SHLDQ - Sears Holdings Corp

[BTShine]

Hey all:

 

I forgot to add that in addition to there being some bad stores in the MI area, the SYW program was riddled with silliness.

 

For example, they were giving away coupons for $1 off a gallon of gas at Speedway stores.  So I, and a couple of others, would figure out what is cheap, on sale, and can be stored, and then buy it up in bulk to get the SYW coupons for the gas.

 

Sometimes there would be other great offers too.  There is no way SHLD was making any money on these sales.  In fact, I would be reasonably sure that they were losing quite a bit.

 

I guess because it is "online" it is different than "regular" retail...and you can afford to lose money, just look at AMZN.

 

SHLD no longer offers the great gas coupons, so I don't really shop there.  The only reason to go was to take advantage of the crazy deals.  No more crazy deals, no more shopping :(  How many other did/do this?

 

I'm going to say not as many people as you think.  Lots of people are not very rational and think they'll "just take this deal, but ignore the future marketing emails SYW sends."  Reality is this is not always the case.  People continue to open the emails from SYW ( which means cheap marketing for Shld). 

[TeddyLampert]

-the fact that Eddie couldn't answer a straight question about stock buy backs at the annual meeting when asked directly (saying to the questioner, "we have to satisfy x, y, z conditions, so with those clues, you figure it out")

-etc. etc.

 

Why is anyone expecting them to return excess cash to shareholders?  How much excess cash is there to return?

 

Excess cash doesn't really seem to be piling up, yet people still seem to expect it to be paid out.  I don't get it.

 

Ericopoly,

 

I wouldn't get hung up on the last bullet point about the buyback. I agree with you that there has to be cash to return (though you could argue that the LE spinoff did provide some of that, but I digress). I was not saying that he should have done a buyback.

 

My larger point, and the source of *one* of my several qualms, is the way in which Eddie answered the question posed by the questioner about the buyback. It was convoluted and lawyerly. It displayed a lack of directness in communication (reinforcing some concerns I had already about the SYW KPIs being disclosed). It was a bit dismissive (i.e. telling the questioner to figure it out yourself now that I've given you the clues). If I were interviewing a potential business partner and he answered questions in this way, I don't think I'd want to do business with him, no matter how brilliant his reputation.

 

All of this (and more) was just feeding into my "gut" check. The more fundamental issues I had for exiting have already been addressed ad nauseum in the last 24 hours: the company continues burning cash in its transformation, which has shown very little signs of progress, and which is holding hostage a fuller unlocking of the NAV. I do believe there is significant value in the NAV, but in the last 12 months, I am unconvinced by Eddie's plan to unlock it and return it to shareholders.

 

Changing topics, I want to repeat a point I made earlier because its worth driving home: at the annual meeting, Eddie was asked how much time he spends as CEO of SHLD and at ESL. He said he spends a "majority of time" at Sears. I don't recall his exact words, but I remember the feeling I got in my stomach. I was thinking: "really?? are you seriously saying this?" My jaw dropped. He said he found this "enjoyable and challenging". Great. So Sears is just a really expensive Rubik's cube for this billionaire. I wanted to hear a strong statement that this was his baby, that he'd do anything to bring this injured bird back to health. Instead, his answer was kind of lackadaisical. What part time CEO ever inspired confidence?

 

Obviously at the right price and a new set of facts, I may purchase SHLD again, but so long as Eddie is gung-ho about the transformation, I would rather sit on the sidelines and invest in proper operating businesses with identifiable moats or special situations that have definable catalysts. 

 

For the sake of the long investors, I sincerely hope SHLD gets the epic short squeeze that has been bandied about so often. It will be a good outcome to a bad process. I will cheer (from the sidelines) those who make money off of it, but it is not a trading game I wish to play. 

[alertmeipp]

Have u guys seen any public companies that are under some sort of transformation but never post guidance on schedule and goals?

 

This guy is either super genius or utmost stupid. It is almost impossible to time this guy.

 

 

[Luke 532]

It is almost impossible to time this guy.

 

That's why I'm not trying to.  In the past I've thought about waiting to get a better entry, but every time I run that mental exercise I conclude that he very well could announce something after-hours.  The opportunity cost of missing that announcement while on the sidelines is more detrimental in my view than the opportunity cost of holding shares and waiting for it to happen.

