SHLDQ - Sears Holdings Corp

[alertmeipp]

Surprise I can't find a subject with Sears... it tanks 20% today.

[Guest hellsten]

Interesting. I remember reading a quarterly letter last week about how money managers are piling in to high-dividend and high-quality stocks. I wonder if it's this flight-to-quality that is pushing down all these smelly stocks or am I hallucinating?

 

Here are a few links:

http://www.grahamanddoddsville.net/wordpress/Files/Gurus/Bruce%20Berkowitz/OID%20-%20Bruce%20Berkowitz%20-%203-17-2009.pdf

http://www.fairholmefunds.com/sites/default/files/120815%20SHLD%20Presentation.pdf

http://www.manualofideas.com/files/shld_moi_20081223.pdf (from 2008...)

 

Value Line doesn't seem to like SHLD (don't remember how fresh this report is…):

TIMELINESS 5 Lowered 4/20/12

SAFETY 3 New 5/13/05

TECHNICAL 3 Raised 3/9/12

BETA 1.05 (1.00 = Market)

2015-17 PROJECTIONS

Ann’l Total

Price Gain Return

High 55 (+10%) 2%

Low 35 (-30%) -9%

[FCharlie]

I too was surprised no one was talking about the 20% drop. The loss was better than expected, but still just more of the same. A company that appears worth so much more dead than alive, yet can't aggressively liquidate in this economy.

 

It seems that Sears has gone from being either completely loved or completely hated to simply no one cares anymore.

 

 

[DCG]

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/shld-anyone/msg75867/#msg75867

[alertmeipp]

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/shld-anyone/msg75867/#msg75867

 

And?

[mysticdrew]

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/shld-anyone/msg75867/#msg75867

 

And?

 

it answers your original comment

"Surprise I can't find a subject with Sears"

[DCG]

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/shld-anyone/msg75867/#msg75867

 

And?

 

it answers your original comment

"Surprise I can't find a subject with Sears"

 

This. While there doesn't seem to be a post in 'investment ideas' Sears has been discussed in this thread.

[Shane]

From what I have heard from this site and others, my impression of SEARS was very poor.  I imagined depressed workers, crappy products, and low foot traffic.

 

Recently I went to their Miami retail store while visiting the city... It was a great place to shop.  Friendly staff, good product selection, and full of shoppers.  Their auto center was on the same property so I imagine people shop while they are getting auto work done.  I was impressed with the reality of the store contrasted with my expectations.

 

Maybe it was a new model, recently remodeled, or just a new store.

[rmitz]

From what I have heard from this site and others, my impression of SEARS was very poor.  I imagined depressed workers, crappy products, and low foot traffic.

 

Recently I want to their Miami retail store while visiting the city... It was a great place to shop.  Friendly staff, good product selection, and full of shoppers.  Their auto center was on the same property so I imagine people shop while they are getting auto work done.  I was impressed with the reality of the store contrasted with my expectations.

 

Maybe it was a new model, recently remodeled, or just a new store.

 

There is definitely a range of quality at sears locations, but in my experience the Kmart locations are the depressing ones.

[FCharlie]

Open question to all:

 

What would it take to get you interested in, or more interested in SHLD?

 

For me, SHLD was one of my largest positions a couple of years ago when they were consistently producing free cash flow and repurchasing shares. I viewed it not as a retailer but as a giant pile of assets being priced as if it were scrap.... and every quarter that passed, I owned more and more of it. The stores were always weak but I like Bruce Berkowitz point that SHLD has more real estate than Simon Property Group yet only has 1/10th the market value... On top of that you have greater than $50/share of net inventory. The share repurchases have stopped. The free cash flow has dried up, and today I sit and wait, not really adding but not selling either.

 

Thoughts anyone?

[valuecfa]

Open question to all:

 

What would it take to get you interested in, or more interested in SHLD?

