SHLDQ - Sears Holdings Corp

[Marve2013]

I suspect Eddie is trying to give time for the internet retail business to chew more meat off the bones (physical retail business).  Usually, once you shut down a retail location all the customers (who are used to shopping in a physical location) will just shift to nearby retailers ... by keeping both the internet retail business and the actual physical locations present he's try to re-train/re-tool the existing shoppers.  Keep in mind that the average Sears customer is slightly older and probably less computer savvy.  So just this in itself already requires quite a long re-training period.

 

At some point a good portion of those shoppers will get re-trained and drawn into the internet retail membership program.  Once that happens, the shutting down of the physical stores will happen much faster and we will start to see the financials improve.  Until then, it's painful to see them incur both the cost of the internet retail business and the physical locations.  Almost like a double cost for the single same customer (maybe not double cost as the internet business is supposed to be more cost efficient, but you get the point).

 

[adesigar]

http://www.chicagobusiness.com/article/20160511/NEWS07/160519971/troubled-sears-plans-smaller-stores

[merkhet]

Anyone have notes from the annual meeting?

[hardincap]

chicagobusiness.com has a few articles out on the meeting

 

http://www.chicagobusiness.com/article/20160511/NEWS07/160519971/sears-ceo-our-loyalty-program-has-fallen-short

 

[Marve2013]

Another article:

 

http://www.chicagotribune.com/business/ct-sears-shareholder-meeting-0512-biz-20160511-story.html

 

"We've built the platforms, we've built the capabilities, but we've fallen short on getting people engaged," Lampert said.

 

The company's membership program has more than enough participants to have a "much bigger company," he said.

 

Does anyone know how many active Shop Your Way users they have? 

 

[adesigar]

Does anyone know how many active Shop Your Way users they have?

 

It depends on what you mean by active.

 

The have a ton of members who only shop a few times a year(2-5 items). Personally I don't call that active. Most shop during Thanksgivings-Christmas using points and try to get deals with points that rollover. SHLD has brought this under control recently but they lost a lot of money before they fixed the rollover fiasco. They still need to get a handle on the perpetually extending SYW Max Trial membership.

 

I have a SYW Account and I buy a few things a year but not much. The reason is they don't have the best selection and they don't have the lowest prices. I'm also an Amazon.com member and the orders there for the last few years range between 50-100. Same with Costco I buy a lot more at Costco than I buy at Sears or even Amazon.

[BargainValueHunter]

http://www.bloomberg.com/news/articles/2016-05-11/lampert-says-fixing-sears-is-as-difficult-as-shutting-guantanamo

 

Getting long-struggling Sears to stop bleeding cash has been about as easy as closing the U.S. military prison in Cuba, according to Chief Executive Officer Edward Lampert.

 

Speaking at the company’s annual shareholders meeting Wednesday, Lampert compared his quest to President Barack Obama’s struggle to close the detention camp in Guantanamo Bay.

 

Bruce Berkowitz, chief investment officer at Fairholme Capital Management, was named to the Sears board in February. While Berkowitz told his investors that much of the cash burn was voluntary and that he expected it to improve, it “does not build confidence or trust among all of Sears’s constituencies,” he said on a conference call in February.

[Ballinvarosig Investors]

I do think he's a fair person and he knows he has a fiduciary duty to SHLD shareholders, especially when there are some (like me) who hold shares in SHLD but not SRG.

I think you misunderstand how the process of spinning out property works. Sears can't just hand over stores to Seritage. For starters, it's not even lawful, secondly it's not possible because Seritage have already spent all the capital they raised as part of the rights offering to Sears shareholders last year. If Sears are going to spin-off more property, then the chances are they'll do it through the same way as they did for Seritage (for each share you own, you will get the right to buy a share in the new spin-co at $x).

[opihiman2]

Ouch on SHLD, WTF!  Not long SHLD, but thinking of just going short on it. 

[tede02]

As the share price dwindles, why not just take the thing private?  Do they really need access to the capital markets?

[hardincap]

As the share price dwindles, why not just take the thing private?  Do they really need access to the capital markets?

 

if berkowitz and lampert team up, they could buy out the rest of the shareholders for ~$250m at current prices. the problem is the rest of the shareholders includes tisch, chou, force cap, who would probably scream bloody murder if they got anything less than at least 3x share price. so $750m. thats alot of money even for berk & lampert

[OracleofCarolina]

https://www.creditriskmonitor.com/blog/sears-bankruptcy-inevitable-inside-our-special-report

 

[scorpioncapital]

Ackman and Lampert should get together to compare notes, maybe they'll come to the right conclusion that Buffett has been saying for decades now (after hard experience with Berkshire textiles and some shoe investments): Avoid, don't try to turn around, lousy companies/business models that are on the decline.

 

[Mephistopheles]

It's just unbelievable what Lampert has done with SHLD. The commitment and consistency trap here is fascinating. Same with Berkowitz. It's been a train wreck for so long and is only going to get worse.

