SHLDQ - Sears Holdings Corp

[merkhet]

For both Chad & wellmont -- my point on the pension funding was that it's my guess that the investments he's making in SYW have an expected return above 10% -- so that's why he's not directing other cash to pension funding. Instead, he's borrowing at 3% rather than diverting the SYW investment cash to the pension -- if that makes sense.

 

Also, Chad, it would seem that the "Restricted Payments" section of the Amended and Restated Credit Agreement does allow for repurchases. After all, a spin-off is also a restricted payment under those terms, and we all got shares of Land's End.

 

A&S Credit Agreement - http://www.sec.gov/Archives/edgar/data/1310067/000119312511144672/dex103.htm

[ERICOPOLY]

Domestic same store sales are down 1.0% in 1Q 2014 (down 2.2% at Kmart and up 0.2% at Sears) versus down 3.6% in 1Q 2013 (down 4.6% at Kmart and down 2.4% at Sears).

 

They have renovated some of the Sears stores, and they have fewer Sears stores overall compared to last year.

 

Did they break out the same store metrics for the renovated stores?  That seems to be the interesting metric -- are they able to successfully run a retailer when they actually make a concerted effort to do so.

 

[tiddman]

They don't have to win, they just need to be moderately profitable for this to be a 'grand slam home run' as Berkowitz calls it.

 

The context of that quote is Eddie turning Sears around, "Of course, the best thing that could happen would be that he turns around Sears and Kmart and it's a grand-slam home run. The worst thing that happens is he gives it his best shot and starts to find higher and better uses for all of the assets, from land to trademarks to online."

 

I don't think anyone, including Eddie, really thinks that Sears traditional retail operations are going to turn around at this point.  Anyone?  After 19 consecutive declining quarters and no end in sight, and no new investment?

 

The battle I was referring to was specifically Sears' online store vs. Amazon.  Amazon sells basically everything that Sears does, so if Sears wants to take some of that business they need to compete in some fashion.  They're probably not going to do it on price (since Amazon is happy to sell at cost).  To the extent that their brands are still in good shape after all the years of turmoil, they could potentially have an advantage there, or perhaps some kind of hybrid online/retail strategy where you buy online but are serviced by a local store (though other retailers have tried this with mixed success).  But Sears needs to find something if they are going to try to grow that business profitably.

[peridotcapital]

For both Chad & wellmont -- my point on the pension funding was that it's my guess that the investments he's making in SYW have an expected return above 10% -- so that's why he's not directing other cash to pension funding. Instead, he's borrowing at 3% rather than diverting the SYW investment cash to the pension -- if that makes sense.

 

Also, Chad, it would seem that the "Restricted Payments" section of the Amended and Restated Credit Agreement does allow for repurchases. After all, a spin-off is also a restricted payment under those terms, and we all got shares of Land's End.

 

A&S Credit Agreement - http://www.sec.gov/Archives/edgar/data/1310067/000119312511144672/dex103.htm

 

Eddie was asked at the annual meeting whether their debt covenants allowed for stock repurchases (the questioner did not want to go through and dig into the ratio tests himself). Eddie told him to look for himself anyway for the details, but he also chimed in that he thought that they only would pass 1 of the 4 tests at the present time.

 

As for debt repurchases, there would not seem to be a big advantage there either... the highest cost debt (SRAC) only costs SHLD ~$20M a year in interest, it's tax deductible, and most of the maturites are more than a decade away (I could see buying back the 2017 issue possibly). My guess would be that he will paydown the revolver as much as he can since that is the first thing he is going to have to extend (expires in 2016). The better deal he can get on that and the less its drawn on, the better the terms he'll get when he has to refinance the $2.25B of debt coming due in 2018.

[Luke 532]

They don't have to win, they just need to be moderately profitable for this to be a 'grand slam home run' as Berkowitz calls it.

 

The context of that quote is Eddie turning Sears around, "Of course, the best thing that could happen would be that he turns around Sears and Kmart and it's a grand-slam home run. The worst thing that happens is he gives it his best shot and starts to find higher and better uses for all of the assets, from land to trademarks to online."

 

I don't think anyone, including Eddie, really thinks that Sears traditional retail operations are going to turn around at this point.  Anyone?  After 19 consecutive declining quarters and no end in sight, and no new investment?

 

The battle I was referring to was specifically Sears' online store vs. Amazon.  Amazon sells basically everything that Sears does, so if Sears wants to take some of that business they need to compete in some fashion.  They're probably not going to do it on price (since Amazon is happy to sell at cost).  To the extent that their brands are still in good shape after all the years of turmoil, they could potentially have an advantage there, or perhaps some kind of hybrid online/retail strategy where you buy online but are serviced by a local store (though other retailers have tried this with mixed success).  But Sears needs to find something if they are going to try to grow that business profitably.