 

For me, SHLD was one of my largest positions a couple of years ago when they were consistently producing free cash flow and repurchasing shares. I viewed it not as a retailer but as a giant pile of assets being priced as if it were scrap.... and every quarter that passed, I owned more and more of it. The stores were always weak but I like Bruce Berkowitz point that SHLD has more real estate than Simon Property Group yet only has 1/10th the market value... On top of that you have greater than $50/share of net inventory. The share repurchases have stopped. The free cash flow has dried up, and today I sit and wait, not really adding but not selling either.

 

Thoughts anyone?

 

I took my first very small bite on Friday. If earnings and sales continue to decline at such a rapid pace as they have in the past, i suspect the share price will continue to follow.

[Grenville]

Do you guys remember where Bruce gave an outline for the worth of the real estate? I'm looking for the source. I could be wrong on my numbers, hence looking for the source.

 

My notes say he valued the real estate:

20% at 500 sq/ft

80% at 10 sq/ft

 

 

[ItsAValueTrap]

What would it take to get you interested in, or more interested in SHLD?

 

New management maybe?  In the history of retail, a few retailers will make almost all the money (e.g. Walmart is one of the best performing stocks of all time).  If you are holding these stocks on multi-year timeframes, then it may make sense to stick to the few companies with the best management teams.  They will probably make most of the money in the sector.

 

I believe why the high short interest (39% of float short) in Sears exists is because of bad management.  It's a bet on Lampert consistently choosing bad CEOs and damaging their performance with interference on his part.

[drewdalton]

Grenville,

 

Bruce discussed Sears Holdings real estate portfolio (ie- the 80/20 rule) in the March 17, 2009 issue of Outstanding Investor Digest.  Here is the link

 

 

http://www.google.ca/url?sa=t&rct=j&q=march%2017%2C%202009%20and%20outstanding%20investor%20digest&source=web&cd=1&cad=rja&sqi=2&ved=0CC0QFjAA&url=http%3A%2F%2Fwww.grahamanddoddsville.net%2Fwordpress%2FFiles%2FGurus%2FBruce%2520Berkowitz%2FOID%2520-%2520Bruce%2520Berkowitz%2520-%25203-17-2009.pdf&ei=1A-8UK6JIYjE2gXdq4GAAw&usg=AFQjCNF7J04qOV9uWCTLCC695qDAjYnPVg

[wisdom]

What are the odds of permanent loss by owning SHLD? With the kind of balance sheet, assets SHLD has - how can it go into bankruptcy?

 

I have been unable to come up with many scenarios where that can happen. Especially, at the holding company level - the odds of bankruptcy are extremely remote.

 

A large part of its sales/services are directly linked to the housing market. Yet, is has survived the worst crash in living memory in housing with a strong balance sheet. In fact, it has continued to contribute to its pension plan, paid down debt and bought a lot of shares through this period. i.e in a lot of ways the balancesheet is better today. Having survived the slow down alone insures that they will do well when consumer spending comes back and the housing market get better.

 

I do not think the management at SHLD has been as bad as most people claim. Look at Home Depot, Best Buy and other retailers like JCP over the last 4 years. SHLD's drop in sales is similar - could the real reason for it be the slow down in housing and lower consumer spending rather than the management. Something to consider.

 

It is also a play on commercial real estate with low cost real estate or low rents locked in.

 

SHLD's strong balancesheet allows EL to play the waiting game (similar to Watsa or Buffett):

- housing is already making a come back which should lead to higher sales, thus, cashflow should start improving.

 

- malls are getting busier, thus, making commercial real estate more valuable. If we get inflation at some point in the future and real estate prices/rentals make a come back - SHLD would be one of the largest beneficiary's as it controls a large commercial real estate portfolio.

 

- in a high inflation scenario SHLD also benefits with its low locked in rents, etc. while revenues should rise with inflation.

 

- in a delationary scenario - SHLD has limited debt compared to some other retailers, low rents, has contributed heavily to its pension plan, a fair amount of cash and flexible B/S.

 

- If SHLD is EL's BRK - he already has 6 different businesses within SHLD - BRK only had textiles in the beginning. The share buybacks reming me of what Singleton (Teledyne) did during tough times in the market.

