SHLDQ - Sears Holdings Corp

[Scudbucket]

When the blog mentions solutions, I keep thinking it has something to do with MetaScale and Hadoop.  And I keep thinking members is more than just retail customers.  But...I have nothing to base this off of.

[davidoosnk]

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.

 

Exactly.

 

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.

 

I'm not talking about FCF – cash burn is not FCF. It's true that pension contributions impair your free cash flow. After all you use the cash for contributions and can't dividend it out. However, my point is that I don't consider this cash "burned" at all. You get the cash value 1:1 in form of a reduction in liabilities. And you actually will see this in the balance sheet.

 

This is my thinking:

 

FY2013

Adjusted EBITDA: -337

Interest expense: -254

Capex: -329

Pension contributions: +426

---------------------------------

Cash burned: $494m

 

 

Q1 2014

Adjusted EBITDA: -211

Interest expense: -71

Capex: -72

Pension contributions: + 102

---------------------------------

Cash burned: $252m

 

 

Q2 2014

Adjusted EBITDA: - 313

Interest expense: - 72

Capex: - 54

Pension contributions: + 205

---------------------------------

Cash burned: $234m

 

==============================

Total cash burned for the last 6 quarters: $980m

average cash burned per quarter: $163m

 

(This is all pre-tax).

 

Want to thank all of you for a great board. Really enjoy the contrasting viewpoints on here. Finally registered. I think I can bring some points to the discussion but there is so much data that I would like to double check before putting my foot in my mouth lol.

 

Ni-co, for the non-accountant types like me, is the $500 million received for Land's End spinoff and $135 or so million for the real estate in the first six months included in adjusted EBITDA or not? In other words, does your cash burn analysis also provide a glimpse into the asset/liability adjustment to the balance sheet (barring other variables).

 

To be more specific, is the half a billion dollars cash burn figure for the first six months of this year already taking account of the above spinoff and real estate sales, or should I take your number and then offset it by the above if I am trying to calculate the net effect on the balance sheet?

 

I know this may be a silly question for some of you and I really should know it but I have zero accounting training. I think the balance sheet assets/liabilities equation is incredibly important for a biz undergoing transformation and with this complicated legal structure. Thanks in advance!

 

[ni-co]

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.

 

Exactly.

 

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.

 

I'm not talking about FCF – cash burn is not FCF. It's true that pension contributions impair your free cash flow. After all you use the cash for contributions and can't dividend it out. However, my point is that I don't consider this cash "burned" at all. You get the cash value 1:1 in form of a reduction in liabilities. And you actually will see this in the balance sheet.

 

This is my thinking:

 

FY2013

Adjusted EBITDA: -337

Interest expense: -254

Capex: -329

Pension contributions: +426

---------------------------------

Cash burned: $494m

 

 

Q1 2014

Adjusted EBITDA: -211

Interest expense: -71

Capex: -72

Pension contributions: + 102

---------------------------------

Cash burned: $252m

 

 

Q2 2014

Adjusted EBITDA: - 313

Interest expense: - 72

Capex: - 54

Pension contributions: + 205

---------------------------------

Cash burned: $234m

 

==============================

Total cash burned for the last 6 quarters: $980m

average cash burned per quarter: $163m

 

(This is all pre-tax).

 

Want to thank all of you for a great board. Really enjoy the contrasting viewpoints on here. Finally registered. I think I can bring some points to the discussion but there is so much data that I would like to double check before putting my foot in my mouth lol.

 

Ni-co, for the non-accountant types like me, is the $500 million received for Land's End spinoff and $135 or so million for the real estate in the first six months included in adjusted EBITDA or not? In other words, does your cash burn analysis also provide a glimpse into the asset/liability adjustment to the balance sheet (barring other variables).

 

To be more specific, is the half a billion dollars cash burn figure for the first six months of this year already taking account of the above spinoff and real estate sales, or should I take your number and then offset it by the above if I am trying to calculate the net effect on the balance sheet?

 

I know this may be a silly question for some of you and I really should know it but I have zero accounting training. I think the balance sheet assets/liabilities equation is incredibly important for a biz undergoing transformation and with this complicated legal structure. Thanks in advance!

 

 

Welcome to the board!