[zenith]

Changing topics, I want to repeat a point I made earlier because its worth driving home: at the annual meeting, Eddie was asked how much time he spends as CEO of SHLD and at ESL. He said he spends a "majority of time" at Sears. I don't recall his exact words, but I remember the feeling I got in my stomach. I was thinking: "really?? are you seriously saying this?" My jaw dropped. He said he found this "enjoyable and challenging". Great. So Sears is just a really expensive Rubik's cube for this billionaire. I wanted to hear a strong statement that this was his baby, that he'd do anything to bring this injured bird back to health. Instead, his answer was kind of lackadaisical. What part time CEO ever inspired confidence?

 

You make an interesting point, however with a large part if his net worth and reputation in Sears, I don't think he is nonchalant about his role as CEO. Like John Chen, who said he was initially a interim CEO and and has now taken over as CEO and commutes from northern California to Waterloo, Eddie is determined to make this work. He makes $1 a year as CEO, and I believe wholeheartedly that he is committed to the turn around of Sears. I don't think your quote on part time is accurate as he said he spends the majority of his time.

To be clear, just because he has a large part of his net worth and spends the majority of his time at Sears, does not guarantee success either. However it allows me to sleep at night knowing we have shared interests, and i have a lower cost basis than Fairholme by more than 40% approx. If he is wrong I am less wrong and if he is right I am more right, a free lunch!

 

[LC]

Do SSS even matter anymore? If the entire margin of safety, and investment thesis, rests on the value of the RE, what do temporary sales issues even matter? What does SYW matter?

 

The question is what will cause those RE values to be realized. IMHO, Sears as a retail entity is not going to unlock that value.

 

Why do I say this? The way I see it, the majority of Sears stores are lower quality retail real estate. Poor locations, poor inventory, no modernization, etc.

 

But have the people in those communities simply stopped buying things? I don't think so. I think they shop at Amazon or other retailers. So how does the value of that RE become realized? Does Eddie wait until the economy in that community turns around and then sell the asset? I have no idea, he has been reluctant to liquidate assets so the way I see it is he is waiting for these economies to turn around. I think that's the bet here, and I don't want to take it.

[ScottHall]

Does anyone think that Sears Holdings is still a valid thesis?  I.E. Sears is a holding company with bankrupt remote subsidiaries with a few billion dollars worth of value.  The real estate moved from the Reinsurance business into its own subsidiary, the KCD brands, Seritage, etc.  Wouldn't the Sears Retail bankruptcy provide the liquidation that would quickly establish the remaining value?  Sears Retail can't be worth less than zero, provided that the debts, and cash burn are non-recourse to Holdings.  The Holdings specific corporate debt is what Lampert bought this quarter. That could be a catalyst (retail failing), if I'm thinking of the corporate structure correctly.

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/shld-sears/msg134755/#msg134755

 

and

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/shld-sears/msg127581/#msg127581

 

 

This has been addressed several times.

[Wilson-TPC]

Here's my 2cents if anyone cares about it:

 

Yes, I agree wholeheartedly Sears still has tons of value left in it (mainly in real estate).

 

However, as an investor, your return is hinged on the discounted value of the "future value."

 

This means that any sum of the parts analysis must be discounted back at an appropriate "absolute risk" (the risk you are willing to take/discount for uncertainty) discount rate and not bullshit WACC.

 

I came out with 3 numbers assuming a 5 year time horizon with 3 years till the decision to liquidate and 2 years to liquidate.

 

If the value attributed to the sum of the parts is anything less than 105, the value of Sears at present value at a 25% (mandatory risk adjusted discount/return rate) is negative assuming 750 million in "ANNUAL" cash burn (interest and pension.) This is also assuming operating cash flow break-even. If you jack the number up to 1 billion, then the break-even value needs to go up to 140.

 

Unless Eddie decides to liquidate the business this year, it's hard for value investors to have a "margin of safety" given the opportunity cost and the required risk adjusted return needed to hold an uncertain investment like Sears.

[alertmeipp]

re: RE value.

 

Okay, we all know ESL sold some of RE to fund this so called transformation. I think many of us think those money spent is pretty much a write off (who knows).

 

But in the last few years, the remaining RE value probably goes up in value. Man, if those RE value goes up as fast as house price in Toronto, ESL did the right thing to hold the company together to future harvest. Isn't it?

