SHLDQ - Sears Holdings Corp

[Mephistopheles]

I'm not arguing the equity is a good play here (I'm long the '17 and '18 debt)

 

At this point what are the major risks to the 2017 debt (6.875% 10/15/17)?

 

The only one I see is a full or partial (subsidiary-specific) restructuring within the next 9 months. I am long the debt because Eddie's actions, plus his words (every chance he and his spokespeople get they make a point to say they are fulfilling all of their obligations), indicate to me that his goal is to slowly liquidate the company outside of court and wind up with a group of smaller self-sufficient businesses. Whether it works, who knows, but I don't see him filing between now and October because of the PR damage (the SRAC notes due 10/2017 represent only ~$40M of principal amount).

 

 

 

Where do you find the principal outstanding for each of the SRAC notes? They stopped filing in 2005 and can't find anything in the SHLD filings. TIA

[peridotcapital]

I'm not arguing the equity is a good play here (I'm long the '17 and '18 debt)

 

At this point what are the major risks to the 2017 debt (6.875% 10/15/17)?

 

The only one I see is a full or partial (subsidiary-specific) restructuring within the next 9 months. I am long the debt because Eddie's actions, plus his words (every chance he and his spokespeople get they make a point to say they are fulfilling all of their obligations), indicate to me that his goal is to slowly liquidate the company outside of court and wind up with a group of smaller self-sufficient businesses. Whether it works, who knows, but I don't see him filing between now and October because of the PR damage (the SRAC notes due 10/2017 represent only ~$40M of principal amount).

 

 

 

Where do you find the principal outstanding for each of the SRAC notes? They stopped filing in 2005 and can't find anything in the SHLD filings. TIA

 

Depending on your broker, when you look at the bids and asks for corporate bonds it often tells you the outstanding amount. Then you can roughly check to see if its close by looking at the SHDL balance sheet and notes to the financials in their filings. All the outstanding SRAC debt combined is ~$300M.

[BeerBBQ]

I'm not arguing the equity is a good play here (I'm long the '17 and '18 debt)

 

At this point what are the major risks to the 2017 debt (6.875% 10/15/17)?

 

The only one I see is a full or partial (subsidiary-specific) restructuring within the next 9 months. I am long the debt because Eddie's actions, plus his words (every chance he and his spokespeople get they make a point to say they are fulfilling all of their obligations), indicate to me that his goal is to slowly liquidate the company outside of court and wind up with a group of smaller self-sufficient businesses. Whether it works, who knows, but I don't see him filing between now and October because of the PR damage (the SRAC notes due 10/2017 represent only ~$40M of principal amount).

 

 

 

Where do you find the principal outstanding for each of the SRAC notes? They stopped filing in 2005 and can't find anything in the SHLD filings. TIA

 

http://finra-markets.morningstar.com/BondCenter/Screener.jsp

 

[Candyman1]

From my talks with people that develop for some of the JV partners, they doubt this whole "value in below market leases" thesis.

 

What specifically makes them doubt the value in below market leases?

 

 

A. Every lease says that you need to get the approval of the landlord for subletting. What is the incentive of a landlord to say "sure SHLD, you are paying me way below market and go ahead, sublet and charge market rent while you continue to pay me below market rent."

 

 

But Seritage is the landlord.

 

Totally irrelevant. SRG is supposed to be an independent company from SHLD. SRG management is expected to act in the interest of the shareholders. SHLD's board just settled a lawsuit around Eddie L's supposed dealings. Although maybe Eddie L might do it anyway. I believe Eddie L is emotionally too invested in SHLD, I don't think he is stupid.

Also isn't this argument a little weird ... so SRG is worth a lot more because it can redevelop all these properties ... and on the other hand it would be willing to allow SHLD to sublet at the average of $4 a sq foot.

But besides the SRG/SHLD stores, SHLD still has a lot of stores they are renting from others, not SRG. That is the supposed value people refer too.

 

[scorpioncapital]

The lawsuit was the claim that SHLD sold the properties for too low a price. As an SRG investor I'd be quite happy if others think this way, although I have seen situations where a company will settle such a claim but turns out it wasn't below fair value, but the lawsuit was a distraction and it wasn't entirely clear one way or the other.

