SHLDQ - Sears Holdings Corp

[Uccmal]

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.

 

There is a big difference between BAC, AIG, and SHLD.  With BAC and AIG, the underlying businesses were intact.  It was screwups from past managers that left them with ugly liabilities.  With SHLD the core business is under serious duress.  And the same manager who put them there is still there. 

 

Over ten years Lampert has been all over the map on this.  He bought back shares for years, rather than reinvesting in the business.  Then he bought virtually all of SCC, then he sold it down to 51% - at a loss.  During that period he never invested in the retailing in Canada.  Now he is going to invest in the retail in the states but only partially.  He is going to be competing against many companies much further along, who didn't stop investing along the way. The evidence of his "success" at retailing is ten years old now with 7 years of losses.  I just dont get the thesis.  Maybe the real estate has value, maybe not, but it will shrink over time as parentco keeps running losses.  These losses have to be paid for somehow.  It looks to me like the losses will be financed by the continued elimination of the real estate portfolio.  When he finally gives up on retailing there will be much less real estate value per share. 

 

Lampert bit off more than anyone could chew.  To some extent he got caught in a major recession.  But, his competitors at amazon, home depot, walmart etc. never stopped investing in their businesses.  He did.  As a result Sears has suffered reputational damage that cant be undone. 

 

Part of my opinion is coloured by experiences with Sears.  It was the only store credit card I have ever had.  I got it because of alleged rewards I would receive when I bought a large number of appliances, and some furniture.  The buggers screwed me out of the rewards by changing the rules.  I was a reasonably loyal Sears shopper.  It ended badly with me cutting up the card in front of the local Sears Home manager, who hid, while I was complaining.  I am a reasonable person, so if I complain, how many others like me are out there?  To say that outlet was badly managed is an understatement. 

 

 

 

[Vish_ram]

If SYW is the nirvana and 100% transition to this platform, will Sears be profitable?

 

The 10-Q keeps talking about decline in gross margin rate due to SYW points. Shouldn't SYW points help them increase the margin rate?

[peridotcapital]

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.

 

Eddie is renovating the best mall locations, which are likely making money already. It's likely too early to have seen much of a lift from the remodels, but speaking of them, I took a few pictures while I was in town for the annual meeting (several of their good mall stores are near Sears HQ so it was silly not to go in a couple). I didn't go crazy with the pictures (see 5 attached), but it gives you a sense of some of the things they are putting in the stores. The last photo is the Oakbrook Center location where they carved out space for Williams Sonoma's offshoot brands.

 

Switching gears to Eddie's original cost basis, a while back I actually went through the public filings and tried to pinpoint what it actually is these days. You have to assume that the figure for his Kmart debt cost basis reported in the media was in the right ballpark (67 cents on the dollar, so $800M for $1.2B face value of debt), but the cash he contributed for more equity before Kmart emerged from bankruptcy was public, as were all of the details on the options and converts he got.

 

The bottom line is that his cost basis in KMRT equity was about $21/share when Kmart emerged from bankruptcy (interestingly, you could have actually gotten them for less than that for a brief time after they began trading). Add the value of the SHLD spinoffs and dividends (about $19/share) to the current stock price and he has made about 2.7x on his original investment. Even more amazing is that the stock was $101 when he announced the Sears/Kmart merger in 2004. So Eddie made about 5x on his money in the 3-4 years before the merger, and then from 2004-2014 has sustained an ~50% decline. Pretty wild roller coaster ride...

[tooskinneejs]

I find it fascinating that Sears longs have done a complete 180 in the last year or so on their thesis for why this stock will be a home run.  There used to be an acknowledgement that their retail operations were doomed and a belief that the "real value" was in the real estate.  Fast forward a year or so later and the view has completely changed; now Sears longs are fully invested in the idea of a retail turnaround despite the seemingly insurmountable odds stacked against the company.

[merkhet]

Don't paint us all with the same brush -- some of us have always been crazy and believed that the turnaround might work. :)

[Guest wellmont]

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.

 

Eddie is renovating the best mall locations, which are likely making money already. It's likely too early to have seen much of a lift from the remodels, but speaking of them, I took a few pictures while I was in town for the annual meeting (several of their good mall stores are near Sears HQ so it was silly not to go in a couple). I didn't go crazy with the pictures (see 5 attached), but it gives you a sense of some of the things they are putting in the stores. The last photo is the Oakbrook Center location where they carved out space for Williams Sonoma's offshoot brands.