 

 

[merkhet]

If the value attributed to the sum of the parts is anything less than 105, the value of Sears at present value at a 25% (mandatory risk adjusted discount/return rate) is negative assuming 750 million in "ANNUAL" cash burn (interest and pension.) This is also assuming operating cash flow break-even. If you jack the number up to 1 billion, then the break-even value needs to go up to 140.

 

Unless Eddie decides to liquidate the business this year, it's hard for value investors to have a "margin of safety" given the opportunity cost and the required risk adjusted return needed to hold an uncertain investment like Sears.

 

I'm confused.

 

Sears spends less than $300 million a year on interest and from 2015 to 2019 will be spending about $1.1 billion on the pension -- so where is the other $250 million a year coming from?

[AchilliesValue]

Couple of questions for the longs. Full disclosure I owned SHLD a few years ago but sold because I was just copying Bruce at the time and have significantly improved as an investor so I rely on my own work now.

 

1) There has been considerable reference to Trophy A properties on this thread that contain much of the value, but I haven't seen any list. Does anyone have a list or a few examples other than the Hawaii and Canada properties that have been sold?

 

2) Has anyone attempted to tie the Sears real estate thesis to CMBS deals where the filings are public? They usually disclose SSS and going through the deals over the last two years it's pretty obvious which stores should be closed / when their leases expire.

 

3) has anyone else tried to tie store closing to the lease rolls in the footnotes of the 10-K?  It would seem logical that the stores would close when the leases are up and it looks like the allegation everyone has been looking for isn't until 2016 when ~1/3 of the leases from a dollar perspective roll.

 

Thanks for any help.

 

I don't consider myself a real estate expert and mostly look at equities but through work the last several years I've looked at a fair number of distressed CMBS deals. I think it's dangerous to extrapolate SPG and GGP valuations for any of SHLD even the A malls. Generally speaking anchor space generates much lower rent and is less valuable than smaller mall stores and in many malls SPG and GGP don't own the anchor space so the don't make a good comparable. I understand the idea of splitting up the anchor pads into small format sublease, but one or two instances of that does not demonstrate a national trend.

[ni-co]

If the value attributed to the sum of the parts is anything less than 105, the value of Sears at present value at a 25% (mandatory risk adjusted discount/return rate) is negative assuming 750 million in "ANNUAL" cash burn (interest and pension.) This is also assuming operating cash flow break-even. If you jack the number up to 1 billion, then the break-even value needs to go up to 140.

 

Unless Eddie decides to liquidate the business this year, it's hard for value investors to have a "margin of safety" given the opportunity cost and the required risk adjusted return needed to hold an uncertain investment like Sears.

 

I'm confused.

 

Sears spends less than $300 million a year on interest and from 2015 to 2019 will be spending about $1.1 billion on the pension -- so where is the other $250 million a year coming from?

 

I'm confused, too. Why is paying down pension liabilities "cash burn"? I've read this over and over again in this thread but repeating it doesn't make it right. You wouldn't say paying back debt is "burning cash", would you? There is a fat $1.72bn pension liability on the balance sheet and if you pay it down – guess what: it's gone. Even better: when interest rates go up this pension liability may even become an asset in form of an overfunded pension pool.

[Luke 532]

I think it's dangerous to extrapolate SPG and GGP valuations for any of SHLD even the A malls. Generally speaking anchor space generates much lower rent and is less valuable than smaller mall stores and in many malls SPG and GGP don't own the anchor space so the don't make a good comparable.

 

OK, give SHLD's top real estate $100/sq ft (which is the national average if I remember correctly) instead of $150 I mentioned above.  You still have some extremely valuable property... and this is placing zero value on everything else they own.  Heck, areas like Detroit and Cleveland get $12/sq ft but I'm giving SHLD $0 across the remainder of their portfolio across the entire nation.

 

If I understand correctly, I guess what you're saying is that SPG or GGP wouldn't pay $100-$150 per sq ft for SHLD's top mall-based stores?

[krazeenyc]

Couple of questions for the longs. Full disclosure I owned SHLD a few years ago but sold because I was just copying Bruce at the time and have significantly improved as an investor so I rely on my own work now.

 

1) There has been considerable reference to Trophy A properties on this thread that contain much of the value, but I haven't seen any list. Does anyone have a list or a few examples other than the Hawaii and Canada properties that have been sold?