[SlowAppreciation]

From my talks with people that develop for some of the JV partners, they doubt this whole "value in below market leases" thesis.

 

What specifically makes them doubt the value in below market leases?

 

 

A. Every lease says that you need to get the approval of the landlord for subletting. What is the incentive of a landlord to say "sure SHLD, you are paying me way below market and go ahead, sublet and charge market rent while you continue to pay me below market rent."

 

 

But Seritage is the landlord.

 

Totally irrelevant. SRG is supposed to be an independent company from SHLD. SRG management is expected to act in the interest of the shareholders. SHLD's board just settled a lawsuit around Eddie L's supposed dealings. Although maybe Eddie L might do it anyway. I believe Eddie L is emotionally too invested in SHLD, I don't think he is stupid.

Also isn't this argument a little weird ... so SRG is worth a lot more because it can redevelop all these properties ... and on the other hand it would be willing to allow SHLD to sublet at the average of $4 a sq foot.

But besides the SRG/SHLD stores, SHLD still has a lot of stores they are renting from others, not SRG. That is the supposed value people refer too.

 

I don't think the fact that SHLD's low rents on the SRG properties is evidence that the real estate isn't as valuable as claimed. If SHLD is paying below market rents, obviously SRG wants to get SHLD out of as many stores as quickly possible. But redeveloping those stores costs money and resources, so SRG can't just do it overnight.

 

Think of it like you owned an apartment building. The units are all occupied, but they're in dire need of being updated. If you remodel them, you can get 2-4x rent than current tenants, who are paying you below market rates. The lease lets you kick them all out if you wanted to, but there are scenarios where it's better to remodel the apartments as existing tenants move out because remodeling takes time, money, and reduces occupancy.

[Ballinvarosig Investors]

I see Francis Chou has dumped 20% of his Sears position - http://www.dataroma.com/m/holdings.php?m=ca

[Candyman1]

From my talks with people that develop for some of the JV partners, they doubt this whole "value in below market leases" thesis.

 

What specifically makes them doubt the value in below market leases?

 

 

A. Every lease says that you need to get the approval of the landlord for subletting. What is the incentive of a landlord to say "sure SHLD, you are paying me way below market and go ahead, sublet and charge market rent while you continue to pay me below market rent."

 

 

But Seritage is the landlord.

 

Totally irrelevant. SRG is supposed to be an independent company from SHLD. SRG management is expected to act in the interest of the shareholders. SHLD's board just settled a lawsuit around Eddie L's supposed dealings. Although maybe Eddie L might do it anyway. I believe Eddie L is emotionally too invested in SHLD, I don't think he is stupid.

Also isn't this argument a little weird ... so SRG is worth a lot more because it can redevelop all these properties ... and on the other hand it would be willing to allow SHLD to sublet at the average of $4 a sq foot.

But besides the SRG/SHLD stores, SHLD still has a lot of stores they are renting from others, not SRG. That is the supposed value people refer too.

 

I don't think the fact that SHLD's low rents on the SRG properties is evidence that the real estate isn't as valuable as claimed. If SHLD is paying below market rents, obviously SRG wants to get SHLD out of as many stores as quickly possible. But redeveloping those stores costs money and resources, so SRG can't just do it overnight.

 

Think of it like you owned an apartment building. The units are all occupied, but they're in dire need of being updated. If you remodel them, you can get 2-4x rent than current tenants, who are paying you below market rates. The lease lets you kick them all out if you wanted to, but there are scenarios where it's better to remodel the apartments as existing tenants move out because remodeling takes time, money, and reduces occupancy.

 

Are you saying that because SRG does not have enough cash, it might tell SHLD that it can sublet some of the stores and keep the economics?

First SHLD does not have the cash to redevelop stores itself using scale. Also SHLD has closed many rented stores over the years ... can you show me one they redeveloped and sublet?

 

In addition, SHLD and Eddie just settled a lawsuit around selling SRG too cheap. I am sure they want more of that by doing more insider deals. (Being sarcastic) Deals like that make lawyers salivate.

 

Also, SHLD just gave back a number of stores to SRG and paid one years rent plus NNN to do that. Why didn't SHLD redevelop those stores itself?