 

I owned the stock a few years ago because the numbers made sense with the real estate. And I thought Eddie would be sane enough to do the right thing, and not burn the furniture to keep the fire going. I was wrong and it's amazing that he still keeps going with this. And then you have Bruce going on comparing it with Simon on an EV basis, laughable.

 

Thankfully I got out with a profit.

[Partner24]

A classical value trap I guess...

[Ballinvarosig Investors]

Anyone want to take a stab at valuing this thing?

 

I am going to present the Baker street sum of parts estimates for 2013 and my own updated estimates for 2016.

 

Real estate 2013 - $7.1bn-$10.1bn

Real estate 2016 - $4bn-$5.6bn

51% interest in Sears Canada 2013 - $0.7bn-$1.0bn

51% interest in Sears Canada 2016 - $0.18bn

Sears Home Service 2013 - $1.3bn-$2.4bn

Sears Home Service 2016 - $0.75bn

Sears Auto 2013 - $0.3bn/$0.7bn

Sears Auto 2016 - $0.25bn

Sears Online 2013 - $0.5bn/$1.5bn

Sears Online 2016 - $0.9bn

Kenmore, Craftsman, Diehard 2013- $2.2bn-$3.0bn

Kenmore, Craftsman, Diehard 2016 - $1.3bn

 

• You have to bear in mind, the real estate estimates were from 2013 when Sears owned 750 stores. As of the Seritage spin-off, that number is down to 420, so doing a back-of-enveloper calculation, the remaining real estate should be worth 56% of the 2012 estimate.
  
• The Sears Canada stake is at market value, so that one is easily identified.
  
• Sears Auto and Home Services appear to be lumped together in the financials with revenue for the two units at $2bn for 2015, shrinking significantly since the Baker report. When you consider that a well run Auto parts stock like AAP trades at about 1x revenue, you'd probably be thinking of Auto and Home Services being worth about 0.5x revenue
  
• Sears Online has probably grown since the original 2013 thesis, but even by Lampert's admission, it has not done enough. Using Overstocks $350m market cap as a guide, we can put a rough value on this. Overstock did $1.7bn in revenue last year, that report has Sears doing $4.2bn in revenue. 20% of all Sears revenue coming from online channels seems unlikely to me, but I will leave it up
  
• Kennmore/Craftsman/Diehard brands are undoubtedly impaired since the original thesis. I have no idea how to value these as I do not live in the US. However, given the fact that the stores that sell these products are struggling, I am going to use the original mid-point, then half it.
  

 

In the event of a liquidation, excluding land, buildings and brands, I have an equity value of negative $4bn-$5bn. After that gets taken out. That gives us an equity value remaining of $3.3bn, or about $33 a share compared to today's price of $11.50. Before anyone thinks this is a screaming buy, the values presented are very rough estimates and completely open to correction. Firstly, I think I have been too generous in my calculations. I think liquidation of current assets is likely to yield a great negative equity value. Also, I suspect that in a distressed sale, the valuations I am using might not be recognised in a stampede out. Finally, you need to also be cognizant of previous spin-offs. Lands End, Sears Home and Outlet were supposed to be the good bits of Sears, but yet when they were spun out, their values collapsed. It is possible that some of the parts in this analysis have no value, or even negative value, as there are costs to closing these operations down.

 

Can anyone take a look at my very approximate numbers and let me know if I am under or over-estimating anything? To me, Sears doesn't look invest-able and I just have no idea how Berkowitz could be thinking that this is worth $150+

[Marve2013]

So if we assume SHLD is un-investable as an on-going concern and they could be headed for bankruptcy, does the below hold true?  I know a lot has been mentioned on this board about the guarantor vs. non-guarantor ... but can someone just provide a summary opinion re the below excerpt?

 

I have to admit it seems a bit like wishful thinking.  In reality, bankruptcies are very messy.

 

Thank you for your thoughts

 

From Horizon Kinetics:

 

Some in the media have opined that Sears might be headed for bankruptcy—we do not believe that is likely, but it is certainly possible.  However, it is also quite possible for Sears shareholders to benefit nicely under those conditions. This possibility exists  because of the way that the Sears corporate structure has been arranged since Chairman and CEO Edward Lampert combined Sears and K-Mart nearly ten years ago. Sears was restructured as a holding company, having two main subsidiaries: the Guarantor subsidiary, which is liable for substantially all of the company’s debt, and the Non-Guarantor subsidiary, which is considered bankruptcyremote. The Non-Guarantor subsidiary would emerge from the bankruptcy debt free, and has generated $1B$1.2B per year in free cash flow for the last few years. This subsidiary includes the 125 (presumably) most valuable real estate properties, the rights to the valuable Diehard, Kenmore, and Craftsman brands, and the Sears Reinsurance business. 

 

 

[tooskinneejs]

"Can anyone take a look at my very approximate numbers and let me know if I am under or over-estimating anything?"

 

The liability side of the balance sheet?

[Ballinvarosig Investors]

"Can anyone take a look at my very approximate numbers and let me know if I am under or over-estimating anything?"