 

2) Has anyone attempted to tie the Sears real estate thesis to CMBS deals where the filings are public? They usually disclose SSS and going through the deals over the last two years it's pretty obvious which stores should be closed / when their leases expire.

 

3) has anyone else tried to tie store closing to the lease rolls in the footnotes of the 10-K?  It would seem logical that the stores would close when the leases are up and it looks like the allegation everyone has been looking for isn't until 2016 when ~1/3 of the leases from a dollar perspective roll.

 

Thanks for any help.

 

I don't consider myself a real estate expert and mostly look at equities but through work the last several years I've looked at a fair number of distressed CMBS deals. I think it's dangerous to extrapolate SPG and GGP valuations for any of SHLD even the A malls. Generally speaking anchor space generates much lower rent and is less valuable than smaller mall stores and in many malls SPG and GGP don't own the anchor space so the don't make a good comparable. I understand the idea of splitting up the anchor pads into small format sublease, but one or two instances of that does not demonstrate a national trend.

 

I have given you 3 NON-trophy properties that represent the bottom(ish) of their A properties. 2 were owned 1 was leased. Each store sold in excess of $300 per sq ft. 2 were sold to CBL and 1 was sold to GGP. If you go back up I detailed more. 2 were being redeveloped the 3rd GGP just stuck BELK inside the space. Keep in mind, the mall owners buying these properties had an immediate plan for the space allowing SHLD to maximize price. If SHLD had to sell properties in bulk, where the mall owner would have to sit on the property until there was a use for it,  I would assume far lower selling prices.

[Luke 532]

 

I have given you 3 NON-trophy properties that represent the bottom(ish) of their A properties. 2 were owned 1 was leased. Each store sold in excess of $300 per sq ft. 2 were sold to CBL and 1 was sold to GGP. If you go back up I detailed more. 2 were being redeveloped the 3rd GGP just stuck BELK inside the space. Keep in mind, the mall owners buying these properties had an immediate plan for the space allowing SHLD to maximize price. If SHLD had to sell properties in bulk, where the mall owner would have to sit on the property until there was a use for it,  I would assume far lower selling prices.

 

Like $150/sq ft  :)

[peridotcapital]

 

Do the malls want this kind of property?

Yes… take a look at the comments from Mathrani, Sokolov, Henry, and Lebovitz on pages 28-32 of Baker Street’s presentation.  For example, although GGP has spent the last few years fixing post-Chapter 11 problems, it sounds like Mathrani is ready to grow (GGP conf call 2/5/2014): So you could see how when you own an A or a B+ mall, or even a B mall for that matter, that recapturing these would be a complete bonanza for the mall owners. So firstly, I think [ph] the uses are tremendous. The demand is tremendous. We have no place to put the bigger box users, the H&Ms, the ZARAs of the world, the Anthropologies, the Urban Outfitters, anyone which is larger format, the DICK'S Sporting Goods, then this makes a perfect position for us to tear the box down and add on a [ph] clip-on with all those of types of tenants. So this could be a tremendous homerun for the mall industry. But we don't anticipate getting any of them back to speak of.

SHLD and GGP have made deals in the past.  And SHLD is an anchor in the vast majority of GGP malls… check out pages 18-21 of GGP’s 10-K for a list:  http://www.sec.gov/Archives/edgar/data/1496048/000104746913001941/a2213015z10-k.htm

 

What price would make financial sense for both SHLD and GGP (or another REIT)?

SHLD has 68M sq ft of prime real estate (not the lesser properties that are being neglected).  Let’s say the malls will buy some for $150/sq ft.  Since GGP and SPG are valued at $250/sq ft this kind of price would make sense for them.  Selling 10% of the 68M sq ft is $1B, 20% is $2B, etc.

 

Bottom-line

So, even if Lampert continues on the transformation path for the next 3 years losing a ton of money, wouldn’t a transaction like the one mentioned above still be possible? It also might be a game-changer in the way the market views SHLD’s remaining prime real estate portfolio.

 

Thoughts?

 

I don't think there is any doubt that if liquidity really becomes dicey Eddie could do a deal overnight with the big mall operators on a handful of the very best properties he has. They have more stores that could fetch 9 digits each. Of the top 100 malls in the US, Sears is in 42 of them and most of those are owned. Those are the trophy properties and they represent about 6 million square feet.