This is a perfectly valid question. I used SHLD's "adjusted EBITDA". They define it as follows:

 

"Adjusted EBITDA is computed as net loss attributable to Sears Holdings Corporation appearing on the statements of operations excluding (income) loss attributable to noncontrolling interests, income tax expense, interest expense, interest and investment income, other income (loss), depreciation and amortization and gain on sales of assets. In addition, it is adjusted to exclude certain significant items as set forth below. Our management uses Adjusted EBITDA to evaluate the operating performance of our businesses, as well as executive compensation metrics, for comparable periods. Adjusted EBITDA should not be used by investors or other third parties as the sole basis for formulating investment decisions as it excludes a number of important cash and non-cash recurring items. While Adjusted EBITDA is a non-GAAP measurement, management believes that it is an important indicator of ongoing operating performance, and useful to the investors, because:

 

EBITDA excludes the effects of financing and investing activities by eliminating the effects of interest and depreciation costs;

Management considers gains/(losses) on the sale of assets to result from investing decisions rather than ongoing operations; and

Other significant items, while periodically affecting our results, may vary significantly from period to period and have a disproportionate effect in a given period, which affects the comparability of results, including the results of the Lands' End business that were included in our results of operations prior to the separation. Adjustments to EBITDA include impairment charges related to fixed assets and intangible assets, closed store and severance charges, domestic pension expense and the Lands' End separation. We have adjusted our results for these items to make our statements more comparable and therefore more useful to investors as the items are not representative of our ongoing operations and reflect past investment decisions."

 

So, to answer your question, neither RE sale nor spin-off proceeds are included. That's alright because adjusted EBITDA is meant to be a yardstick for measuring operating performance.

[davidoosnk]

Ni-co thanks much for the quick response.

 

I was cautiously optimistic that was indeed the case. In my mind then things haven't changed much from six months ago.

 

Also the skeptics aren't giving enough weight perhaps to the idea that future spinoffs may benefit shareholders more than than SHLD, especially if they are spun off in the form of shares in a new company in a more attractive sector (online biz comes to mind, but also maybe high end mall REIT) with a more manageable debt load.

 

If I were to speculate I would say that recent selling is maybe tied to skepticism about the Sears Canada sale and valuation. The way Wall Street works though (connections in opaque ways where large financial transactions don't always have to make sense in a linear conventional sense), I would think Lampert can pull it off.

 

Also, if Lampert is in control and has firm conviction, then a slow transformation is worth it so that he and buddies Berkowitz et al can continue to derive risk free high bond income in a low yield environment. There may be a method to the madness.

 

 

[texual]

Can he spin off Shop Your Way, ever? Is that possible?

[Luke 532]

What would stop Lampert from having every tenant in a SHLD building (owned or long-term leased) be a partner in SYW Rewards, as well as additional partners that aren’t tenants?  They already have Forever 21, Whole Foods, Dick’s Sporting Goods, etc. as tenants… and they have other relationships with places like Burger King.  And what if the points you earned at one place could be used at any place in the network?* 

 

It’s a Saturday afternoon and I decide to buy a set of golf clubs at Dick’s and by doing so I earn some points.  I intend on heading home until I pass a Forever 21 and my SYW app says “select ladies jewelry/accessories regularly $29.95 now $19.95 with the points you just earned.”  So I go in and get some earrings that my daughter would like (after all it’s back to school, so why not).  And I earn a few points on the $19.95 I actually spent.  I’m feeling pretty good imagining the look on my daughter’s face when my SYW app alerts me again: “Burger King; buy one get one free on all desserts today only for SYW members!”  Of course, the app knows I’m about to pass Burger King so I decide to take advantage of the deal, buying 1 milkshake and getting 1 free.  Plus I can give the free milkshake to my wife.  She had a rough day so this will cheer her up.  I’m on top of the world.  Got my clubs, going to be the hero Dad for getting my daughter her earrings, and I get a chance to show my wife that I understand and I care with a simple milkshake.  Rockstar.  Thank you, SYW.

 

This isn’t something that could be created overnight but Lampert is building some kind of ecosystem.  It would be very powerful.  For vendors not in the SYW network customers might ask “oh, so this little reward card at your store, I have to use any rewards I earn at your store only?  That’s lame.”

 

One might ask “well, why can’t anybody just do this and develop relationships with a ton of places like Burger King and create a similar network?”  Others could, of course.  But it seems like SHLD would have a competitive advantage in the fact that it has so much real estate and it is renting out space to vendors as well as bringing them into the network, not just solely a network which is what a competitor might try to do.  This wouldn’t apply to places like Burger King, but it would to Forever 21, Dick’s Sporting Goods, etc. that are renting space.

