SHLDQ - Sears Holdings Corp

[valuestudent]

I think Marve, you have to ask why would any of the other retailers want to help Sears? They all saw appliance sales increase without selling Kenmore brands.  So, Sears has to walk in and say, hey guys are products are amazing you will increase sales if you carry them.  And they say well that maybe the case, but your sales are declining rapidly in that department. Our sales are increasing rapidly.  Why do we need you? Plus, JCP, Home Depot, Lowe's, would all benefit if Sears disappears.  I don't think these retailers think the risk of floating Sears, by buying Kenmore products, outweighs the gains they would get if Sears simply disappears. Home Depot/Lowe's would get more tool sales, and JCP would get more clothing sales (in theory).

 

The same issues arise for the malls and buying the retail property.  The malls have only so much they can spend for renovations and they have tons of options. So, why buy from Sears unless Sears is selling for the lowest price.  The mall operators are long term thinking in nature and thus, are doing a similar analysis weighing the risk reward.  Their risk reward would be do we want to pay X price today or wait for BK or more stressed situation and pay a lower price versus the risk that Sears does well and then is in a better position to negotiate in 5/10 years.  They would then assign a probability to these events happening. Also, they would add the benefits for redoing the Sears locations to their analysis.  I think that right now they have too many other viable projects and assign a high probability that Sears will continue to struggle in the near future. 

 

Closing stores isn't as simple as sending a mass notice of closure. Sears takes both cash and non cash charges when they close stores that have ramifications in other areas like the debt covenants, leases, etc.  They have closed massive amounts of stores, and the sales continue to decline along with margins. The rewards system fuels a reliance on promotions, making it harder to increase margins. Less stores increases the costs of distribution out on fewer stores hurting margins. 

 

Just some thoughts. 

[CorpRaider]

Yeah, I fear the home depot folks now running JCP are going to be feasting on the marrow of Sears' bones.

[alertmeipp]

Maybe Amazon should buy Sears.

Crappy stores can be used as warehouse. :D

[merkhet]

Has anyone considered the idea that SYW is actually a method of slow-motion liquidation of inventory?

[ScottHall]

Has anyone considered the idea that SYW is actually a method of slow-motion liquidation of inventory?

 

Will you stop?  ;D

[merkhet]

Has anyone considered the idea that SYW is actually a method of slow-motion liquidation of inventory?

 

Will you stop?  ;D

 

Stop what? o_0

[rkbabang]

I get the same feeling whenever I see this thread pop up on the unread posts list as I do when I drive into my local mall and see the Sears sign.  The only way to describe it is an amazed feeling, like "WTF? Sears still exists?".

 

I've never owned SHLD, but it is an interesting case.  Is there no way to cease operations to stop the bleeding, sell off assets and brands to pay off debt (and maybe issue one final special dividend to shareholders if there is anything left) and then cease existence as a going concern?    Rather than just bleed out until bankruptcy or is it already too far gone?  Does any public company ever do this?  I can't think of ever hearing of one.

 

[merkhet]

Unclear. They seem to be in dire straits. I've said elsewhere that their most recent presentation w/ a slide that said $9.1 billion of cash raised might as well say $9.1 billion of cash incinerated. It's merely framing.

 

I got interested to gaze into the abyss this morning because my fiancée and I recently moved, and we need a few one-off things like bath mats. I figured if Sears is going to give me some SYW points randomly, then I might as well see if they have the cheapest price.

 

A few days ago, when the quarterly presentation came out, there were a number of people (either on here or FinTwit, I can't recall) that scoffed at the idea that Sears was counting the inventory as money good rather than taking a haircut on that amount, so I looked up the inventory valuation:

 

Valuation of Inventory

 

Our inventory is valued at the lower of cost or market determined primarily using the retail inventory method ("RIM"). RIM is an averaging method that is commonly used in the retail industry. To determine inventory cost under RIM, inventory at its retail selling value is segregated into groupings of merchandise having similar characteristics, which are then converted to a cost basis by applying specific average cost factors for each grouping of merchandise. Cost factors represent the average cost-to-retail ratio for each merchandise group based upon the year purchasing activity for each store location. Accordingly, a significant assumption under the retail method is that inventory in each group is similar in terms of its cost-to-retail relationship and has similar turnover rates. Management monitors the content of merchandise in these groupings to prevent distortions that would have a material effect on inventory valuation.

 

RIM inherently requires management judgment and certain estimates that may significantly affect the ending inventory valuation, as well as gross margin. Among others, two significant estimates used in inventory valuation are the level and timing of permanent markdowns (clearance markdowns used to clear unproductive or slow-moving inventory) and shrinkage. Amounts are charged to cost of sales, buying and occupancy at the time the retail value of inventory is reduced through the use of permanent markdowns.