 

So let's assume he decides that selling 5 stores won't ruin his vision for SYW (no matter which 5 you choose I have to think this would be true) and he can raise $500M-$750M in very short order by doing so. I'm not sure this really changes the investment thesis (or the sentiment on Wall Street). Nobody is debating whether these properties exist, or if they are very valuable, or if the mall operators want them. It's a question of where the money goes once Eddie cashes the stores in.

 

At this stage the answer is to reduce debt, fund the pension, and invest in SYW. But that does not solve the cash burn problem (in fact it makes it immaterially worse by closing a few profitable stores), which is the main issue the bears have with owning the stock. The bearish argument is that the real estate is valuable but even if you assume a slow monetization of the properties and continued cash burn for a while, you still wind up with a net present value of the asset base that is not very impressive relative to the current stock price. One can easily map out a scenario where the real estate is truly worth $8.5 billion but the NPV per share of SHLD is not very high due solely to the operational strategy being employed. I don't think the issue is the real value of the real estate, the issue is with the operational strategy for extracting cash flow from the asset base and how that cash is used once it is received.

[txlaw]

Luke, your points are well taken, SHLD is clearly undervalued but many here are losing patience and cannot keep tolerating watching retails in action.

 

Lack of patience usually doesn't coincide with extremely successful value investing.  Unless, of course, the opportunity cost and/or destruction of value due to retail operations overrides the gap between value and share price.  I find that to be a pretty tough case to make with SHLD.

 

This is the crux of the matter. 

 

There is a debate about the range of NAV for SHLD.  Baker Street, Berkowitz, and others believe that NAV is far in excess of share price.  If you are not so certain about that excess amount, then decisions that consume resources matter insofar that there is direct cash burn and resultant deterioration in assets that clearly have value.

 

On the other hand, if there is an ROI to be associated with the criticized decisions (taking into account, for example, cash burn, deterioration in the Sears brands and appliance market share, etc.), then the MOS remains, though it's uncertain what the investor's ROI will be after all is said and done at the current price.

 

My main beef with ESL is not that he's taking a long time to do whatever he wants to do.  It's that I don't agree with the decisions he is making, and there's really nothing one can do about it.  The fact that there is such high turnover at SHLD, a fractious work environment (at least as described by third party reports), and a reliance on "corporate speak" makes me pessimistic about ESL's ability to run a retail co. 

 

I also think his lack of disclosure to investors is terrible.  Not WEB-like at all.  Why set up organizations like Seritage, Ubiquity, and Metascale and then never talk disclose any real info about them?  Don't tell me it's about proprietary info.  I might be willing to accept that if ESL were Jeff Bezos and I trusted him to make the right decisions, but I don't.

 

Keep in mind that I believe in the NAV story and that I also gave ESL the benefit of the doubt for a long time.  But he simply hasn't made a case for himself. 

[enoch01]

 

Do the malls want this kind of property?

Yes… take a look at the comments from Mathrani, Sokolov, Henry, and Lebovitz on pages 28-32 of Baker Street’s presentation.  For example, although GGP has spent the last few years fixing post-Chapter 11 problems, it sounds like Mathrani is ready to grow (GGP conf call 2/5/2014): So you could see how when you own an A or a B+ mall, or even a B mall for that matter, that recapturing these would be a complete bonanza for the mall owners. So firstly, I think [ph] the uses are tremendous. The demand is tremendous. We have no place to put the bigger box users, the H&Ms, the ZARAs of the world, the Anthropologies, the Urban Outfitters, anyone which is larger format, the DICK'S Sporting Goods, then this makes a perfect position for us to tear the box down and add on a [ph] clip-on with all those of types of tenants. So this could be a tremendous homerun for the mall industry. But we don't anticipate getting any of them back to speak of.

SHLD and GGP have made deals in the past.  And SHLD is an anchor in the vast majority of GGP malls… check out pages 18-21 of GGP’s 10-K for a list:  http://www.sec.gov/Archives/edgar/data/1496048/000104746913001941/a2213015z10-k.htm

 

What price would make financial sense for both SHLD and GGP (or another REIT)?