*of course they’d have to develop some kind of algorithm for the financial/points/rewards relationship between vendors to make sense… in other words, guard against everybody buying stuff at Dick’s Sporting Goods and using all their points at Forever 21, or something along those lines.

 

[oddballstocks]

What would stop Lampert from having every tenant in a SHLD building (owned or long-term leased) be a partner in SYW Rewards, as well as additional partners that aren’t tenants?  They already have Forever 21, Whole Foods, Dick’s Sporting Goods, etc. as tenants… and they have other relationships with places like Burger King.  And what if the points you earned at one place could be used at any place in the network?* 

 

It’s a Saturday afternoon and I decide to buy a set of golf clubs at Dick’s and by doing so I earn some points.  I intend on heading home until I pass a Forever 21 and my SYW app says “select ladies jewelry/accessories regularly $29.95 now $19.95 with the points you just earned.”  So I go in and get some earrings that my daughter would like (after all it’s back to school, so why not).  And I earn a few points on the $19.95 I actually spent.  I’m feeling pretty good imagining the look on my daughter’s face when my SYW app alerts me again: “Burger King; buy one get one free on all desserts today only for SYW members!”  Of course, the app knows I’m about to pass Burger King so I decide to take advantage of the deal, buying 1 milkshake and getting 1 free.  Plus I can give the free milkshake to my wife.  She had a rough day so this will cheer her up.  I’m on top of the world.  Got my clubs, going to be the hero Dad for getting my daughter her earrings, and I get a chance to show my wife that I understand and I care with a simple milkshake.  Rockstar.  Thank you, SYW.

 

This isn’t something that could be created overnight but Lampert is building some kind of ecosystem.  It would be very powerful.  For vendors not in the SYW network customers might ask “oh, so this little reward card at your store, I have to use any rewards I earn at your store only?  That’s lame.”

 

One might ask “well, why can’t anybody just do this and develop relationships with a ton of places like Burger King and create a similar network?”  Others could, of course.  But it seems like SHLD would have a competitive advantage in the fact that it has so much real estate and it is renting out space to vendors as well as bringing them into the network, not just solely a network which is what a competitor might try to do.  This wouldn’t apply to places like Burger King, but it would to Forever 21, Dick’s Sporting Goods, etc. that are renting space.

*of course they’d have to develop some kind of algorithm for the financial/points/rewards relationship between vendors to make sense… in other words, guard against everybody buying stuff at Dick’s Sporting Goods and using all their points at Forever 21, or something along those lines.

 

I believe the advantage of a loyalty network is that you give something (discounts) in exchange for something (information).  I know a local grocery store chain pioneered this stuff in the 80s and 90s.  They licensed their software out.  But they have this intricate database and could tell a lot of things about a shopper just from what they bought, when they purchased it etc.  This is extremely valuable information to them, and they wouldn't share it with anyone else.  I think this is why you don't see a universal points card...oh wait you do, it's called a credit card.  Retailers pay into this program via the interchange fees.  What a retailer gets back is a consumer who spends on average 17% more than they would with cash.

[Luke 532]

I think this is why you don't see a universal points card...oh wait you do, it's called a credit card.  Retailers pay into this program via the interchange fees.  What a retailer gets back is a consumer who spends on average 17% more than they would with cash.

 

But there are limited ways you can use points with a traditional credit card (airline miles, cash back, etc.).  It sounds crazy but most people prefer getting stuff than getting cash back on their credit card (I always prefer cash, personally).  Plus the alerting via the SYW app would be different from credit cards.  With the hypothetical Saturday afternoon I described above, I doubt I would have stopped by Forever 21 after getting the golf clubs.  I would have paid for my clubs, known that I'll get some airline miles or cash back on my card, and that would have been the end of it.  No earrings, no milkshakes (i.e. no impulse buys).

 

And who says the consumer wouldn't get the best of both worlds... using their credit card while making purchases in the SYW network.

[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

 

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.

 

I'm not talking about FCF – cash burn is not FCF. It's true that pension contributions impair your free cash flow. After all you use the cash for contributions and can't dividend it out. However, my point is that I don't consider this cash "burned" at all. You get the cash value 1:1 in form of a reduction in liabilities. And you actually will see this in the balance sheet.