 

If he's able to transform Sears and Kmart this will surely be a grand slam, even if it's just moderately profitable. 

 

Nobody thinks he'll have Sears succeed in the traditional retail sense (he's not even trying for that), but he doesn't need to for this investment to be a boon for shareholders.  And to do that he doesn't need to beat Amazon... there is plenty of room for more than one company to play and do well at the online game.

[jeffmori7]

Domestic same store sales are down 1.0% in 1Q 2014 (down 2.2% at Kmart and up 0.2% at Sears) versus down 3.6% in 1Q 2013 (down 4.6% at Kmart and down 2.4% at Sears).

 

They have renovated some of the Sears stores, and they have fewer Sears stores overall compared to last year.

 

Did they break out the same store metrics for the renovated stores?  That seems to be the interesting metric -- are they able to successfully run a retailer when they actually make a concerted effort to do so.

 

That is the good question to ask.

 

And do we know how many stores were renovated by the way? Do they disclose those numbers?

[heth247]

 

I don't think anyone, including Eddie, really thinks that Sears traditional retail operations are going to turn around at this point.  Anyone?  After 19 consecutive declining quarters and no end in sight, and no new investment?

 

 

What do you mean by "no new investment"?  They are investing (or "burning") an estimated $800MM a year into the SYW platform.

 

 

[tiddman]

What do you mean by "no new investment"?  They are investing (or "burning") an estimated $800MM a year into the SYW platform.

 

It's less than $800M per year and it isn't all in the SYW platform:

 

We spent $329 million, $378 million, and $432 million during 2013, 2012 and 2011, respectively, for capital expenditures. Capital expenditures during both 2013 and 2012 primarily included investments in online and mobile shopping capabilities, enhancements to the Shop Your Way platform, information technology infrastructure and store maintenance.

 

The way I read this the investments were primarily in online and mobile, and not in the traditional brick-and-mortar retail, and that is what I meant. I don't see Sears' traditional retail operations improving or turning around because they aren't getting any new investment.

[heth247]

What do you mean by "no new investment"?  They are investing (or "burning") an estimated $800MM a year into the SYW platform.

 

It's less than $800M per year and it isn't all in the SYW platform:

 

We spent $329 million, $378 million, and $432 million during 2013, 2012 and 2011, respectively, for capital expenditures. Capital expenditures during both 2013 and 2012 primarily included investments in online and mobile shopping capabilities, enhancements to the Shop Your Way platform, information technology infrastructure and store maintenance.

 

The way I read this the investments were primarily in online and mobile, and not in the traditional brick-and-mortar retail, and that is what I meant. I don't see Sears' traditional retail operations improving or turning around because they aren't getting any new investment.

 

This does not include the SYW reward points, which is counted as part of cost of goods sold.

[Kraven]

I have a vivid memory from 1982 of the Sears in my local mall adding a small arcade during the video game craze of the early 80's.  You had to walk all the way through the store to get to the arcade in back.  I remember playing Star Castle there over and over again.  I guess my point is maybe they could try that again.  Might be a way to get some crowds in.

[oddballstocks]

They don't have to win, they just need to be moderately profitable for this to be a 'grand slam home run' as Berkowitz calls it.

 

The context of that quote is Eddie turning Sears around, "Of course, the best thing that could happen would be that he turns around Sears and Kmart and it's a grand-slam home run. The worst thing that happens is he gives it his best shot and starts to find higher and better uses for all of the assets, from land to trademarks to online."

 

I don't think anyone, including Eddie, really thinks that Sears traditional retail operations are going to turn around at this point.  Anyone?  After 19 consecutive declining quarters and no end in sight, and no new investment?

 

The battle I was referring to was specifically Sears' online store vs. Amazon.  Amazon sells basically everything that Sears does, so if Sears wants to take some of that business they need to compete in some fashion.  They're probably not going to do it on price (since Amazon is happy to sell at cost).  To the extent that their brands are still in good shape after all the years of turmoil, they could potentially have an advantage there, or perhaps some kind of hybrid online/retail strategy where you buy online but are serviced by a local store (though other retailers have tried this with mixed success).  But Sears needs to find something if they are going to try to grow that business profitably.

 

If he's able to transform Sears and Kmart this will surely be a grand slam, even if it's just moderately profitable. 

 

Nobody thinks he'll have Sears succeed in the traditional retail sense (he's not even trying for that), but he doesn't need to for this investment to be a boon for shareholders.  And to do that he doesn't need to beat Amazon... there is plenty of room for more than one company to play and do well at the online game.

 

What's a grand slam?  Is it a double, triple, 5x, 10x?