SHLD has 68M sq ft of prime real estate (not the lesser properties that are being neglected).  Let’s say the malls will buy some for $150/sq ft.  Since GGP and SPG are valued at $250/sq ft this kind of price would make sense for them.  Selling 10% of the 68M sq ft is $1B, 20% is $2B, etc.

 

Bottom-line

So, even if Lampert continues on the transformation path for the next 3 years losing a ton of money, wouldn’t a transaction like the one mentioned above still be possible? It also might be a game-changer in the way the market views SHLD’s remaining prime real estate portfolio.

 

Thoughts?

 

I don't think there is any doubt that if liquidity really becomes dicey Eddie could do a deal overnight with the big mall operators on a handful of the very best properties he has. They have more stores that could fetch 9 digits each. Of the top 100 malls in the US, Sears is in 42 of them and most of those are owned. Those are the trophy properties and they represent about 6 million square feet.

 

So let's assume he decides that selling 5 stores won't ruin his vision for SYW (no matter which 5 you choose I have to think this would be true) and he can raise $500M-$750M in very short order by doing so. I'm not sure this really changes the investment thesis (or the sentiment on Wall Street). Nobody is debating whether these properties exist, or if they are very valuable, or if the mall operators want them. It's a question of where the money goes once Eddie cashes the stores in.

 

At this stage the answer is to reduce debt, fund the pension, and invest in SYW. But that does not solve the cash burn problem (in fact it makes it immaterially worse by closing a few profitable stores), which is the main issue the bears have with owning the stock. The bearish argument is that the real estate is valuable but even if you assume a slow monetization of the properties and continued cash burn for a while, you still wind up with a net present value of the asset base that is not very impressive relative to the current stock price. One can easily map out a scenario where the real estate is truly worth $8.5 billion but the NPV per share of SHLD is not very high due solely to the operational strategy being employed. I don't think the issue is the real value of the real estate, the issue is with the operational strategy for extracting cash flow from the asset base and how that cash is used once it is received.

 

^+1

[ni-co]

This is the crux of the matter. 

 

There is a debate about the range of NAV for SHLD.  Baker Street, Berkowitz, and others believe that NAV is far in excess of share price.  If you are not so certain about that excess amount, then decisions that consume resources matter insofar that there is direct cash burn and resultant deterioration in assets that clearly have value.

 

On the other hand, if there is an ROI to be associated with the criticized decisions (taking into account, for example, cash burn, deterioration in the Sears brands and appliance market share, etc.), then the MOS remains, though it's uncertain what the investor's ROI will be after all is said and done at the current price.

 

My main beef with ESL is not that he's taking a long time to do whatever he wants to do.  It's that I don't agree with the decisions he is making, and there's really nothing one can do about it.  The fact that there is such high turnover at SHLD, a fractious work environment (at least as described by third party reports), and a reliance on "corporate speak" makes me pessimistic about ESL's ability to run a retail co. 

 

I also think his lack of disclosure to investors is terrible.  Not WEB-like at all.  Why set up organizations like Seritage, Ubiquity, and Metascale and then never talk disclose any real info about them?  Don't tell me it's about proprietary info.  I might be willing to accept that if ESL were Jeff Bezos and I trusted him to make the right decisions, but I don't.

 

Keep in mind that I believe in the NAV story and that I also gave ESL the benefit of the doubt for a long time.  But he simply hasn't made a case for himself.

 

Yes, he is no WEB. And I think the crux of the matter is really communication. It doesn't help that the few things we actually hear from Lampert are peppered with buzzwords. My best guess is that he simply doesn't want the market (= us) to know too much. I somewhat understand this. What should he do now with a high share price? He is under no pressure because of his controlling stake.

 

The reason for him to move with glacial speed is to preserve cash/assets and keep cash burn low – not the opposite. How much hard cash has really been burned within the last few quarters? Now take a look how much cash JCP has been burning, for example. Is this really the better strategy? That's what I try to focus on, because that's what really impairs my MOS. I don't mind if he "keeps burning cash" as long as it's a reasonable amount compared to the asset values that I believe are still there.

 

To all the asset players: He won't liquidate SHLD. Period. You should have sold your stock at least months ago, if you are hoping that. However, what is the "transformation to an asset light business model" (how much I hate this phrasing!) other than a slow and steady partial liquidation? What's the spin-off of SHOS, LE, Sears Auto, the sale of Sears Canada (okay he changed his mind on this one) and the sale of all the non-performing stores other than a slow but steady partial liquidation? The market doesn't acknowledge what's happening, because it happens just too slowly. For ESL this is just fine. Why should he care? And if you own the stock, I think you have to get used to it.