 

Switching gears to Eddie's original cost basis, a while back I actually went through the public filings and tried to pinpoint what it actually is these days. You have to assume that the figure for his Kmart debt cost basis reported in the media was in the right ballpark (67 cents on the dollar, so $800M for $1.2B face value of debt), but the cash he contributed for more equity before Kmart emerged from bankruptcy was public, as were all of the details on the options and converts he got.

 

The bottom line is that his cost basis in KMRT equity was about $21/share when Kmart emerged from bankruptcy (interestingly, you could have actually gotten them for less than that for a brief time after they began trading). Subtract the value of the SHLD spinoffs and dividends (about $19/share) and his adjusted cost basis in what is now trading as SHLD is an astounding $2/share. Even more amazing is that the stock was $101 when he announced the Sears/Kmart merger in 2004. So Eddie made about 5x on his money in the 3-4 years before the merger, and then from 2004-2014 has sustained an ~50% decline. Pretty wild roller coaster ride...

 

Edit: So I mixed around a lot of numbers there in the last paragraph and it makes it sound like Eddie has made 20x on the investment (2 to 40), which is obviously wrong...  Essentially he has gotten 90% of his money back on the spinoffs and dividends alone, and the current SHLD shares are mostly pure profit...

 

no wonder he lacks urgency. :)

[heth247]

Don't paint us all with the same brush -- some of us have always been crazy and believed that the turnaround might work. :)

 

Same here.  ;) 

[20ppy]

I've always believed the turn around or deeper yet, transformation. RE and all other assets being distributed or spun off are really the margin of safety. What's here to lose? I am willing to give Eddie many tries before he succeeds and once he does, the ride will have been worth it and much more. So the next few years down the road, the journey will be exciting as well. I am very conformtable with my money in Eddie's hands.

[20ppy]

I actually moved my BRK investment to SHLD in a serious way because, one is at the peak and perfection, the other is yet to begin and likely to shine into the future.

[ni-co]

I find it fascinating that Sears longs have done a complete 180 in the last year or so on their thesis for why this stock will be a home run.  There used to be an acknowledgement that their retail operations were doomed and a belief that the "real value" was in the real estate.  Fast forward a year or so later and the view has completely changed; now Sears longs are fully invested in the idea of a retail turnaround despite the seemingly insurmountable odds stacked against the company.

 

1. I don't even think that's true for Berkowitz. Liquidation has always been one of several options. The asset values have been downside protection. You've always had to trust Lampert with the assets. And there is value there after all!

 

2. Does it really matter? When the facts change, I change my mind.

[tiddman]

I've always believed the turn around or deeper yet, transformation. RE and all other assets being distributed or spun off are really the margin of safety. What's here to lose?

 

Well the company has about $820M in cash and lost $600M last quarter, and has nearly $3 billion in debt plus other long term obligations such as the pension.  What's to lose is everything, from a shareholder perspective, i.e. the company gets into trouble with its lenders, the stock goes to zero, and the remaining assets are distributed to bond holders.

 

They say that businesses don't die because they run out of money, they die because they run out of cash. SHLD could have theoretical asset value but if they run short of cash to pay their current obligations they'll go under.  The real estate that is supposedly the margin of safety would be sold at a discount to the bond holders.

 

I've been amazed that Eddie has been able to throw things overboard fast enough to keep the ship afloat but there are only a few things left, Sears Canada and what else?  Maybe he could spin the brands and online store.  Is that stuff worth the current market cap of $4 billion?

[tiddman]

Over ten years Lampert has been all over the map on this.  He bought back shares for years, rather than reinvesting in the business.  Then he bought virtually all of SCC, then he sold it down to 51% - at a loss.  During that period he never invested in the retailing in Canada.  Now he is going to invest in the retail in the states but only partially…. Lampert bit off more than anyone could chew.

 

I agree with you and part of the reason it's hard for me to be bullish on SHLD is just this inconsistency.

 

However, I think the simple answer is that Eddie just changed his mind a few times and in each case did what he thought was best.  He was in incontrovertible control and just played around with different options.  In a sense this is inconsistent, but in a sense it is a good policy because it's a big, complex, fluid situation, and to stick to a single approach dogmatically over 10-20 years without entertaining other ideas would also probably not be a good idea either.  In retrospect I'm sure he wishes he didn't buy back stock etc. but overall he's actually done phenomenally well.  As mentioned elsewhere in this thread he's probably made 4-5x his money.  SHLD is basically a 20 year "work-out".

 

I agree with others that the plan here was never to try to turn the operations around or compete in the retail space.  He's obviously never shown any acumen for that, and isn't showing it now.  It's all about how to carve of more pieces that have value.

