SHLDQ - Sears Holdings Corp

[BTShine]

I'm not sure if we can assume that ESL has extra cash with which to distribute for redemptions -- it's possible that redemptions were met with using both cash & SHLD securities.  It's also unclear to me whether Eddie has additional cash around to purchase the redemptions from his limited partners.

 

It does surprise me that he chose to part with SHLD shares rather than AN or GPS shares though...

 

If he distributed AN, it would've been about 1/2 of his stake in AN, and his ownership stake of the company would've gone from about 14% to 7%.  I'm not sure if it was appealing to distribute SHLD since the distribution wouldn't affect his control of the company.  At 48% stake, he still effectively controls SHLD. 

 

If he distributed GPS, it would've been worth $265 million, so he would've had to distribute his entire stake plus some cash or another security.

 

The above are just thoughts.  Clearly his distribution of stock signals he doesn't think SHLD stock is his best idea.  He may like buying it at $40, but not at $60. 

[wisdom]

Please feel free to comment:

 

SHLD had indicated they intended to raise $500 mil in cash this year. They are on track to raise a lot more than that. Could Eddie have been planning for this very event - redemptions - using it to buyback and retire the shares sold. Someone had to buy all the shares that were sold - who has been buying over the last 2 days?

 

 

[AchilliesValue]

Lots of reasons to sell, only one to buy. Could be high cost basis shares for tax reasons, different structure amongst the various ESL Partnerships, he thinks it's the closest to intrinsic value, etc. probably not worth trying to speculate over. What we do know is he has been buying within the last 12 months below $45. When I last did the math (when 10-K came out) if you put conservative numbers on the brands $45 effectively values the real estate at zero not taking into account the cash burn. I think if your cost basis is below that and you have some patience you'll end up alright.

[merkhet]

 

Clearly his distribution of stock signals he doesn't think SHLD stock is his best idea.  He may like buying it at $40, but not at $60.

 

 

Didn't Eddie buy shares from redeemers in September 2012? If you look back at prices around that time, they were @ $60 a share.  Arguably, he's made more progress in his transformation (SYW, RE sales, etc.) this year than last year -- so what accounts for the differential treatment of redemptions?

[ourkid8]

He has made considerably more progress then the past but the cash burn is also increasing.  Which is a huge concern since the transformation is not happening fast enough. For all the long term holders, doesn't that concern you?

 

Tks,

S

 

 

Clearly his distribution of stock signals he doesn't think SHLD stock is his best idea.  He may like buying it at $40, but not at $60.

 

 

Didn't Eddie buy shares from redeemers in September 2012? If you look back at prices around that time, they were @ $60 a share.  Arguably, he's made more progress in his transformation (SYW, RE sales, etc.) this year than last year -- so what accounts for the differential treatment of redemptions?

[wisdom]

http://blogs.barrons.com/focusonfunds/2013/12/04/morning-read-leave-lamperts-fund-get-paid-with-sears-stock/?mod=yahoobarrons&ru=yahoo

 

[prevalou]

I am not sure this sale is bad news. It put some pessure on Lampert to accelerate his plan because activists could come in while redemptions continue in the future forcing the hedge fund to sell more shares.

[ASTA]

When will I ever learn to sell some of the gains into the market well if it goes to 40 again maybe this time I will buy some leaps as I lost out last time :D

[Luke 532]

Synthetic long opportunity for bulls at the 2015 $50 strike.  Calls going for much cheaper than the puts even though stock > $50.  Calls roughly $9.70 vs puts at $12.30.

[merkhet]

 

He has made considerably more progress then the past but the cash burn is also increasing.  Which is a huge concern since the transformation is not happening fast enough. For all the long term holders, doesn't that concern you?

 

Tks,

S

 

 

It's definitely concerns me, but, as far as I can tell, the cash burn comes from deciding to increase Shop Your Way rewards -- which is a controllable issue. I don't know that SYWR spending will stay at this high level in perpetuity.

[tng]

A good entry point may be forming soon. I'm not sure how many people redeeming their money are going to hold SHLD stock. If they were happy to be long SHLD, they probably would have left their money with Eddie.

[ourkid8]

I am not so certain this is a controllable issue as there will be a point in which EL needs to decide if it makes sense to continue poring money into SYW or not.  If you stop offering rewards at the current level, will they loose shoppers and it will hinder EL's ability to grow SYW?  Maybe or maybe not...

 

Tks,

S

 

 

He has made considerably more progress then the past but the cash burn is also increasing.  Which is a huge concern since the transformation is not happening fast enough. For all the long term holders, doesn't that concern you?

 

Tks,

S

 

 

It's definitely concerns me, but, as far as I can tell, the cash burn comes from deciding to increase Shop Your Way rewards -- which is a controllable issue. I don't know that SYWR spending will stay at this high level in perpetuity.

[phil_Buffett]

I am not so certain this is a controllable issue as there will be a point in which EL needs to decide if it makes sense to continue poring money into SYW or not.  If you stop offering rewards at the current level, will they loose shoppers and it will hinder EL's ability to grow SYW?  Maybe or maybe not...

 

Tks,

S

 

 

He has made considerably more progress then the past but the cash burn is also increasing.  Which is a huge concern since the transformation is not happening fast enough. For all the long term holders, doesn't that concern you?

 

Tks,

S

 

 

It's definitely concerns me, but, as far as I can tell, the cash burn comes from deciding to increase Shop Your Way rewards -- which is a controllable issue. I don't know that SYWR spending will stay at this high level in perpetuity.

 

if i would be Eddie, i would stop SYW and liquidate all of the assets and invest it otherwise. the cash burn will increase more and more overtime.

