SHLDQ - Sears Holdings Corp

[Parsad]

fyi

https://www.washingtonpost.com/news/morning-mix/wp/2018/10/16/searss-radical-past-how-mail-order-catalogues-subverted-the-racial-hierarchy-of-jim-crow/?utm_term=.09dc509e09cd&wpisrc=nl_most&wpmm=1

 

I think there's alot to be said for Sears, that hasn't been said lately.  Frankly a business surviving 130+ years is worth noting, and in it's hey day, Sears was a beast of a retailer with cash gushing from its coffers.  The demise of Sears falls squarely on Lampert's shoulders.  Unlike other retailers, he put in as little capital as he could into the departments stores, was turtle slow when it came to selling off underperforming stores, and didn't exploit the redevelopment of sites to unleash commercial/retail potential until it was too late.  All the while, plowing cash from sold assets into buying back overpriced stock in a declining, neglected retail business. 

 

My family and I used to shop at Sears all the time 20-30-40 years ago...then we completely stopped about 10 years ago when the stores started to look like bare warehouses and you couldn't find a salesperson or cashier.  I actually disagree with Warren's quote regarding a good manager and poor business when it comes to Sears...I think the good manager led to an early demise...how else do you explain Macy's, Kohls and Nordstrom's doing perfectly fine while Sears is no more.  Cheers!

 

I think the biggest issue with Sears is that it was no longer a desirable option for individual products(specialty, niche, like kitchen/garden stuff) nor was it a good enough option collectively(ala not the best at one but had enough of everything to make it time efficient). I see the same fate for JCP.

 

JCP is definitely going the same direction, and they don't have the real estate or brand assets that Sears did.  Have you seen a JC Penny's store these days...empty shelves, poor customer service, dated stores...exactly how Sears looked 10-12 years ago.  Cheers!

[Cigarbutt]

Humility required here with retrospective analysis.

 

For quite some time, the sum-of-the parts thesis was quite compelling.

I remember trying to come up with some kind of valuation for the company especially when I noticed that Mr. Chou had a significant investment in Sears. As suggested by a respected poster above, I did in fact visit stores then.

The difference between a satisfactory puff and a value trap can be tenuous.

 

Retrospectively, I would say that there was value but, somehow, value did not materialize. When Mr. Lampert took over, I guess there could have been a timeline which should have been much more of a liquidation than a turnaround. The trouble, it seems, is that I'm not sure if Mr. Lampert ever made his mind about an exit strategy for investors. Some kind of self-reinforcing loop.

 

Sears was the Amazon of its time and, for some reasons, I can still remember the 1979 catalogue.

http://www.chicagotribune.com/news/opinion/commentary/ct-sears-roebuck-homan-catalog-flashback-perspec-0514-jm-20170512-story.html

 

[JRM]

Just curious on what others think.  Sears was said to be Eddie's Berkshire vehicle.  What went wrong?

 

1.  Buffett invested in outside businesses rather than the textile business (insurance).

2.  Costs didn't come down quickly enough with asset sales.

3.  Too much debt/pension liabilities.

 

[Parsad]

Just curious on what others think.  Sears was said to be Eddie's Berkshire vehicle.  What went wrong?

 

1.  Buffett invested in outside businesses rather than the textile business (insurance).

2.  Costs didn't come down quickly enough with asset sales.

3.  Too much debt/pension liabilities.

 

1.  Might have made a difference, but not the reason Sears went under.

2.  Yes, definitely...or revenues didn't go up because of a lack of investment.  Definitely too slow on the asset sales...I said this like 7 years ago.

3.  Alot of the debt was accumulated in the last 5 years.  Yes, pension obligations were rising, but alot of this could have been fulfilled through the early asset sales instead of buying back shares at over $100!

 

Cheers!

[bizaro86]

I think the biggest mistake was the early buybacks.  If he had invested that cash into a stock portfolio, new subsidiaries, or real estate development I think this would have turned out differently. 

 

The buybacks were essentially concentrating the value in the crappy business instead of WEBs plan of diversifying away from the crappy business.

[Gregmal]

I also think MSM needs to drop the Lampert failed narrative. I for one, believe Fast Eddy just orchestrated one of the greatest wealth transfer schemes we'll ever see. This guy made money everywhere here, from fees thru his HF, personal loans to SHLD secured by prime real estate, to freakin 50-100%+ annually lending out his shares for over a decade to short sellers. Eddy will be just fine.