 

Factors considered in the determination of permanent markdowns include current and anticipated demand, customer preferences, age of the merchandise, fashion trends and weather conditions. In addition, inventory is also evaluated against corporate pre-determined historical markdown cadences. When a decision is made to permanently markdown merchandise, the resulting gross margin reduction is recognized in the period the markdown is recorded. The timing of the decision, particularly surrounding the balance sheet date, can have a significant effect on the results of operations.

 

Shrinkage is estimated as a percentage of sales for the period from the date of the last physical inventory to the end of the year. Physical inventories are taken annually for all stores and inventory records are adjusted accordingly. The shrinkage rate from the most recent physical inventory, in combination with historical experience, is used as the basis for the shrinkage accrual following the physical inventory.

 

So it seems possible to me that inventory might actually be money good -- particularly if SYW can target individuals that live around a particular Sears that's in the process of closing down to slowly rid themselves of inventory rather than have an "everything must go" sale.

[CorpRaider]

I mean they still printed like 5 bil in revenue didn't they?  If eddie had like a good Al "Chainsaw" Dunlap or the guy at Pennys or someone with a clue...

[KinAlberta]

I don't follow it. Has SHLD been a bad performer?

 

With the value of the various spinoffs included, has anyone calculated the various rates of return investors entering at different times would have earned, to date??

[Marve2013]

I think in order to believe that Sears can stop the bleeding, you have to first believe that within their huge footprint, there are some stores which are 1) doing really bad 2) doing bad, but not crazy bad and 3) doing just OK (I'll leave out the profit generators as hard to see).  In other words, not every single store is losing money.  Only then can you start believing that closing the majority of the really bad stores would help its financials.

 

Regarding KCD - some have suggested that the value of the brands is tied to the Sears business.  Meaning, Sears going down, then KCD goes down.  My view is that a part of the KCD decline is also attributable to the "intentional" closing of the Sears stores.  Not necessarily that KCD has lost it's customer share ... meaning if there was a KCD to be found, it would have been purchased.  But there just wasn't.  Hence, I still think it's possible to do some kind of revenue sharing with other distribution channels and bring KCD back - perhaps not to it's former glory, but somewhere along the middle. 

 

Sears is a very tough call.  Partly, because of the lack of information.  I know Bruce Berkowitz has tried to get Eddie Lampert to share more info with the general public and I hope he succeeds. 

 

Valuation on items like Real Estate and KCD are difficult to me.  I've seen some others perform back-of-the-envelope calculations on warranties business and home improvement businesses.  I just think its almost impossible to do so with the limited information we have.  The best we can do is just take a value investor's (Bruce or Chou) valuation and add a further discount that makes you feel comfortable.

[tooskinneejs]

Has anyone considered the idea that SYW is actually a method of slow-motion liquidation of inventory?

 

That has crossed my mind recently.  The only things I buy from Sears are tools and outdoor power equipment (mowers/trimmers, etc.).  Craftsman used to be a premium brand with premium pricing compared to brands available at Home Depot.  Not any more.  I now regularly find Craftsman branded items for significantly less than other brands.

 

When you combine sale prices with the "bonus points" that Sears is always throwing around, their net sales prices are significantly lower.  That is a good thing for me as a consumer, but I think it is a very bad thing for sears.  I can't help but think they aren't making much margin on the items I've purchased recently (a miter saw stand, sawhorses, retractable extension cord reels, etc.).  It does almost seem as if they are giving stuff away at or near cost just to move product.

[Ballinvarosig Investors]

[paperwerks]

MHI:AU is a pretty good debt free net net fwiw.

 

They are a Chinese boot/linen manufacturer who opened a USA facility two years ago (Footwear Industries of Tennessee) primarily to serve Walmart and Sears in providing "made in America" labeled boots. SHLD pushed for this and believed that consumers will pay a premium for Craftsman boots if they are "made in America "It has proven to be a bad idea for MHI and the facility has been losing money.

 

It appears to be a wise move if it is SHLD that MHI has cut off as a SHLD BK would be a disaster for little MHI.

 

It's kind of off topic but I can not see how SHLD will survive beyond January. (I know that this is said every year).

 

MHI likely had trouble factoring SHLD invoices.

 

How can we monitor the availability/cost of factoring SHLD invoices? Is this type of information quoted anywhere? IF CIT were to refuse to factor SHLD invoices would it be public information?

 

 

[oddballstocks]

MHI:AU is a pretty good debt free net net fwiw.

 

They are a Chinese boot/linen manufacturer who opened a USA facility two years ago (Footwear Industries of Tennessee) primarily to serve Walmart and Sears in providing "made in America" labeled boots. SHLD pushed for this and believed that consumers will pay a premium for Craftsman boots if they are "made in America "It has proven to be a bad idea for MHI and the facility has been losing money.

 

It appears to be a wise move if it is SHLD that MHI has cut off SHLD as a SHLD BK would be a disaster for little MHI.