 

This is my thinking…

 

I think I made two bad errors in my calculation that nobody seems to have noticed:

1. I double counted for the pension contribution by taking SHLD's adjusted EBITDA – they already subtract pension costs.

2. I should have taken pension costs instead of pension contributions. Only pension costs are costs in the sense of the earnings statement (and they are lower than actual contributions because the expected returns on the pension plan's investments are deducted).

 

FY2013

Adjusted EBITDA: -337

Interest expense: -254

Capex: -329

Pension contributions: +426

---------------------------------

Cash burned: $494m

Cash burned: $920m

 

 

Q1 2014

Adjusted EBITDA: -211

Interest expense: -71

Capex: -72

Pension contributions: + 102

---------------------------------

Cash burned: $252m

Cash burned: $354m

 

 

Q2 2014

Adjusted EBITDA: - 313

Interest expense: - 72

Capex: - 54

Pension contributions: + 205

---------------------------------

Cash burned: $234m

Cash burned: $439m

 

==============================

Total cash burned for the last 6 quarters: $980m $1,713m

average cash burned per quarter: $163m $286m

[bobp]

Classic Jenga for sale on Amazon for $9.86. Free 2 day shipping with prime.

 

11.49 at Sears online. Or $15.49 earns 160 points for later purchases. 1000 points equals 1 dollar, so let's see, that's 16 cents? I guess you just have to think of them as points. And points are good!

 

I hate the whole member idea. Good game though, Jenga.

 

 

Got to love that he mentioned the game of Jenga.

 

I loved that reference... classic.

[TwoCitiesCapital]

Classic Jenga for sale on Amazon for $9.86. Free 2 day shipping with prime.

 

11.49 at Sears online. Or $15.49 earns 160 points for later purchases. 1000 points equals 1 dollar, so let's see, that's 16 cents? I guess you just have to think of them as points. And points are good!

 

I hate the whole member idea. Good game though, Jenga.

 

 

Got to love that he mentioned the game of Jenga.

 

I loved that reference... classic.

 

But with Sears, you can purchase online and then have it delivered to your car at the store. And while you're in your car, you might as well get your tiles and oil changed and put this 160 points to good use. Also, since there is a Nordstrom in the same building, you might actually be tempted to go peruse the clothing.

 

;)

[BTShine]

Classic Jenga for sale on Amazon for $9.86. Free 2 day shipping with prime.

 

11.49 at Sears online. Or $15.49 earns 160 points for later purchases. 1000 points equals 1 dollar, so let's see, that's 16 cents? I guess you just have to think of them as points. And points are good!

 

I hate the whole member idea. Good game though, Jenga.

 

 

Got to love that he mentioned the game of Jenga.

 

I loved that reference... classic.

 

This doesn't really apply to Jenga, but some items are 'more likely to be returned' and therefore people would rather buy the item from the store (or an online retailer with brick & mortar locations) in case the items needs to be returned.  I've always hated mailing back items to Amazon.com or other online retailers .

 

Because of this I prefer to buy some things (even at a higher price) from online stores (target.com, sears.com, etc.) with a brick and mortar location.

[Luke 532]

Classic Jenga for sale on Amazon for $9.86. Free 2 day shipping with prime.

11.49 at Sears online. Or $15.49 earns 160 points for later purchases. 1000 points equals 1 dollar, so let's see, that's 16 cents? I guess you just have to think of them as points. And points are good!

 

Keep in mind Amazon Prime is $99/year while SYW Max is $39/year (both include "free" 2-day shipping).  $60 over 360 days is $0.17/day that you're paying Amazon over and above SYW.  Jenga at Amazon is $1.63 cheaper... so if you order nothing else from Amazon over the next 10 days ($0.17 * 10 = $1.70) then ordering Jenga from Amazon is a bit more expensive than SYW.  With that said, the average consumer never thinks this way and, as a result, they'll take Jenga on Amazon over SYW any day of the week.

[Liberty]

Classic Jenga for sale on Amazon for $9.86. Free 2 day shipping with prime.

11.49 at Sears online. Or $15.49 earns 160 points for later purchases. 1000 points equals 1 dollar, so let's see, that's 16 cents? I guess you just have to think of them as points. And points are good!

 

Keep in mind Amazon Prime is $99/year while SYW Max is $39/year (both include "free" 2-day shipping).  $60 over 360 days is $0.17/day that you're paying Amazon over and above SYW.  Jenga at Amazon is $1.63 cheaper... so if you order nothing else from Amazon over the next 10 days ($0.17 * 10 = $1.70) then ordering Jenga from Amazon is a bit more expensive than SYW.  With that said, the average consumer never thinks this way and, as a result, they'll take Jenga on Amazon over SYW any day of the week.