[Parsad]

I also think MSM needs to drop the Lampert failed narrative. I for one, believe Fast Eddy just orchestrated one of the greatest wealth transfer schemes we'll ever see. This guy made money everywhere here, from fees thru his HF, personal loans to SHLD secured by prime real estate, to freakin 50-100%+ annually lending out his shares for over a decade to short sellers. Eddy will be just fine.

 

Alot of the income, interest, assets, etc he siphoned off offset his equity losses.  He didn't come out as badly as stockholders, but he didn't do well either.  Not to mention that ESL went from $15B in assets down to $1.5B...that's alot of fees that he will not be getting.  And why do you always have to throw in there "MSM"...is there anything in this world that you won't make partisan?  Cheers!

[Gregmal]

I also think MSM needs to drop the Lampert failed narrative. I for one, believe Fast Eddy just orchestrated one of the greatest wealth transfer schemes we'll ever see. This guy made money everywhere here, from fees thru his HF, personal loans to SHLD secured by prime real estate, to freakin 50-100%+ annually lending out his shares for over a decade to short sellers. Eddy will be just fine.

 

Alot of the income, interest, assets, etc he siphoned off offset his equity losses.  He didn't come out as badly as stockholders, but he didn't do well either.  Not to mention that ESL went from $15B in assets down to $1.5B...that's alot of fees that he will not be getting.  And why do you always have to throw in there "MSM"...is there anything in this world that you won't make partisan?  Cheers!

 

I mean have been you seen anything anywhere that touches on the things I mentioned recently? There’s obituaries all over, and pieces rippin Lampert, but none that really hit the nail on the head and call this what it is. A failed vanity project where the culprit still walks away in his $9,000 suite to his private jet.

[Parsad]

I also think MSM needs to drop the Lampert failed narrative. I for one, believe Fast Eddy just orchestrated one of the greatest wealth transfer schemes we'll ever see. This guy made money everywhere here, from fees thru his HF, personal loans to SHLD secured by prime real estate, to freakin 50-100%+ annually lending out his shares for over a decade to short sellers. Eddy will be just fine.

 

Alot of the income, interest, assets, etc he siphoned off offset his equity losses.  He didn't come out as badly as stockholders, but he didn't do well either.  Not to mention that ESL went from $15B in assets down to $1.5B...that's alot of fees that he will not be getting.  And why do you always have to throw in there "MSM"...is there anything in this world that you won't make partisan?  Cheers!

 

I mean have been you seen anything anywhere that touches on the things I mentioned recently? There’s obituaries all over, and pieces rippin Lampert, but none that really hit the nail on the head and call this what it is. A failed vanity project where the culprit still walks away in his $9,000 suite to his private jet.

 

Gregmal, I don't think you want to go down that path.  You know the difference between a corporate shield and personal liability.  It's a common practice, part of business and nothing worng with it, otherwise investors would not risk capital and pursue new ventures.  Trump hotels and casinos have gone bankrupt, while "the culprit still walks away in his $9,000 suit to his private jet" and became President!  Cheers!

[augustabound]

And why do you always have to throw in there "MSM"

 

What's MSM?

[Cigarbutt]

And why do you always have to throw in there "MSM"

What's MSM?

Maybe what Gregmal meant was "Men who have Sex with Men" but I wonder if it is not mainstream media. 

 

PS I seem to remember an argument about doing your own work and simple google searches but helping you with the English language is my pleasure. :)

 

 

[augustabound]

And why do you always have to throw in there "MSM"

What's MSM?

Maybe what Gregmal meant was "Men who have Sex with Men" but I wonder if it is not mainstream media. 

 

PS I seem to remember an argument about doing your own work and simple google searches but helping you with the English language is my pleasure. :)

 

Helping me with the English language? 

[Mephistopheles]

I think I figured out why the SRAC bonds are trading so high:

 

https://www.barrons.com/articles/this-one-weird-cds-trick-may-make-your-bond10-times-more-valuable-temporarily-1539391729

[aws]

I really don't understand that article.  It seems like they are saying there are more CDS outstanding than actual bonds, which I'm fine with as you can apparently buy the insurance without owning the underlying asset.  What I don't get is how this creates a squeeze.  If more than 100% of a stock were short and there was some event that caused everyone to cover then a massive squeeze makes sense, but I don't get how this works with a CDS.

