likely to be another "Outsider CEO". Honestly, neither matters to me as long as he manages to generate a compounded return of 20% over the next 20 years for me. Btw, it is unfair to say that "SHLD kept loosing". As Eddie indicated in his letters, adjusted EBITDA is the best metric to measure. They have earned pretty stable adjusted EBITDA and generated lots of cash before 2011. Then the dramatic decline started... Using adjusted EBITDA as a core metric proves Eddie is not going to mimic Warren Buffett. Buffett hates managers who use adjusted EBITDA. I would suggest looking at free cash flow instead, especially when the two are wildly different, which is quite often unfortunately. You mean like Buffett suggests we ignore the effect of the long term derivatives contracts on Earnings(aka adjusted earnings)? I agree with Buffett that we should ignore the effects of those Derivatives contracts on Berkshire earnings just like I agree with Lampert that his Adjusted EBITDA is a better measure for SHLD. To me there's a difference because BRK does not have to put up any additional cash even if the mark-to-market position of the derivatives goes the wrong way in the short-term (I believe he made sure of that), so they don't have any impact on cash flow. The problem with adjusted EBITDA is that is ignores actual cash that is going out the door, as well as the awarding of things that have actual value... in the case of stock-based compensation for example. So you are saying its ok to ignore the short-term effect of derivatives in the case of Berkshire, no "actual cash that is going out the door". In the case of Sears the excess depreciation of 400 million each year is supposed to be considered as "actual cash that is going out the door"? Im also sure that Pension Expenses and Pension Settlements are recurring payments. While I remember Munger and Buffets comments on EBITDA aka Bullshit earnings, generalizations like this should not be taken at Face Value. What Buffett and Munger were talking about is companies that have recurring "one time" charges going on for 5-10 years and use EBITDA. If Buffett always ignored one time or temporary effects on a company's net income how many value investments would he have found? My previous comments advocated the use of free cash flow as opposed to adjusted EBITDA. How would doing that treat depreciation as a cash outflow? I never said to use reported GAAP earnings, which would factor in depreciation. Link to comment Share on other sites More sharing options...
thelads Posted February 25, 2014 Share Posted February 25, 2014 I am aware of the valuable Real Estate. But just wondering about the bad real estate. I know Eddie is going through spin offs. I do think there is a lot of value in the top 20% of the RE. But what about the bottom 50%? Where is the exit? And what is the cost to exit per store (to break the leases?). I am just concerned that swallows a lot of the value. Not a concern obviously if all the brands and good RE gets spun off. Or maybe he spins off the BAD RE? But would there be a fear of fraudulent conveyance? Sorry if this was answered before Link to comment Share on other sites More sharing options...
heth247 Posted February 26, 2014 Share Posted February 26, 2014 But if he stabilizes things, converts assets into cash and redeploys it into good businesses that provide lots of FCF for him to play with, then I'll certainly consider it. If not, there are other good Outsiders-style CEOs out there... Liberty, do you mind sharing a few other good outsider-style CEOs out there? I mean, excluding companies like BKA, KO, XOM... thanks. Link to comment Share on other sites More sharing options...
Luke 532 Posted February 26, 2014 Share Posted February 26, 2014 Form 4's: Just over 3,000,000 shares of AutoNation sold in past week. 2/18-2/20: 1.19M shares http://www.sec.gov/Archives/edgar/data/350698/000118143114008203/xslF345X03/rrd403038.xml 2/21-2/25: 1.87M shares http://www.sec.gov/Archives/edgar/data/350698/000118143114009277/xslF345X03/rrd403624.xml Link to comment Share on other sites More sharing options...
merkhet Posted February 26, 2014 Share Posted February 26, 2014 I believe my little experiment in January paid off -- I'm starting to get e-mails about buying a television from Sears with Surprise Points (about $33 worth). Of course, we don't have a real experiment with a control group here, but I find it interesting nonetheless. Anyone else receiving e-mails from Sears pushing TVs? Link to comment Share on other sites More sharing options...
Luke 532 Posted February 26, 2014 Share Posted February 26, 2014 I believe my little experiment in January paid off -- I'm starting to get e-mails about buying a television from Sears with Surprise Points (about $33 worth). Of course, we don't have a real experiment with a control group here, but I find it interesting nonetheless. Anyone else receiving e-mails from Sears pushing TVs? Was that when you walked around that department for an hour or so with SYW logged-in? Thanks for doing that, by the way. I haven't received any TV-related offers. Link to comment Share on other sites More sharing options...
merkhet Posted February 26, 2014 Share Posted February 26, 2014 Yup. I have yet to work up the courage to stand around the junior miss section... like a creeper... to test out the hypothesis that they might be sending me TV stuff purely because I am a male. Link to comment Share on other sites More sharing options...
Luke 532 Posted February 26, 2014 Share Posted February 26, 2014 Yup. I have yet to work up the courage to stand around the junior miss section... like a creeper... to test out the hypothesis that they might be sending me TV stuff purely because I am a male. ;D Link to comment Share on other sites More sharing options...
BTShine Posted February 26, 2014 Share Posted February 26, 2014 I believe my little experiment in January paid off -- I'm starting to get e-mails about buying a television from Sears with Surprise Points (about $33 worth). Of course, we don't have a real experiment with a control group here, but I find it interesting nonetheless. Anyone else receiving e-mails from Sears pushing TVs? I have not been getting offers for TVs. Also, how did you get the $33 of points? Link to comment Share on other sites More sharing options...
Luke 532 Posted February 26, 2014 Share Posted February 26, 2014 I have not been getting offers for TVs. Also, how did you get the $33 of points? That's the targeted marketing of SYW. You don't have to (or need to) offer everybody the same deals... just those that will be interested. Offer them just enough to get them to buy. Link to comment Share on other sites More sharing options...
BTShine Posted February 26, 2014 Share Posted February 26, 2014 Did anyone notice that Sears Canada's Adj EBITDA came in above the midpoint of their guidance range from Jan. 9? Link to comment Share on other sites More sharing options...
merkhet Posted February 26, 2014 Share Posted February 26, 2014 I have been shopping more often at Sears. I actually bought a Valentine's gift from Sears for the first time this year. They had a surprisingly useful page that allowed me to choose the category of gift and a slider to decide how much I wanted to spend. It was a lot easier than I had expected given previous interactions with the SYW platform. Link to comment Share on other sites More sharing options...
Matson125 Posted February 26, 2014 Share Posted February 26, 2014 Is there a way to Itunes or Google Play to determine how many times the Shopyourway app has been downloaded? Link to comment Share on other sites More sharing options...
ni-co Posted February 26, 2014 Share Posted February 26, 2014 http://www.bloomberg.com/video/is-there-any-way-to-rescue-j-c-penney-and-sears-ufLzzmqbRcmRFM4_d1PFEA.html Greg, I wonder if Lampert himself should take a page out of Lampert's playbook, so to speak. :o Link to comment Share on other sites More sharing options...
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