 

Shareholders today need to be very cautious because something like a 50% decline in the stock wouldn't bother Eddie one bit because he's already made many fortunes from this, but shareholders today would be hurt by that.  Shareholders always need to be aware of differences in alignment of interests between themselves and those controlling their investments.

[merkhet]

A 50% decline shouldn't bother shareholders either unless the decline is in intrinsic value.

 

Would you be equally as worried if the company broke even and yet made a $560 million investment in cap ex under cash flows from investment?

[ni-co]

The real estate that is supposedly the margin of safety would be sold at a discount to the bond holders.

 

I don't think so.

[ERICOPOLY]

Shareholders today need to be very cautious because something like a 50% decline in the stock wouldn't bother Eddie one bit because he's already made many fortunes from this, but shareholders today would be hurt by that.  Shareholders always need to be aware of differences in alignment of interests between themselves and those controlling their investments.

 

You are saying that because Eddie has made a lot of money, he doesn't mind losing 50% of what he has left in it.

 

Similarly, Berkshire investors today need to be very cautious because a 50% decline from here wouldn't worry Buffett one bit because he's already made many fortunes from BRK.

 

[Luke 532]

Shareholders today need to be very cautious because something like a 50% decline in the stock wouldn't bother Eddie one bit because he's already made many fortunes from this, but shareholders today would be hurt by that.  Shareholders always need to be aware of differences in alignment of interests between themselves and those controlling their investments.

 

As a business owner why in the world would I care if the quoted price that someone is offering me for my share in the business has declined?  What does that have to do with the underlying business?  This comment has listening to Mr. Market to tell you whether you're right or wrong written all over it.

 

I think a point that is often lost that I find useful during volatile periods is this; those voting today are largely traders, momentum guys, etc.  They are playing the short-term game.  Those that are business owners are not participating in the price action from day-to-day, therefore their votes don't count for the short-term.  They are playing the long-term game.  It's very difficult to play and succeed at both games.  Once one figures out which game they want to play their results stand a chance to improve.

[tiddman]

You are saying that because Eddie has made a lot of money, he doesn't mind losing 50% of what he has left in it.

 

Similarly, Berkshire investors today need to be very cautious because a 50% decline from here wouldn't worry Buffett one bit because he's already made many fortunes from BRK

 

Lampert and Buffett are different investors, and Sears and Berkshire are different investments.  Sears is an extended work-out, it is clearly less valuable today than 5 and 10 years ago due to the spin-offs, store closures, real estate sales, operational losses and loss of competitive position, and this trend will continue.  Berkshire on the other hand is a wealth creation/accumulation machine and on all counts is doing the opposite of Sears -- accumulating new businesses, opening more stores, expanding its operations, increasing profits and improving its competitive position.  All of the pieces are in place for these trends to continue.  However the trends at Sears and Berkshire are completely opposite.  Sears is getting smaller, Berkshire is getting bigger.

 

I think a lot of people hoped that Lampert would act with Sears in the same way as Buffett did with the original Berkshire and make investments to expand it into other businesses and continue his 20%+ compounded returns.  But he didn't.  Instead he has done well for himself and ESL and certain early shareholders by taking Sears apart piece by piece, leaving less and less for remaining shareholders.

 

Buffett has nearly 100% of his wealth in Berkshire.  Lampert has less than 50% of his wealth in Sears.  Lampert clearly has other irons in the fire and his motivation with Sears is to get a little more icing on his cake rather than try to recover from losses. This is in contrast to Sears shareholders to bought at prices ranging from $50-100 who are hoping he'll perform a miracle so they can recover their losses.  It is a misalignment of interests.

[tiddman]

The real estate that is supposedly the margin of safety would be sold at a discount to the bond holders.

 

I don't think so.

 

You may recall that the way that Lampert got involved in Sears to begin with was buying Kmart bonds at around 2/3 of face value and taking control of Kmart and its real estate and operations that way, after shareholders had been wiped out… this is typically how it works when retail chains go bankrupt.  If/when Radio Shack goes bankrupt, watch and see what happens to shareholders and debt holders.

[ERICOPOLY]

Buffett has nearly 100% of his wealth in Berkshire.  Lampert has less than 50% of his wealth in Sears.  Lampert clearly has other irons in the fire and his motivation with Sears is to get a little more icing on his cake rather than try to recover from losses. This is in contrast to Sears shareholders to bought at prices ranging from $50-100 who are hoping he'll perform a miracle so they can recover their losses.  It is a misalignment of interests.

 

So if Buffett had 50% of his wealth outside of Berkshire, then he wouldn't care if BRK dropped 50%.  He only cares because his ownership is 99%, not 50%.  That's the key difference between him and Eddie that align them with shareholders? 