 

The article says there are 200mm of SRAC bonds that are 'deliverable' (whatever that means - is that a sub-category of all outstanding bonds as I thought the amount was much higher?).  And apparently if you own a CDS which would payout cash you can demand payment in bonds instead?  I'm not really sure why such an option would exist since if you own a CDS presumably you are trying to protect your risk of loss in a bond, not acquire more of the same bond.  So then if all CDS holders force the counterparties to deliver bonds in excess of the amount in existence there's some squeeze where they trade way over 100 or something?  And if you own the CDS you try to short the bond at that price before delivery to lock in profit?  Otherwise the squeeze didn't really help you since at the end you are left with a nearly worthless bond that someone just happened to pay a fortune for before delivering to you.  What's going on here?

 

Sorry for the stream of consciousness ramble there but I'm hoping someone can explain the situation better than the article author.

[Hielko]

I think the author of the article doesn't understand how it works, or I'm totally wrong... because I think it's exactly the other way around, the CDS protection buyers can deliver bonds to the auction, doesn't make sense for the CDS protection seller. Here is how I think it works:

 

Normally CDS are bought as a hedge:

 

1. How much a CDS pays is determined based on the price of some bonds that are sold in an auction.

2. If you own the CDS and the bonds you sell your bonds in the auction, and the CDS will payout the difference. No matter how the bonds are priced in the auction, you get your money back.

 

Now, you only bought the CDS:

 

1. How much you get for your CDS is totally dependent on the auction. But if people for some reason are willing to pay par for the bonds, you will not get anything for your CDS.

2. And if someone has sold a lot of CDS - more than the notional of the outstanding bonds - he of course could "simply" buy all the bonds in the auction at par, and he doesn't have to pay a cent to people who bought the CDS.

 

Then he or she ends up up overpaying for some bonds, but that could make sense. Let's say the bonds are worthless. If you would have sold $1 billion in CDS you could lose that full $1 billion. But if there are only $200 million of bonds outstanding ,you could buy the $200 million in bonds. Lose $200 million on that because they are worthless, but then because they would be priced at par in the auction you wouldn't have to pay out a single cent to the CDS buyers.

[Cigarbutt]

The problem happens during the auction process that is triggered by default. The auction is a two-stage process where market orders are solicited and where dealers put a floor and a cap in order to determine the recovery value of the bonds and calculate the amount of cash (cash settlement) that occurs between the CDS seller and the CDS buyer. Then bonds that entered the auction (volume may be small relative to total outstanding) are then matched between seller and buyer and are labeled as "physical delivery".

 

Fine in theory and usually works fine but "inefficiency" issues can occur with price discovery if the total volume of CDS is much larger than the underlying bond market of the entity and if some market "participants" have unusually large CDS positions where there may be incentives to influence the auction and price discovery process.

 

It has happened and, presumably, will happen again, perhaps big time.

There is a relevant thread on this topic with specific examples: "High yield debt and CDS market - Wild West".

The thread was more about how to engineer a default and benefit from it but the auction aspect is discussed.

Wonder how this applies to Sears.

https://www.kramerlevin.com/en/perspectives-search/opportunistic-cds-strategies-available-to-cds-protection-sellers-part-ii-mcclatchy-and-sears.html

 

[aws]

That makes a lot more sense, but also reinforces why I keep a wide berth from the bond market as I have absolutely no idea about the games the big fish can play.  So then people buying now at possibly inflated prices might be naked CDS holders afraid they will get gamed and receive nothing, and they want to lock in a bond they can deliver at auction?  Hard to feel too sorry for the CDS holders though if they bought protection without holding the underlying bonds in the first place.

[Cigarbutt]

Also remember that the CDS trigger is only a one-time event and should not change your longer term outlook on the outcome of the bonds.

 

FWIW, I think that the biggest risk for distortion is not from the CDS buyer without the underlying but from the CDS seller when the CDS market is larger than the underlying because net CDS sellers, by bidding above the fair value and eventually realizing a loss from buying the underlying bonds, can achieve a reduction in the net payoff to the existing CDS buyers, potentially resulting in an overall net gain versus not distorting the market. It looks like the distortion could be particularly significant if the auction is relatively illiquid. So, contrary to what Mr. Buffett is trying to achieve with his buyback activity, the market distorters aim to really move the market with the minimal amount of capital possible. Didn't Mr. Munger say something about the power of incentives?

