SHLDQ - Sears Holdings Corp

[giofranchi]

I like Eddie...I much prefer him to Einhorn, Ackman, or a multitude of other hedge fund managers of similar notoriety...

 

Well, although Mr. Einhorn has clearly still to prove himself as a businessman, I think he recognized the fact that insurance + investment acumen generally is better that retail + investment acumen. Insurance tends to be much less subject to all those changes that only Mr. Bezos saw and nobody else. Insurance basically is exploiting opportunities and risk management, both activities at which I think Mr. Einhorn excels.

 

giofranchi

[prevalou]

I don't see the cash burn in 2012

[Edward]

I don't see the cash burn in 2012

looking at Q3 2012 cash flow statement:

 

Cash generated from operating activities before changes in operating assets and liabilities, 39 weeks: (735) M $

 

Same number for 39 weeks in 2011 was: (473) M $

 

This is a significant cash burn even before capex, which is much lower than depreciation. With such minimal investment in the business no wonder it struggles.

[Uccmal]

I don't see the cash burn in 2012

looking at Q3 2012 cash flow statement:

 

Cash generated from operating activities before changes in operating assets and liabilities, 39 weeks: (735) M $

 

Same number for 39 weeks in 2011 was: (473) M $

 

This is a significant cash burn even before capex, which is much lower than depreciation. With such minimal investment in the business no wonder it struggles.

 

The thing is, you only need to do a little scuttlebut on this to know the above is true.  Just go to a dozen of their stores.  Takes what, half a day?  For Pete's sakes, Sears Canada is closing its flagship Toronto Store at Toronto's pre-eminent mall.  And the mall is perpetually full.  The management by Lampert has been atrocious. 

 

Since I first invested in BAC I have been to NT, Boston, Fresno, LV, and their machines and storefronts are busy everywhere.  That told me something, right there. 

 

I appreciate Shah's sentiment about it being a trading stock only.  If I held it from 7 years ago, waiting for the real esate side to play out I would have made -100% so far.  As an asset play it would have been a real long wait. 

[prevalou]

I don't see the cash burn in 2012

looking at Q3 2012 cash flow statement:

 

Cash generated from operating activities before changes in operating assets and liabilities, 39 weeks: (735) M $

 

Same number for 39 weeks in 2011 was: (473) M $

 

This is a significant cash burn even before capex, which is much lower than depreciation. With such minimal investment in the business no wonder it struggles.

Why choose selective numbers on the cash flows statements ?

I'd prefer adjusted EBITDA: (74 m$) 2011 39 weeks, +197 m$ 2012 39 weeks and 2012 Q4 is better than 2011 Q4.

Your figures take the pension plan contribution into account (unrelated to stores performance) but not other items.

 

 

[Edward]

Why choose selective numbers on the cash flows statements ?

I'd prefer adjusted EBITDA: (74 m$) 2011 39 weeks, +197 m$ 2012 39 weeks and 2012 Q4 is better than 2011 Q4.

Your figures take the pension plan contribution into account (unrelated to stores performance) but not other items.

 

I prefer looking at free cash flow (FCF) which I define as: Cash from operating activities - changes in operating assets and liabilities - maintenance CAPEX.

 

Sometimes adjustments should be made but this is the general formula. Of course to isolate the business you could eliminate the pension contributions as you mentioned.

 

This doesn't make for a much prettier picture as FCF is a negative number in 2011 and 2012. It means that even excluding pensions, they are burning through at least several hundreds of USD per year and this is financed primarily by more debt. It is not sustainable for long.

 

I think that the outcome here is binary. Either the lenders stop lending and it's forced liquidation time, or the company actually survives for a while, liquidates assets at good prices, and shareholders make some/a lot of money. But it's by no means a low risk investment.

 

Just my take on the situation.

 

EDIT: edited for clarity.

[prevalou]

Adjusted EBITDA is computed as net loss attributable to Sears Holdings Corporation appearing on the Condensed Consolidated Statements of Operations excluding income (loss) attributable to noncontrolling interest, loss from discontinued operations, net of tax, income tax (expense) benefit, interest expense, interest and investment income, other income (loss), depreciation and amortization and gain on sales of assets. In addition, it is adjusted to exclude certain significant items as set forth below. Our management uses Adjusted EBITDA to evaluate the operating performance of our businesses, as well as executive compensation metrics, for comparable periods. Adjusted EBITDA should not be used by investors or other third parties as the sole basis for formulating investment decisions as it excludes a number of important cash and non-cash recurring items.