 

It's kind of off topic but I can not see how SHLD will survive beyond January. (I know that this is said every year).

 

MHI likely had trouble factoring SHLD invoices.

 

How can we monitor the availability/cost of factoring SHLD invoices? Is this type of information quoted anywhere? IF CIT were to refuse to factor SHLD invoices would it be public information?

 

You can pull a quote on their CDS

 

1yr: 1713.58

2yr: 1455.65

3yr: 1674.47

5yr: 1801.89

10yr: 1694.32

 

To put it into context, here is Target

1yr: 7.455

10yr: 71.43

 

Walmart

 

1yr: 8.28

10yr: 63.025 

 

The swap market is saying Sears is 229x more likely to go bankrupt in a year compared to Target.  The swap prices factor into the factoring cost for inventory.  I believe at this point Sears has to pay cash for inventory, not many people are going to go 30/60/90 out when the insurance cost is so high.

[benhacker]

You can pull a quote on their CDS

 

1yr: 1713.58

2yr: 1455.65

3yr: 1674.47

5yr: 1801.89

10yr: 1694.32

 

17 pts on Sears CDS?... Is that a midpoint, a trade actual, or... ???

 

Someone should tell that to their 9-12% YTM bonds... '17 - '32 are all in that range...

 

Until one person can share (real) liquidity info on Sears CDS, I will continue to just suggest that something is not being interpreted correctly, or there is a ton of arb money on the table for those with an ISDA...

 

Honestly, either way I'm cool. ;-)

 

I don't have access to a Bloomberg...

[fareastwarriors]

At Kmart, a Store Overhaul That Stands Out

 

Struggling retailer has been closing dozens of outlets, but shows it can still move with the times

 

http://www.wsj.com/articles/at-kmart-a-store-overhaul-that-stands-out-1473285077

[morningstar]

You can pull a quote on their CDS

 

1yr: 1713.58

2yr: 1455.65

3yr: 1674.47

5yr: 1801.89

10yr: 1694.32

 

17 pts on Sears CDS?... Is that a midpoint, a trade actual, or... ???

 

Someone should tell that to their 9-12% YTM bonds... '17 - '32 are all in that range...

 

Until one person can share (real) liquidity info on Sears CDS, I will continue to just suggest that something is not being interpreted correctly, or there is a ton of arb money on the table for those with an ISDA...

 

Honestly, either way I'm cool. ;-)

 

I don't have access to a Bloomberg...

 

SRAC 5y CDS 31-34 pts upfront. Pretty consistent with the pricing on the long SRAC bonds. 1y CDS is quoted 6-11 pts upfront, basically consistent with the 2017 SRAC bond although that is illiquid.

[benhacker]

M*,

 

Thanks.

 

Can you triangulate the numbers you just shared (which make sense to me) with what Nate posted?  Am I being daft (through Occum's Razor, that is the right answer...)?

[morningstar]

M*,

 

Thanks.

 

Can you triangulate the numbers you just shared (which make sense to me) with what Nate posted?  Am I being daft (through Occum's Razor, that is the right answer...)?

 

http://www.markit.com/converter.jsp

 

HY CDS has a 500 bps coupon. The SRAC 1yr being quoted is the June 2017 maturity. Nate's figures are an annualized premium (spread). For instance on the 1yr if I sell protection on that quote I get 6 pts upfront + 5 pts of coupon over the 10 month life, which works out spreadwise to 1331 bps. The other side of the bid ask is 2099 bps spread. Nate's figure is a midpoint.

 

On the long bonds / long CDS, SRAC is pricing to default so comparing YTM on bonds to CDS spread is not very useful - better to compare discount on the bonds to points upfront on CDS.

[oddballstocks]

Here's the pricing for the 1yr.  Morningstar's explanation is much better than I could do.

[benhacker]

Ok thanks, that makes sense.

 

instead of talking about CDS risk, I prefer to simply look at bond yields and discounts as that is what seems most germane in these discussions.

 

Any way to see CDS notional volume in Bloomie?

[morningstar]

Ok thanks, that makes sense.

 

instead of talking about CDS risk, I prefer to simply look at bond yields and discounts as that is what seems most germane in these discussions.

 

Any way to see CDS notional volume in Bloomie?

 

http://www.swapsinfo.org/

 

This is what's available. SRAC CDS is much more liquid than SRAC bonds.

[CorpRaider]

Does that imply lost of bearish speculation or just lots of trade creditors trying to hedge a lil'?

[benhacker]

M*, thanks again.

 

What do I make of the "trade count" number.  Net and gross notional are great data point, but the trade count seems like some kind of cumulative count vs. what is happening on a day to day basis which I would assume to be very close to nil.

 

net notional is within ~50% of total SRAC outstanding obligations, so I'm very curious to see if the liquidity is linear or much greater.

 

thanks!