 

- Online retailers have enjoyed an advantage over brick and mortar companies - no sales taxes. Online retailers will start paying sales taxes as governments look for more revenue. Most brick and mortar stores with a large online presence stand to benefit. The advantage that Amazon has enjoyed will be reduced and a lot of these sales could come back to large retailers with both an online and a physical presence. 

 

$40B in annual sales

Even at EBITDA of 5% on $40B in sales (or $2B) SHLD will do well purchased at current prices with no increase in sales.

 

Thus, the question is - $42/share - is this a reasonable price to pay. I think so and I am prepared to wait.

[ERICOPOLY]

- If SHLD is EL's BRK

 

 

It isn't.  When SHLD has cash, it returns it to shareholders.

 

BRK never did that.  BRK was built by retaining cash and using it to fund new income streams.

 

Completely different trajectory at SHLD.  Moons apart.

[drewdalton]

Eric-  This is what I recall from reading Snowball.

 

In the early days of Berkshire Buffett used part of the cash he squeezed out of the textile business to repurchase shares.  Buffett first invested in Berkshire in 1962 and assumed control in 1965.  From 1962 to 1975 Berkshire reduced its shares outstanding from about 1.6 million to slightly under 1 million.  Many of the shares were repurchased from Buffett's previous partners.  Warren gave them enough information about the business, but just enough. 

 

 

 

[Guest rimm_never_sleeps]

What are the odds of permanent loss by owning SHLD? With the kind of balance sheet, assets SHLD has - how can it go into bankruptcy?

 

I have been unable to come up with many scenarios where that can happen. Especially, at the holding company level - the odds of bankruptcy are extremely remote.

 

A large part of its sales/services are directly linked to the housing market. Yet, is has survived the worst crash in living memory in housing with a strong balance sheet. In fact, it has continued to contribute to its pension plan, paid down debt and bought a lot of shares through this period. i.e in a lot of ways the balancesheet is better today. Having survived the slow down alone insures that they will do well when consumer spending comes back and the housing market get better.

 

I do not think the management at SHLD has been as bad as most people claim. Look at Home Depot, Best Buy and other retailers like JCP over the last 4 years. SHLD's drop in sales is similar - could the real reason for it be the slow down in housing and lower consumer spending rather than the management. Something to consider.

 

It is also a play on commercial real estate with low cost real estate or low rents locked in.

 

SHLD's strong balancesheet allows EL to play the waiting game (similar to Watsa or Buffett):

- housing is already making a come back which should lead to higher sales, thus, cashflow should start improving.

 

- malls are getting busier, thus, making commercial real estate more valuable. If we get inflation at some point in the future and real estate prices/rentals make a come back - SHLD would be one of the largest beneficiary's as it controls a large commercial real estate portfolio.

 

- in a high inflation scenario SHLD also benefits with its low locked in rents, etc. while revenues should rise with inflation.

 

- in a delationary scenario - SHLD has limited debt compared to some other retailers, low rents, has contributed heavily to its pension plan, a fair amount of cash and flexible B/S.

 

- If SHLD is EL's BRK - he already has 6 different businesses within SHLD - BRK only had textiles in the beginning. The share buybacks reming me of what Singleton (Teledyne) did during tough times in the market.

 

- Online retailers have enjoyed an advantage over brick and mortar companies - no sales taxes. Online retailers will start paying sales taxes as governments look for more revenue. Most brick and mortar stores with a large online presence stand to benefit. The advantage that Amazon has enjoyed will be reduced and a lot of these sales could come back to large retailers with both an online and a physical presence. 

 

$40B in annual sales

Even at EBITDA of 5% on $40B in sales (or $2B) SHLD will do well purchased at current prices with no increase in sales.

 

Thus, the question is - $42/share - is this a reasonable price to pay. I think so and I am prepared to wait.