 

The liability side of the balance sheet?

In the event of a liquidation, excluding land, buildings and brands, I have an equity value of negative $4bn-$5bn.

I started off with negative equity value of $4-5bn which includes liabilities like pension and debt that will have to be paid in bankruptcy.

[adesigar]

Can anyone take a look at my very approximate numbers and let me know if I am under or over-estimating anything? To me, Sears doesn't look invest-able and I just have no idea how Berkowitz could be thinking that this is worth $150+

 

Real Estate Value. Generic calculations wont give anywhere near a correct valuation. Ignoring the Leases wont give a correct valuation either. A handful of properties can get you to 4 Billion. Sears share of South Coast Plaza could be almost 1 billion. The Manhattan K-Marts. Sears also occupy 7 of the top floors at Langham Place Hong Kong and are the main anchor tenant(No idea if they own or lease). etc

 

SHLD does not have 51% of Sears Canada they only have 12%.

 

You are comparing a Auto Parts seller to a Auto Service Center using the one with the lower Price to Sales(O'Reilly and AutoZone sell for approx. 2.5x Sales). Taking half that multiple and applying it to the biggest Home Service provider in the country.

 

KCD - The Kenmore brand is listed separately but its integrated with Home Services. The reason Kenmore Appliances (manufactured by Whirlpool/Samsung/GE etc) gets consistently higher rating than Whirlpool/Samsung/GE is the feedback loop from the Home Services Techs from Service calls. The Home Service techs are also involved in the design of the products.

 

 

[ScottHall]

So if we assume SHLD is un-investable as an on-going concern and they could be headed for bankruptcy, does the below hold true?  I know a lot has been mentioned on this board about the guarantor vs. non-guarantor ... but can someone just provide a summary opinion re the below excerpt?

 

I have to admit it seems a bit like wishful thinking.  In reality, bankruptcies are very messy.

 

Thank you for your thoughts

 

From Horizon Kinetics:

 

Some in the media have opined that Sears might be headed for bankruptcy—we do not believe that is likely, but it is certainly possible.  However, it is also quite possible for Sears shareholders to benefit nicely under those conditions. This possibility exists  because of the way that the Sears corporate structure has been arranged since Chairman and CEO Edward Lampert combined Sears and K-Mart nearly ten years ago. Sears was restructured as a holding company, having two main subsidiaries: the Guarantor subsidiary, which is liable for substantially all of the company’s debt, and the Non-Guarantor subsidiary, which is considered bankruptcyremote. The Non-Guarantor subsidiary would emerge from the bankruptcy debt free, and has generated $1B$1.2B per year in free cash flow for the last few years. This subsidiary includes the 125 (presumably) most valuable real estate properties, the rights to the valuable Diehard, Kenmore, and Craftsman brands, and the Sears Reinsurance business.

 

I promised I wouldn't hark on this again, but this is a myth. Kraven and I have explained why many times. Unless something major has changed since then, it's still a myth. I don't care to read the credit agreements again to find out.

[merkhet]

If I remember correctly, there are guarantor & non-guarantor companies. However, the Sears HoldCo is a guarantor, and therefore, the fact that there are non-guarantor subsidiaries... held by the Sears HoldCo is... sort of useless.

 

I also have yet to go back through the credit agreements, but the cheaper the company gets, the more tempted I am to make it a weekend project.

[ScottHall]

If I remember correctly, there are guarantor & non-guarantor companies. However, the Sears HoldCo is a guarantor, and therefore, the fact that there are non-guarantor subsidiaries... held by the Sears HoldCo is... sort of useless.

 

I also have yet to go back through the credit agreements, but the cheaper the company gets, the more tempted I am to make it a weekend project.

 

This is accurate, or was as of my last analysis.

[A_Hamilton]

If I remember correctly, there are guarantor & non-guarantor companies. However, the Sears HoldCo is a guarantor, and therefore, the fact that there are non-guarantor subsidiaries... held by the Sears HoldCo is... sort of useless.

 

I also have yet to go back through the credit agreements, but the cheaper the company gets, the more tempted I am to make it a weekend project.

 

Can't you spin out non-guarantor subs and not be subject to a fraudulent conveyance claim in bankruptcy?

[merkhet]

If I remember correctly, there are guarantor & non-guarantor companies. However, the Sears HoldCo is a guarantor, and therefore, the fact that there are non-guarantor subsidiaries... held by the Sears HoldCo is... sort of useless.

 

I also have yet to go back through the credit agreements, but the cheaper the company gets, the more tempted I am to make it a weekend project.

 

Can't you spin out non-guarantor subs and not be subject to a fraudulent conveyance claim in bankruptcy?

 

We are at the razor's edge of my understanding of the bankruptcy code, but my thought is that you can sort of spin out whatever you want so long as (A) you are not prevented from doing so by the credit agreement, and (B) it's done two or more years from the eventual bankruptcy. But that wouldn't be exactly what the Horizon Kinetics blurb is suggesting.