 

Not to mention that Amazon Prime isn't just shipping.

[Luke 532]

Not to mention that Amazon Prime isn't just shipping.

 

Good point. Although the free $3 in points each month is pretty cool and makes SYW max effectively free:

 

Annual MAX subscribers earn Double Base Points on qualifying purchases online and in-store. Annual members also receive $3 in points to use on purchases during the first part of each month (a $36 value!) starting your first full month of membership. With a Sears Credit Card it gets even better: 3% points at Sears and 6% at Kmart.

 

[hardincap]

When drones become reality a few years down the line, who do you think will be on top? Amazon and google. Sears has zero technical capability to compete with these guys. Hence their retail strategy is doomed. The sooner they realize this the better.

[Liberty]

Not to mention that Amazon Prime isn't just shipping.

 

Good point. Although the free $3 in points each month is pretty cool and makes SYW max effectively free:

 

Annual MAX subscribers earn Double Base Points on qualifying purchases online and in-store. Annual members also receive $3 in points to use on purchases during the first part of each month (a $36 value!) starting your first full month of membership. With a Sears Credit Card it gets even better: 3% points at Sears and 6% at Kmart.

 

It only looks free if you don't count that you're paying more for stuff on average than you would at Amazon. And if you think of it this way, Amazon Instant Video (or whatever they call it) saves you money on Netflix and/or renting/buying movies, so Prime can be free too.

[ni-co]

When drones become reality a few years down the line, who do you think will be on top? Amazon and google. Sears has zero technical capability to compete with these guys. Hence their retail strategy is doomed. The sooner they realize this the better.

 

Yeah. Looking forward to getting my new washing machine delivered by a drone.

 

I think SYW is a crapshoot but I really can't understand why people are so convinced that brick and mortar retailers are going to die.

[Liberty]

Yeah. Looking forward to getting my new washing machine delivered by a drone.

 

Self-driving delivery trucks + robots?

[Luke 532]

Yeah. Looking forward to getting my new washing machine delivered by a drone.

 

Self-driving delivery trucks + robots?

 

Self-driving delivery trucks + robots = lawsuits galore :-)

[Picasso]

The thing that makes SHLD such a tough investment is you have the opposite of what typically makes value investing work: time.  The more time that goes by, the worse the competitive position for SHLD.  This is not value investing.

[Liberty]

Self-driving delivery trucks + robots = lawsuits galore :-)

 

I'm sure people thought that automated teller machines (ATMs) sounded like they couldn't possibly work back in the day ;)

[Luke 532]

Self-driving delivery trucks + robots = lawsuits galore :-)

 

I'm sure people thought that automated teller machines (ATMs) sounded like they couldn't possibly work back in the day ;)

 

I'm not sure how many ATMs have killed people.  What do we do when a robot driving a car, or an automated car with no robot, causes a fatal accident?  With humans you lock the guy up in jail.  Will we lock up a robot?  No.  We'll have lawsuits galore for the creator of the robot.  And I'm pretty sure we'll have more than just a few fatal accidents.

[Liberty]

Self-driving delivery trucks + robots = lawsuits galore :-)

 

I'm sure people thought that automated teller machines (ATMs) sounded like they couldn't possibly work back in the day ;)

 

I'm not sure how many ATMs have killed people.  What do we do when a robot driving a car, or an automated car with no robot, causes a fatal accident?  With humans you lock the guy up in jail.  Will we lock up a robot?  No.  We'll have lawsuits galore for the creator of the robot.  And I'm pretty sure we'll have more than just a few fatal accidents.

 

I brought that up as a joke, but fact is, today there are many things that are automated and used to be done by people. Many are in critical functions that could have serious consequences if there was a problem. But over time, we've come to trust those things and think of them as banal because they just work (I bet people didn't trust the first traffic light, because they were afraid of getting T-boned by a malfunction). Someday, I wouldn't be surprised if we came to that point with vehicles and some types of robots. I have no idea when, and it's certainly not my reason for not buying Sears stock.

[ni-co]

I think there is also a strong male bias in this "traditional retail is dying" debate. My wife hates online shopping and I love it. And why haven't malls been killed by mail-order? Only because it was slower than Amazon?