While Adjusted EBITDA is a non-GAAP measurement, management believes that it is an important indicator of operating performance because:

•

EBITDA excludes the effects of financings and investing activities by eliminating the effects of interest and depreciation costs;

•

Management considers gains/(losses) on the sale of assets to result from investing decisions rather than ongoing operations; and

•

Other significant items, while periodically affecting our results, may vary significantly from period to period and have a disproportionate effect in a given period, which affects comparability of results.

 

 

Anyway you have to consider the whole year because cash flow is negative Q1 to Q3 and largely positive Q4.

[Edward]

Anyway you have to consider the whole year because cash flow is negative Q1 to Q3 and largely positive Q4.

Of course,

 

Looking forward to the 2012 FY results.

[ShahKhezri]

It means that even excluding pensions, they are burning through at least several hundreds of USD per year and this is financed primarily by more debt. It is not sustainable for long.

 

I think that the outcome here is binary. Either the lenders stop lending and it's forced liquidation time, or the company actually survives for a while, liquidates assets at good prices, and shareholders make some/a lot of money. But it's by no means a low risk investment.

 

 

I disagree.  The cash burn was not financed by more debt in 2012, but asset dispositions. 

 

Why would a lender stop lending if they are in a good collateral position and the debt is ABL?  If it was unsecured, I could see your scenario.  Further, I would study the Americredit/GGP and Fairholme.  In a scenario where SHLD is tapped of the credit markets (which is FAR from truth as most real estate/HQ/DC is unencumbered), there is backstop.  Quite frankly I think the liquidity concerns are WAY overblown (like the BAC run on the bank that never happened).  I'd also look at the maturities for the next 3 years, there is very little refinance risk.  The CIT headlines last year were a concern and 5-year CDS on SRAC was 3x the level this time last year. 

 

Again, I don't think a guy of EL caliber goes "all in" (see quote below) on a hunch.  And if he is, he'll lose his net worth and I will lose mast 5-10%. 

 

"He's in it all the way," one high-level executive told Crain's. "It's a go-for-broke fight. I believe he'll invest everything he has to prove he's right."

 

 

http://www.chicagorealestatedaily.com/article/20121204/BLOGS08/121209944/flashback-meet-eddie-lampert-the-next-warren-buffett

[Edward]

I disagree.  The cash burn was not financed by more debt in 2012, but asset dispositions. 

 

Why would a lender stop lending if they are in a good collateral position and the debt is ABL?  If it was unsecured, I could see your scenario.  Further, I would study the Americredit/GGP and Fairholme.  In a scenario where SHLD is tapped of the credit markets (which is FAR from truth as most real estate/HQ/DC is unencumbered), there is backstop.  Quite frankly I think the liquidity concerns are WAY overblown (like the BAC run on the bank that never happened).  I'd also look at the maturities for the next 3 years, there is very little refinance risk.  The CIT headlines last year were a concern and 5-year CDS on SRAC was 3x the level this time last year. 

I think we have to wait for FY 2012 results to see if they really added debt or not, as the short term debt increase in Q3 is seasonal.

 

As for the available collateral, I don't know how to keep track of it. Would love a reference.

 

On the one hand they probably have plenty of unencumbered assets.

 

On the other hand these assets are used by a cash flow negative retailer. It could have been a lot more valuable leased under a long term contract to some other profitable and stable business. Also, every time an asset is posted as collateral the company loses a degree of control over its finances.

 

How could shareholders be certain that the company has enough reserves to weather the next few years and make a good return for them? Has anyone done the math on the real value of the real estate assets and the probable cost and time of winding down the retail business?

[Partner24]

The fact is time is the friend of the great businesses and when the business is weak, it's usually the reputation of the management that get hurt. Regarding Lampert, when things got clear that it was not about building a holding company like BRK (and benefit from it's investment acumen) but a retailer turnaround situation only, I did get out quickly.