 

No one seems to have a hard value on what this is worth just "more than this" or "read 500 pages and you'll find out".  I know this is your whole portfolio or most of it, so I figured you'd probably have the best insight.  What do you expect to earn on this, 10% a year, 15/25/35%?

[ni-co]

If he's able to transform Sears and Kmart this will surely be a grand slam, even if it's just moderately profitable. 

 

Nobody thinks he'll have Sears succeed in the traditional retail sense (he's not even trying for that), but he doesn't need to for this investment to be a boon for shareholders.  And to do that he doesn't need to beat Amazon... there is plenty of room for more than one company to play and do well at the online game.

 

What do you mean by "no new investment"?  They are investing (or "burning") an estimated $800MM a year into the SYW platform.

 

The way I read this the investments were primarily in online and mobile, and not in the traditional brick-and-mortar retail, and that is what I meant. I don't see Sears' traditional retail operations improving or turning around because they aren't getting any new investment.

 

This is what the main stream media isn't getting (or doesn't want to get): It's not about Lampert not investing SHLD cash at all, he simply chose not to invest it primarily into store renovation and merchandise. Instead he chose to invest it into SYW first, pensions second and only after that into renovating (a few) stores. Suffering losses and burning cash is inevitable with these priorities – and of course he knew this. He's not a complete idiot who "doesn't get retail" and is too stupid to know that you have to invest into your stores, as so many are happy to state over and over again. I think Clayton Christensen proved that the "management is stupid" theory rarely is the right explanation for a business suffering. This is also why he absolutely needs control to undertake such a transition.

 

Of course this doesn't mean that he's poised to succeed! But certainly you can't argue that he's been sitting on his hands doing nothing but selling assets.

[ni-co]

What's a grand slam?  Is it a double, triple, 5x, 10x?

 

No one seems to have a hard value on what this is worth just "more than this" or "read 500 pages and you'll find out".  I know this is your whole portfolio or most of it, so I figured you'd probably have the best insight.  What do you expect to earn on this, 10% a year, 15/25/35%?

 

I think at least 5x from here. Think about it. What earnings do other department stores create on $30bn in sales? If he needs 10 years to do it I expect to earn 17%, if he needs 5 years I expect to earn 38% annualized. It's easy as that. And the downside is not a zero.

[constructive]

What's a grand slam?  Is it a double, triple, 5x, 10x?

 

I absolutely agree we need to standardize baseball/investing metaphors. I'd propose the following:

 

Single +25%

Double +50%

Triple +75%

Home Run +100%

Grand Slam +400%

[Luke 532]

What's a grand slam?  Is it a double, triple, 5x, 10x?

 

No one seems to have a hard value on what this is worth just "more than this" or "read 500 pages and you'll find out".  I know this is your whole portfolio or most of it, so I figured you'd probably have the best insight.  What do you expect to earn on this, 10% a year, 15/25/35%?

 

I don't know on an exact upside as that will change based on (1) if the transformation is successful, (2) how quickly it becomes successful OR Lampert decides it's not successful and monetizes, (3) the level to which they lease out properties, etc.  Many won't agree with the "I don't know" response, but I'm fine not knowing today whether this has 5x, 10x, 50x*, etc. potential.  We'll find out that potential in due time.  I'm more focused on the downside.  Post-spin, I think there is a huge margin of safety in the high-$30's for reasons I've stated before.  There is the risk of opportunity cost as things play out, but that is the most prevalent risk at these prices with an investment in SHLD, and I'm very comfortable with that risk.

 

It's roughly 1/3 of my portfolio via common and options.

 

* feel free to snark at 50x but give Lampert free cash flow from a permanent-capital asset-rich enterprise for a decade or two and let's see what he can do (obviously the rate of return will be dependent on how long it would take to multiply shareholder value).

[oddballstocks]

I appreciate the replies, seems like most who are in this thing there is little risk of a loss and the potential for a 5x or greater gain.

 

I have no dog in this fight, but I do enjoy reading this thread, it's entertaining.  It reminds me of the old Yahoo message boards where there'd be a passionate core group of posters who were head over heals for a company.  I've never had that feeling for a company, but I appreciate when people do.  It must be a personality type.

 

 

[tiddman]

This is what the main stream media isn't getting (or doesn't want to get): It's not about Lampert not investing SHLD cash at all, he simply chose not to invest it primarily into store renovation and merchandise. Instead he chose to invest it into SYW first, pensions second and only after that into renovating (a few) stores.

 

Well I agree, though there seem to be investors and analysts (a few on this thread) that seem to keep waiting for the traditional retail results will turn around, when I agree that was never the strategy, and there's really no hope of that happening.