[SlowAppreciation]

From my talks with people that develop for some of the JV partners, they doubt this whole "value in below market leases" thesis.

 

What specifically makes them doubt the value in below market leases?

 

 

A. Every lease says that you need to get the approval of the landlord for subletting. What is the incentive of a landlord to say "sure SHLD, you are paying me way below market and go ahead, sublet and charge market rent while you continue to pay me below market rent."

 

 

But Seritage is the landlord.

 

Totally irrelevant. SRG is supposed to be an independent company from SHLD. SRG management is expected to act in the interest of the shareholders. SHLD's board just settled a lawsuit around Eddie L's supposed dealings. Although maybe Eddie L might do it anyway. I believe Eddie L is emotionally too invested in SHLD, I don't think he is stupid.

Also isn't this argument a little weird ... so SRG is worth a lot more because it can redevelop all these properties ... and on the other hand it would be willing to allow SHLD to sublet at the average of $4 a sq foot.

But besides the SRG/SHLD stores, SHLD still has a lot of stores they are renting from others, not SRG. That is the supposed value people refer too.

 

I don't think the fact that SHLD's low rents on the SRG properties is evidence that the real estate isn't as valuable as claimed. If SHLD is paying below market rents, obviously SRG wants to get SHLD out of as many stores as quickly possible. But redeveloping those stores costs money and resources, so SRG can't just do it overnight.

 

Think of it like you owned an apartment building. The units are all occupied, but they're in dire need of being updated. If you remodel them, you can get 2-4x rent than current tenants, who are paying you below market rates. The lease lets you kick them all out if you wanted to, but there are scenarios where it's better to remodel the apartments as existing tenants move out because remodeling takes time, money, and reduces occupancy.

 

Are you saying that because SRG does not have enough cash, it might tell SHLD that it can sublet some of the stores and keep the economics?

First SHLD does not have the cash to redevelop stores itself using scale. Also SHLD has closed many rented stores over the years ... can you show me one they redeveloped and sublet?

 

In addition, SHLD and Eddie just settled a lawsuit around selling SRG too cheap. I am sure they want more of that by doing more insider deals. (Being sarcastic) Deals like that make lawyers salivate.

 

Also, SHLD just gave back a number of stores to SRG and paid one years rent plus NNN to do that. Why didn't SHLD redevelop those stores itself?

 

We may be misunderstanding each other. I'm not advocating for SHLD being a good investment or not. I simply have no opinion one way or the other. Nor do I know if all of their real estate is under or over valued. But I do believe that the stores spun off toe SRG are undervalued, and that SRG will be able to get higher rents after redevelopment than what they current get from SHLD.

[doughishere]

Force Capital.

 

https://www.sec.gov/Archives/edgar/data/1317601/000117266117000739/xslForm13F_X01/infotable.xml

[valueinvestor82]

That's a huge concentration as a percentage of the amount shown as the portfolio total.

[Mephistopheles]

Has anyone had trouble buying SRAC? My broker told me that SRAC bonds are restricted in 46 states. I tried buying the 2017 and my broker is Merrill Edge. They even read out all the states where it is restricted...

[racemize]

I tried to buy the Oct 2017 bonds, but they didn't file blue sky in Texas.  And Fidelity has no way of telling you that until you try to buy it...

[benhacker]

Race, who is your broker?

[racemize]

Fidelity for IRA. I could have bought it via my institutional IB account.

[TwoCitiesCapital]

https://www.bloomberg.com/news/articles/2017-03-08/urban-outfitters-tumbles-as-ceo-warns-retail-bubble-has-burst

 

Chickens coming home to roost for retail in general.

[Candyman1]

https://searsholdings.com/press-releases/pr/2033

 

Wow ... just look at the spread between gross and SGA margins. Operationally things just keep getting worse. Yes in Q4 sears had a better gross margin, but just look at the same store sales impact.

After having SSS of minus 9.2% in 2015, I never expected it could be even worse in 2016.

In 2016 Sears' gross margin minus SGA margin was minus 6%. BBY's was plus 4%. Only 10% more to go and SHLD will be killing it. =) Sears runs SGA margin of 29.2%, BBY does 19.3%. I guess SHLD can keep closing stores and when the last store closes it will finally have lower cost margin than BBY.