 

It's very tough to turnaround a retailer, especially a big one like that. Lampert was open minded to try different things and look for the results, but so far it has not worked very much. I do not want to say that there is anything to do and Sears is a mess, but it's a tough job.

[ShahKhezri]

There is the traditional retail turnaround, which JCP is doing and there is execution/operation/financial (capex) risk, and then there's SHLD or the kitchen sink approach.  So let’s go back to 2008 and assume he spends instead of the 4-500MM in Capex/year, but $1bn, that would have been a disaster as evidenced by housing only starting to pickup at 2011/2012.  Keep in mind that Ackman brought the “retail genius” and now the fund managers and retail think he’s an idiot for trying to engineer a turnaround. 

Sales have dropped from $53Bn in FY07 to $40Bn LTM FY12.  This is a period where stores with poor economics AND upcoming leases maturing have closed down.  Also, it's no wonder that they are through Q4 reporting positive comps for Sears - Domestic when this is a retailer that is fundamentally driven by housing.  This is hindsight, but who actually thinks that if in FY'08, FY'09 and FY'10 he spend $1bn/year vs. the approximately $1.4Bn total that sales would have moved up?

HD from 07-10 sales down ~16%

Stanley Black and Decker 07-10 sales down ~15%

SHLD 07-10 sales down ~18%

 

I also want to ask the group that believes he should have done something differently as far as doing something radically different than what he has, how many exciting/new retailing concepts have been introduced in the last 5 years?  (LULU, ULTA, UA, FRAN - ok?).  JCP is bringing in Levis, Disney and they have a crown in Sephora…none of  those would have fit in at SHLD. 

He's gone from being a genius in 2006 to being labeled an idiot in 5 years and I'm not sure if I would have done anything differently if you factor in a pension liability, 200K employees and the worst housing crisis in a long time. 

1.  People want him to monetize assets as quickly/rapidly as possible - which is nonsense considering consolidated still has $40Bn in sales and 4 major brand anchors.  If you have a cheap lease and the store is at breakeven cashflow, why would you shut it down if that lease matures in 12-24 months?  You simply let it come within 3 months and announce a closing.

2. People want a retail turnaround, but if spent the $1bn in capex/year there would have been a liquidity issue. 

Surprisingly, 1 and 2 are brought up by the same people which I don't understand. 

One concern that I think is valid and Al brought up is the customer service.  I think that in order to be a well thought retailer, great (not good) customer service is important. 

 

[maxprogram]

I'm not sure if Lampert could have done much different (other than not plow $billions into share buybacks at prices that had, even with a healthy real estate market, little margin of safety).

 

He was damned if he did, damned if he didn't. It was a bad long-term investment to begin with, with the best-case scenario involving many years of slow liquidation, bad press, closing stores down, and laying off 10s of thousands of people. He made most of his profit from purchasing Kmart in BK and seeing it out.

 

Buying with today's prices and timeframe may be a different story, but to me it was clearly a bad investment (even without hindsight) 5+ years ago.

[Edward]

I'm not sure if Lampert could have done much different (other than not plow $billions into share buybacks at prices that had, even with a healthy real estate market, little margin of safety).

 

He was damned if he did, damned if he didn't. It was a bad long-term investment to begin with, with the best-case scenario involving many years of slow liquidation, bad press, closing stores down, and laying off 10s of thousands of people. He made most of his profit from purchasing Kmart in BK and seeing it out.

 

Buying with today's prices and timeframe may be a different story, but to me it was clearly a bad investment (even without hindsight) 5+ years ago.

I agree completely.

[txlaw]

Open market purchases by ESL?

 

http://www.sec.gov/Archives/edgar/data/860585/000118143113003011/xslF345X03/rrd366643.xml

[texual]

I'd like to buy some shares of this now that all this news just confirms my theory that his CEO move isn't just dumb luck. Then again you'd have to be crazy to ignore his continued purchase of stock and I wouldn't be surprised if he gets more.

 

Perhaps my NOK profit can go toward my renewed 2013 sears thesis. I made my original purchases in 2009 and so this would be averaging down for me. How about you guys where do you stand on sears after the news?

 

I may also just wait a month and see what he says in the shareholder letter but last year buying shares in January after his purchase was pretty profitable.