 

except his balance sheet is not that strong. his debt ratings are not good and the bonds trade below par. I own some sears bonds that trade at $12, down from $18-$19. finance 101. if your bonds trade below par buy them in before you buy back your stock. he also has big issues with underfunded pension.  3 years ago you could make your argument. but things have gone south in a big way. when you are losing money your balance sheet can go south in a hurry. that's what's happened. that's why he did the rights offering. to raise cash. his share buybacks were terrible uses of cash in hindsight. not like Singleton at all.

[drewdalton]

I just noticed a new SEC filing for SHLD effective Nov 30, 2012.  From my reading ESL (Eddie's hedge funds) has wound up one of its partnerships and distributed 5.9m of SHLD to its limited partners.  It will be interesting to see if Eddie has taken his management fees in SHLD shares.  In January and July of this year ESL wound up two partnerships that it specifically set up for the Ziff brothers.  Eddie ended up with all those shares (about 6 to 7 million) either through fees or through purchases. 

 

SHLD may have been sold off last week in anticipation of the limited partners' shares hitting the market.

 

 

[compoundinglife]

- Online retailers have enjoyed an advantage over brick and mortar companies - no sales taxes. Online retailers will start paying sales taxes as governments look for more revenue. Most brick and mortar stores with a large online presence stand to benefit. The advantage that Amazon has enjoyed will be reduced and a lot of these sales could come back to large retailers with both an online and a physical presence. 

 

I have heard this argument quite a bit, usually in the context of AMZN bear cases. I know it has been discussed quote a bit on the Overstock thread as well. I don't buy it.

 

AMZN delivers a better experience to shoppers and I think customers who shop on AMZN only to cheat sales tax is a non-material percentage. I think it is pretty meaningless in the SHLD turn around thesis. SHLD's online sales will be dependent on execution of delivering a decent shopping experience. Unfortunately they are at a serious disadvantage to a company like Amazon in that space. But I think if they can sticking around the top 5 and generating some return from that business it does not have to be best of breed.

 

disclosure: long

 

 

[ERICOPOLY]

Eric-  This is what I recall from reading Snowball.

 

In the early days of Berkshire Buffett used part of the cash he squeezed out of the textile business to repurchase shares.  Buffett first invested in Berkshire in 1962 and assumed control in 1965.  From 1962 to 1975 Berkshire reduced its shares outstanding from about 1.6 million to slightly under 1 million.  Many of the shares were repurchased from Buffett's previous partners.  Warren gave them enough information about the business, but just enough. 

 

 

 

Okay, I got that part wrong.

 

As for the other half, what businesses has Eddie bought for diversifying the earnings streams of ESL?  None.

[wisdom]

Eric - it could be worthwhile looking at how he has structured SHLD - 6 different areas of business eg: home services, real estate, etc. One could interpret it as different subsidiaries.

 

You also have Sears Canada, potential global expansion of sears.com (some of it is already happening), etc.

[wisdom]

compounding life - you are right - sales tax on online sales is not something that SHLD thesis depends on. I have tried to list things that could work in the same direction - build momentum.

 

rimm - it is easy to say that the share purchases were bad use of capital in hindsight. At that point in time it could have been the best decision. Today it might be buying back the debt.

 

The rights offer also speaks to the flexibility he has if an error is made - I believe the large margin of safety allows him more room for error. I do not expect EL to be perfect in every decision.

[ERICOPOLY]

Eric - it could be worthwhile looking at how he has structured SHLD - 6 different areas of business eg: home services, real estate, etc. One could interpret it as different subsidiaries.

 

You also have Sears Canada, potential global expansion of sears.com (some of it is already happening), etc.

 

ESL is the Berkshire.  Not SHLD.

 

ESL has passive investments.  ESL has operating companies (via SHLD).

 

Buffett had all passive investments and operating companies done via Berkshire.

 

[wisdom]

Eric - I am not saying SHLD is like BRK. This is why i used - IF SHLD is EL's BRK.

 

It could be one of the outcomes depending on how things play out.

 

Would ESL provide permanent capital? The %age of ownership that EL now has in SHLD keeps moving up.