 

This ownership thing can be taken too far (for example, see if WorldCom shareholders were well served by Bernie Ebbers' stake.  A person with too large of a stake might cover things up when things are getting bad, hide it from fellow shareholders to buy themselves more time.).  Eddie has plenty of incentive here.

 

I don't think this argument has merit -- his cost basis in SHLD is irrelevant to his forward returns, and growing his money is what a billionaire does for sport.  You don't like losing in sports even if you can afford to retire from it.  Lampert likes to compound his money, not see it go down.  He already has more than a billion net worth -- for many many years now he could afford to lose 1/2 of his money, but I think it's the last thing he wants to do. 

 

[tiddman]

So if Buffett had 50% of his wealth outside of Berkshire, then he wouldn't care if BRK dropped 50%.  He only cares because his ownership is 99%, not 50%.  That's the key difference between him and Eddie that align them with shareholders? 

 

Not sure where the comparisons to Buffett come from?  Sure they're both rich and both investors but there are as many differences as similarities.  For example the Leucadia guys put up a great long term track record but after a 50% decline and a series of rough years essentially retired and turned over the reins to others and returns have been nowhere near the same since.  You're saying that Lampert is destined to deliver the same value to shareholders as the single greatest investor of all time?  Even if I were to believe that it's clear that Sears isn't the way it's going to happen since it's getting smaller every year.  I think it's a lot more likely that he's semi-retired and will extract a little value from Sears every year for the next few years and then it'll go to zero and he'll focus on other things.

[krazeenyc]

Tiddman,

 

The notion that Eddie Lampert is not aligned with shareholders because "he's already rich" or "he's already made a lot of money on SHLD" is an absurd one. That's why Eric brought up Buffett.  In addition to his holding with ESL and various entities he owns more than 25M shares personally. I would say his interest are directly aligned with shareholders -- this is clear to everyone -- even the most bearish on SHLD.

 

I would suggest you look at Alexanders as an example of a retail bankruptcy with poor retail operations but valuable real estate.

 

 

[ERICOPOLY]

So if Buffett had 50% of his wealth outside of Berkshire, then he wouldn't care if BRK dropped 50%.  He only cares because his ownership is 99%, not 50%.  That's the key difference between him and Eddie that align them with shareholders? 

 

Not sure where the comparisons to Buffett come from?

 

 

Where does Buffett come in?

 

He is an example of an investor with a very low cost basis.

 

Applying your argument, he would not be aligned with shareholder interests if the following two things happened:

 

1)  he sold 50% of his stake (he could therefore afford to lose the other half)

2)  the stock dropped 50%  (he wouldn't care if it went back up because his cost basis is so low)

 

 

I'm simply pointing out to you how retarded that argument is.  Sometimes an example is necessary.

 

[constructive]

As mentioned elsewhere in this thread he's probably made 4-5x his money.

 

Peridot just explained that he has made roughly 2.7x return on KMRT - SHLD. ($38 share price + $19 spinoffs) / $21 cost basis = 2.7x

 

However the problem is that 100% of that return came from buying KMRT at a bargain price over a decade ago. None of it has come from business value creation.

[Guest wellmont]

As mentioned elsewhere in this thread he's probably made 4-5x his money.

 

Peridot just explained that he has made roughly 2.7x return on KMRT - SHLD. ($38 share price + $19 spinoffs) / $21 cost basis = 2.7x

 

However the problem is that 100% of that return came from buying KMRT at a bargain price over a decade ago. None of it has come from business value creation.

 

$21 is his cost basis in kmart not shld. his cost basis in shld is way lower.

[peridotcapital]

As mentioned elsewhere in this thread he's probably made 4-5x his money.

 

Peridot just explained that he has made roughly 2.7x return on KMRT - SHLD. ($38 share price + $19 spinoffs) / $21 cost basis = 2.7x

 

However the problem is that 100% of that return came from buying KMRT at a bargain price over a decade ago. None of it has come from business value creation.

 

+1

 

Here's another way of looking at it... After emerging from bankruptcy, Kmart shares started trading at $15 (May 2003). A year later in 2004 they hit $57 each. Why did I pick $57 as a measurement point? Because the current SHLD stock price of $38 plus the value of the dividends and spin-offs received since then ($19/share) gets you to $57 per share. Eddie made all his profit in a single year (mid 2003 to mid 2004) and it's been dead money for a decade since. Granted, the volatility has been enormous, so some people did sell at higher prices for a nice profit (count me as one of the fortunate ones), but I would bet most current equity holders are sitting on a loss, not simply a reduced gain like Eddie.