[ShahKhezri]

I'm at 60%, this just confirms my view as well.  Looking to add the other 40% in the next 20-30 days when I sell my FAAFX and BBY. 

[compoundinglife]

Currently a %2 position for me. Bought some in December 2011 for an average price of 40 and some more in January for average price of 29 and change. I added a little last week, figured I wait to see if we got down the near the lows of last January considering that we have shed some assets since last years lows with the orchard, sosh, and sears canada. It appears that Mr. Market might not give us the same prices this time around. I would like to make this at least a %10 percent position. If the PRXI titanic auction could finally work out then I can move those funds into SHLD :) I was also thinking about parlaying most of my USG into SHLD. 

[bargainman]

I'm at 60%, this just confirms my view as well.  Looking to add the other 40% in the next 20-30 days when I sell my FAAFX and BBY.

 

Are you saying your portfolio/fund is 60% in SHLD?  sorry if that's a dumb question, I just wanted to clarify.

[ShahKhezri]

I'm at 60%, this just confirms my view as well.  Looking to add the other 40% in the next 20-30 days when I sell my FAAFX and BBY.

 

Are you saying your portfolio/fund is 60% in SHLD?  sorry if that's a dumb question, I just wanted to clarify.

 

Yeah, I should have clarified, I read it that way too just right now.  I look to allocate 12.5-15% of my portfolio to SHLD, currently I'm at 60% of that allocation.  Do you own any? 

 

 

[texual]

USG ey? I like both companies and the thesis is similar with housing rebounding but for the time being I believe I'd rather hold onto USG than give it up for shld. Both companies are owned by great long term investors with a decent sense of how the world works. That being said my dollar cost average on USG is simply too good for SHLD till it really hits those lows from January last year.

 

I'm actually becoming one of those investors that works in pairs. Name one company in my portfolio and ill name you a analog that I balance depending on risk. MSFT and NOK are one pair and I guess Citi and BAC are another. And SHLD and USG are a great pair too. I didn't really want to bet on one without the other.

 

 

Back to SHLD though. This new CEO position would be great if there was no risk of Lampert finding a different CEO down the road. Truthfully I want this to be like WEB taking control of the company via shares and re instating himself as the CEO and carries forward by winding down his fund. I've got the feeling lampert is now here to stay and really make the gears turn but I said that a long time ago too. We're now on his 10th anniversary of Kmart and so I wonder if that was his timeline to begin to make significant changes?

 

I love the investment potential but I don't see the road ahead for the simple reason that ESL is still a hedge fund that needs his time. He installs a new president which is fine but I want things to be clearer as to his career choices this year.

 

Berkowitz says this is all reminiscent of early Berkshire Hathaway if we play back the tape.

 

Earlier this year he said we are beginning to see the emergence of a new Berkshire Hathaway. Lampert sells autozone and buys more stock of sears. Lampert hires a president for his firm and moves to Florida and now for the first time stepping into the CEO job. I don't  know but this seems like a good time to watch every bit of news coming from sears

[texual]

http://www.nantucketproject.com/eddie-lampert

[Evolveus]

Lampert takes another $67m bite of SHLD:

 

http://www.sec.gov/Archives/edgar/data/860585/000118143113003011/xslF345X03/rrd366643.xml

[BargainValueHunter]

Sears is a big deal in appliances, tools and home services:

 

http://research.stlouisfed.org/fred2/data/HOUST_Max_630_378.png

 

Assuming the current stock price only reflects RE and inventory value...

 

and 15.83% of shares are sold short...

 

and 55.75% of shares owned by two institutional investors who show no signs of selling (one is definitely buying)...

 

Hmmm....  ???

[FCharlie]

Sears has been left for dead. Period.  It's almost impossible to find anyone who thinks that buying the stock makes sense.

 

Isn't this the dream of of value investors?

 

You've got three die hard value guys (Lampert, Tisch, Berkowitz) controlling all but about twenty million shares, and even though the main market for the company (tools & appliances) is just beginning to recover from a depression, the twenty million shares that remain are priced as if the company has no hope of anything good ever happening. On top of this you have Lampert and Berkowitz buying in the open market this year. What more could you ask for as an investor?