[peridotcapital]

 

The reason for him to move with glacial speed is to preserve cash/assets and keep cash burn low – not the opposite. How much hard cash has really been burned within the last few quarters? Now take a look how much cash JCP has been burning, for example. Is this really the better strategy? That's what I try to focus on, because that's what really impairs my MOS. I don't mind if he "keeps burning cash" as long as it's a reasonable amount compared to the asset values that I believe are still there.

 

 

Keep cash burn low? Free cash flow over the last 6 quarters has been negative $2 billion. That's $19 per share on a $33 per share stock. Now, it's true that 75% of that has gone towards capital expenditures, interest on the debt, and pension contributions (and not operational losses), but cash is cash from an equity holder's perspective.

[ni-co]

 

The reason for him to move with glacial speed is to preserve cash/assets and keep cash burn low – not the opposite. How much hard cash has really been burned within the last few quarters? Now take a look how much cash JCP has been burning, for example. Is this really the better strategy? That's what I try to focus on, because that's what really impairs my MOS. I don't mind if he "keeps burning cash" as long as it's a reasonable amount compared to the asset values that I believe are still there.

 

 

Keep cash burn low? Free cash flow over the last 6 quarters has been negative $2 billion. That's $19 per share on a $33 per share stock. Now, it's true that 75% of that has gone towards capital expenditures, interest on the debt, and pension contributions (and not operational losses), but cash is cash from an equity holder's perspective.

 

No, it is not.

[ni-co]

Note that the company’s legacy pension obligation is essentially a form of debt and has influenced revolver usage. The $1.1 billion of contributions made in the last 10 quarters have been funded by revolver borrowings. On a pro forma basis, the revolver balance would be $339 million absent these contributions. We have used one form of debt, being the revolver, to fund another form of debt, the pension. Since 2012, about $1.1 billion of the second quarter revolver balance of $1.4 billion was driven by pension contributions which should be distinguished from funding operating expenses.

 

http://searsholdings.com/invest/docs/2014_Q2_Call_transcript.pdf

[BTShine]

 

The reason for him to move with glacial speed is to preserve cash/assets and keep cash burn low – not the opposite. How much hard cash has really been burned within the last few quarters? Now take a look how much cash JCP has been burning, for example. Is this really the better strategy? That's what I try to focus on, because that's what really impairs my MOS. I don't mind if he "keeps burning cash" as long as it's a reasonable amount compared to the asset values that I believe are still there.

 

 

Keep cash burn low? Free cash flow over the last 6 quarters has been negative $2 billion. That's $19 per share on a $33 per share stock. Now, it's true that 75% of that has gone towards capital expenditures, interest on the debt, and pension contributions (and not operational losses), but cash is cash from an equity holder's perspective.

 

No, it is not.

 

Agree.  It is not. 

 

Selling assets to pay down debt (approximately) doesn't change the value of an investment. 

[peridotcapital]

Note that the company’s legacy pension obligation is essentially a form of debt and has influenced revolver usage. The $1.1 billion of contributions made in the last 10 quarters have been funded by revolver borrowings. On a pro forma basis, the revolver balance would be $339 million absent these contributions. We have used one form of debt, being the revolver, to fund another form of debt, the pension. Since 2012, about $1.1 billion of the second quarter revolver balance of $1.4 billion was driven by pension contributions which should be distinguished from funding operating expenses.

 

http://searsholdings.com/invest/docs/2014_Q2_Call_transcript.pdf

 

I'm not sure how that has anything to do with free cash flow, which is how the value attributable to the equity holders of the company is determined. The shareholders equity line of the balance sheet will show the value destruction clear as day. Using the revolver to fund the pension doesn't help equity holders very much, except that the interest rate may be lower than other forms of financing. The pension obligation goes down, but short term debt goes up by an equal amount. You still need positive free cash flow to pay down the debt. That is how value flows down to the equity.

[merkhet]

I think what they mean is that pension contributions that suck up the FCF aren't permanent sucks the way that interest and/or cap ex might be -- at some point you stop having to pay for pension contributions so your free cash flow improves considerably.