 

What I fail to see is whether or not this alternative strategy is working.  It might be working from the perspective of Eddie's shares purchased 10-15 years ago. His basis is reportedly around $15/share, not sure if that includes his cost of buying Kmart on the cheap etc. From that perspective the Land's End spin-off was probably worth nearly 50% of his cost basis so that alone was a nice profit.  The value of the spin-offs probably handily exceeds his cost basis at this point and so even if what's left of SHLD goes to zero he would, over the long term, come out ahead.

 

But the same isn't true of those that bought their shares more recently.  Fairholme's basis is reportedly around $85 per share:

 

http://www.peridotcapital.com/2014/05/even-great-investors-like-bruce-berkowitz-make-mistakes.html

 

I am not sure how much of that $85 they have received from the various spin-offs, but I'm guessing less than half that, so they are probably still showing a loss with SHLD at about $38.

 

Investors buying today obviously don't get the benefit of those spin-offs and there are probably only a few things left to spin, meanwhile cash burns unabated.  Sears Canada is one of them (which has a value between zero and $750 million depending on who you ask).

 

In other words, those buying today are buying into the tail end of what will probably be a 20 year work-out of the combined Sears and Kmart operations, and in my opinion there isn't much left on the carcass.  Those hoping for a 3-5x return are completely dreaming and really aren't understanding the situation.

 

But as you say, it isn't and was never about the retail operations which are as bad as anything in the US.

[Luke 532]

 

* feel free to snark at 50x but give Lampert free cash flow from a permanent-capital asset-rich enterprise for a decade or two and let's see what he can do (obviously the rate of return will be dependent on how long it would take to multiply shareholder value).

 

His 29% annualized rate of return from '88-'04 was roughly a 59-fold return in 16 years.  SHLD is a different animal than ESL, of course, but he could work wonders with SHLD kicking off hundreds of millions of dollars to him annually to invest as he sees fit.

[tiddman]

... he could work wonders with SHLD kicking off hundreds of millions of dollars to him annually to invest as he sees fit.

 

SHLD is not producing investable funds, it is burning cash at an alarming rate.

 

SHLD is in a way kicking money over to Eddie with the spin-offs, but if Eddie receives a spin-off, sells it, and then re-invests the money, that doesn't benefit you, the SHLD shareholder, unless you are also invested in Eddie's ESL fund.

[Luke 532]

Those hoping for a 3-5x return are completely dreaming and really aren't understanding the situation.

 

I couldn't disagree more.  When all is said and done I would be mildly disappointed with a share price of just $100.

 

It's that kind of rhetoric I'm glad I ignored in 2009 with GGP, and a few years ago with BAC, AIG, etc.

 

... he could work wonders with SHLD kicking off hundreds of millions of dollars to him annually to invest as he sees fit.

 

SHLD is not producing investable funds, it is burning cash at an alarming rate.

 

No kidding.  I'm assigning a risk/reward on where I think the ball is headed, not where it currently is.  And if I'm right I get the benefit of the depressed stock price due to the uncertainty.

[TwoCitiesCapital]

What's a grand slam?  Is it a double, triple, 5x, 10x?

 

I absolutely agree we need to standardize baseball/investing metaphors. I'd propose the following:

 

Single +25%

Double +50%

Triple +75%

Home Run +100%

Grand Slam +400%

 

This is just plain confusing. Where I come from a double is a 100% gain, a triple a 200% gain, etc.

 

Let's just drop the baseball talk :)

[Luke 532]

This is just plain confusing. Where I come from a double is a 100% gain, a triple a 200% gain, etc.

 

Let's just drop the baseball talk :)

 

Agreed.  I think SHLD is like a half-court shot at the buzzer... that's the potential.  :)

[constructive]

What's a grand slam?  Is it a double, triple, 5x, 10x?

 

I absolutely agree we need to standardize baseball/investing metaphors. I'd propose the following:

 

Single +25%

Double +50%

Triple +75%

Home Run +100%

Grand Slam +400%

 

This is just plain confusing. Where I come from a double is a 100% gain, a triple a 200% gain, etc.

 

Let's just drop the baseball talk :)

 

I see how that conflict might make you balk at my suggestion.

[Luke 532]

What's a grand slam?  Is it a double, triple, 5x, 10x?

 

I absolutely agree we need to standardize baseball/investing metaphors. I'd propose the following:

 

Single +25%

Double +50%

Triple +75%

Home Run +100%

Grand Slam +400%

 

This is just plain confusing. Where I come from a double is a 100% gain, a triple a 200% gain, etc.

 

Let's just drop the baseball talk :)

 

I see how that conflict might make you balk at my suggestion.

 

I see what you did there.  Well done.  :D

 

And whoever made the Seritache (as in mustache) comment this morning, that was pretty funny.

[ERICOPOLY]

Does anyone know if the renovated stores are making money?  At the end of the day, all the stores will either be closed or renovated.  So you get left holding the renovated bag.  Might be interesting to find out.