 

It seems that the incentive issue used to be a larger problem when the payout of the CDS contract required physical delivery of the underlying bond (think Delphi in 2005, when the CDS market was much larger than the bonds) but with the Big Bang Protocol (these guys know how to name things), things have improved but the quest for efficiency has not been solved.

 

From the moral standpoint, it's not OK to create these situations but perhaps helpful to know about them. Isn't value investing about the discovery of mispricings?

[bizaro86]

IB got their stuff together and is letting me bid for the bonds now. Of course, they're up from bid $23 to bid >$30...

 

That's a bit frustrating

[Spekulatius]

NYT article, where Fast Eddy comments SYW.

Mr. Lampert insisted to me that ShopYourWay was showing promise but required far more time and capital than Sears could muster. “If I could have raised billions, I could have done things differently,” he said. “The ability to incubate ideas requires a huge investment.”

https://www.nytimes.com/2018/10/18/business/sears-edward-lampert-bankruptcy.html?rref=collection%2Fsectioncollection%2Fbusiness

“If I could have raised billions,

He should've said: 'If i didn't waste $6.5B on buybacks'....

 

Even SYW was a misapplication of capital,IMO and would not have succeeded even when he had spent a couple more billions on it. In the mean time, he starved totally fine operations like the car centers, Craftmans tools (which dominated several categories like tools, garden ), Diehard and made them generic brands with little residual value.

[SHDL]

I was planning to do a joke post at some point on how SHLD could work as an amazing hyperinflation hedge but so much for that idea. 

[Mephistopheles]

Anyone know the figure for owned unencumbered real estate? As of the last 10-k the company had 1002 stores, and 307 were owned. As of the last Q the company operated 866 stores. 138+88 = 226 are encumbered and owned. So I assume 81 are max owned and unencumbered. Just trying to do the math on this one for potential payoffs to bondholders.

 

The 138 Sparrow (former REMIC) properties have $624.2 outstanding loan vs. 138 stores, or about $4.5 per store.

The Cascade/JPP loan facility have 88 properties securing $831.4 million, or about $9.4 million per property.

 

Assuming all those stores go to the respective lenders in whole in BK. Even if there are 81 unencumbered stores max, I can't imagine more than a $100 million payoff from them in total. IMO, Kenmore, Home Services, and Diehard won't fetch more than $500 m. Then it's a question of the warranty business (Sears Re), how much of capital does it have and will they be able to extract Kenmore/Diehard? So say about $500 million in assets unencumbered now.

 

Say the current assets cover the 1st lien, letter of  credit, and the second lien term loan. Then it's: $264.4 million of second lien notes, $231.2 million of the IP/Ground lease term loan, and $293.5 million of SRAC notes left to duke it out, all pretty much guaranteed either by holdings or most of its subs. About $789 million in total between these 3. I feel 2019 unsecured's are worth nothing in the end.

 

 

This is a very rough, 5 mile high view of the situation. I'm no BK expert and it's the first time I've been in a situation. $500 m of assets say to cover $789 m in debt? Doesn't seem so promising, but may not be too accurate, so please do correct me where I went wrong.

[bizaro86]

I have no idea how valuable the unencumbered stores are, but a little over $1MM each seems pretty low to me. If you took either of the numbers from the secured stores you're getting a multiple of that.

[Mephistopheles]

I have no idea how valuable the unencumbered stores are, but a little over $1MM each seems pretty low to me. If you took either of the numbers from the secured stores you're getting a multiple of that.

 

Right, I was just trying to be conservative. Secondly I don't know how many unencumbered stores they still have. It's kind of annoying that it's not reported in the the 10q. Also the value of each store can vary wildly as we all know. I guess all we can do is a property by property analysis to figure out which ones and how much each may be worth.

[bizaro86]

For sure, lots of assumptions necessary. However, Seritage got $13.5 MM for 4 non big city KMart locations. I doubt unencumbered properties are crappier than those, so $3.375MM per property also seems like a reasonable/conservative guess on per property value.