 

[Parsad]

https://searsholdings.com/press-releases/pr/2033

 

Wow ... just look at the spread between gross and SGA margins. Operationally things just keep getting worse. Yes in Q4 sears had a better gross margin, but just look at the same store sales impact.

After having SSS of minus 9.2% in 2015, I never expected it could be even worse in 2016.

In 2016 Sears' gross margin minus SGA margin was minus 6%. BBY's was plus 4%. Only 10% more to go and SHLD will be killing it. =) Sears runs SGA margin of 29.2%, BBY does 19.3%. I guess SHLD can keep closing stores and when the last store closes it will finally have lower cost margin than BBY.

 

You read his shareholder letter and you think "This guy is f**king delusional!"  The letter is extremely optimistic and glaringly omits any mistakes.  Cheers!

[CorpRaider]

WoW.  Marketing $1 Billion in RE.  A secondary coming in SRG?

[BeerBBQ]

"we recently received an additional $105 million in gross proceeds from the sale of three Sears Fullline stores, one owned and two leased"

 

not sure which leased stores these were but this does suggest there is some value in the leased stores.  Does anyone know if there is semantics surrounding the term "gross proceeds" i.e. 3 stores for 105M is $35m per store which seems very high.  Would there be a net# that would be more informative?

[alpha asset strategies]

"we recently received an additional $105 million in gross proceeds from the sale of three Sears Fullline stores, one owned and two leased"

 

not sure which leased stores these were but this does suggest there is some value in the leased stores.  Does anyone know if there is semantics surrounding the term "gross proceeds" i.e. 3 stores for 105M is $35m per store which seems very high.  Would there be a net# that would be more informative?

 

I had heard a few months ago that SHLD was attempting to sell the leases on their 2 valuable New York City Kmart locations - One Penn Plaza (34 St.) and Astor Place.  I still haven't been able to confirm if these 2 locations were included in this transaction.

[Candyman1]

"we recently received an additional $105 million in gross proceeds from the sale of three Sears Fullline stores, one owned and two leased"

 

not sure which leased stores these were but this does suggest there is some value in the leased stores.  Does anyone know if there is semantics surrounding the term "gross proceeds" i.e. 3 stores for 105M is $35m per store which seems very high.  Would there be a net# that would be more informative?

 

I had heard a few months ago that SHLD was attempting to sell the leases on their 2 valuable New York City Kmart locations - One Penn Plaza (34 St.) and Astor Place.  I still haven't been able to confirm if these 2 locations were included in this transaction.

 

Yes there are some valuable properties and leases, but you have to look at more than 1,000 stores. I assume something like that happened where they did a transaction around stores in NYC. Trust me the Kmart leased store in Shittown, MI ain't worth much. Likely the owner bought back the lease.

[Candyman1]

https://searsholdings.com/press-releases/pr/2033

 

Wow ... just look at the spread between gross and SGA margins. Operationally things just keep getting worse. Yes in Q4 sears had a better gross margin, but just look at the same store sales impact.

After having SSS of minus 9.2% in 2015, I never expected it could be even worse in 2016.

In 2016 Sears' gross margin minus SGA margin was minus 6%. BBY's was plus 4%. Only 10% more to go and SHLD will be killing it. =) Sears runs SGA margin of 29.2%, BBY does 19.3%. I guess SHLD can keep closing stores and when the last store closes it will finally have lower cost margin than BBY.

 

You read his shareholder letter and you think "This guy is f**king delusional!"  The letter is extremely optimistic and glaringly omits any mistakes.  Cheers!

 

I have been saying that for years. Go through EL's presentation/letters and look at what he says and his presented strategies and you wonder if he is on the same planet as we are.

 

[DamienC]

Could someone give me the exact definition of equity in inventory that Sears presents every quarters? Thanks

[BeerBBQ]

 

5) I believe SRAC debt is structurally senior (barely) to '19 holdco debt (many comments on this over the years, some disagree)

 

 

Ben,

 

Can you elaborate on why you think this is the case and if true, what that would mean in a BK scenario? (or point me to the thread if discussed already)

 

Thanks for any insights.