[hyten1]

http://www.peridotcapitalist.com/2013/12/cracks-begin-form-baker-street-capital-bullish-thesis-sears-holdings.html

[txlaw]

I wonder if these redemptions are in anticipation of possible rights offerings for Lands' End and the Sears Auto Centers. 

 

Any such offerings will require new cash to be put into the Sears assets.  And I'm guessing that ESL will be fully subscribing to any such rights offerings. 

[Guest wellmont]

I'm not sure if we can assume that ESL has extra cash with which to distribute for redemptions -- it's possible that redemptions were met with using both cash & SHLD securities.  It's also unclear to me whether Eddie has additional cash around to purchase the redemptions from his limited partners.

 

It does surprise me that he chose to part with SHLD shares rather than AN or GPS shares though...

 

If he distributed AN, it would've been about 1/2 of his stake in AN, and his ownership stake of the company would've gone from about 14% to 7%.  I'm not sure if it was appealing to distribute SHLD since the distribution wouldn't affect his control of the company.  At 48% stake, he still effectively controls SHLD. 

 

If he distributed GPS, it would've been worth $265 million, so he would've had to distribute his entire stake plus some cash or another security.

 

The above are just thoughts.  Clearly his distribution of stock signals he doesn't think SHLD stock is his best idea.  He may like buying it at $40, but not at $60.

 

you're ignoring cash. he could have distributed cash. I am sure esl operates with a large cash cushion in the fund.

[Guest wellmont]

I wonder if these redemptions are in anticipation of possible rights offerings for Lands' End and the Sears Auto Centers. 

 

Any such offerings will require new cash to be put into the Sears assets.  And I'm guessing that ESL will be fully subscribing to any such rights offerings.

 

this would make sense if ESL goes in and buys new stock for his personal account at lower prices. no signs of that. otherwise I don't see the connection. If he wanted to fully subscribe in lands end offering for his fund and investors, he has less an opportunity because the fund holds less shares of shld. by distributing the shares he is distributing the inherent rights to lands end. in essence he is giving others the chance to subscribe.

 

the fact is one can't contort themselves into making this a positive. sometimes there are negatives to the thesis. this is one.

[Guest wellmont]

Please feel free to comment:

 

SHLD had indicated they intended to raise $500 mil in cash this year. They are on track to raise a lot more than that. Could Eddie have been planning for this very event - redemptions - using it to buyback and retire the shares sold. Someone had to buy all the shares that were sold - who has been buying over the last 2 days?

 

no. sears is burning cash. and it's retail operations show no signs at all of going to break even, let alone turning a profit. it has a terrible balance sheet. some of it's bonds trade at distress levels. the reason he is raising cash because the company was dangerously close to going off the rails with creditors. this company is in no position to buy back shares.

[merkhet]

 

http://www.peridotcapitalist.com/2013/12/cracks-begin-form-baker-street-capital-bullish-thesis-sears-holdings.html

 

 

I'm confused about the Eaton Center example. The presentation talks about how a similar multiple to Alana Moana would put Eaton Center's valuation @ $590 million, but it doesn't say that they've used that metric in their own valuation.  As far as I can tell, they're using a (Cap Rate X Rent per Sq. Ft.) metric in their calculations.  Also, since it's part of Sears Canada, I don't know that it's even calculated as part of the $9.8 billion in real estate value for Sears Holdings.

 

 

 

Please feel free to comment:

 

SHLD had indicated they intended to raise $500 mil in cash this year. They are on track to raise a lot more than that. Could Eddie have been planning for this very event - redemptions - using it to buyback and retire the shares sold. Someone had to buy all the shares that were sold - who has been buying over the last 2 days?

 

 

no. sears is burning cash. and it's retail operations show no signs at all of going to break even, let alone turning a profit. it has a terrible balance sheet. some of it's bonds trade at distress levels. the reason he is raising cash because the company was dangerously close to going off the rails with creditors. this company is in no position to buy back shares.

 

 

wellmont, do you have a source for this? I haven't seen this floating around anywhere.

[merkhet]

 

I am not so certain this is a controllable issue as there will be a point in which EL needs to decide if it makes sense to continue poring money into SYW or not.  If you stop offering rewards at the current level, will they loose shoppers and it will hinder EL's ability to grow SYW?  Maybe or maybe not...

 

Tks,

S

 

 

They way I've been looking at this is that it's required capital expenditures for "next-gen" retail. You can stop it and probably not lose shoppers (and basically be doing what most other retailers are doing -- nothing) and you'll be free cash flow positive -- however, you might slowly bleed to death at some point in the future...

 

Basically, it's controllable burn in the sense that he has control over whether he chooses to (1) run down the stores as an old-school retailer w/o SYW or (2) invest in the stores to become a "next-gen" retailer.

[Guest wellmont]

http://articles.chicagotribune.com/2012-01-13/business/ct-biz-0113-sears-factor--20120113_1_sears-holdings-sears-and-kmart-sears-stock

 

Fitch Downgrades Sears Holdings' IDR to 'B'; Outlook Negative

June 21, 2011 09:14 AM Eastern Daylight Time

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded its long-term Issuer Default Ratings (IDR) on Sears Holdings Corporation (Holdings) and its various subsidiary entities to 'B' from 'B+'. The ratings on various tranches of debt have also been downgraded by a notch. The Rating Outlook is Negative. A full rating list is shown below.

 

The downgrades reflect continued deterioration in EBITDA on worse than expected top line growth, with a precipitous decline during the first quarter of 2011. As a result, credit metrics continue to be pressured and leverage could increase by an additional turn or more in 2011 from 4.6x in 2010, and be potentially higher in 2012 and 2013 (versus Fitch's prior expectation of leverage remaining under 5.0x). The revised expectations contemplate reduction in EBITDA from a latest 12-month (LTM) level of $1.2 billion. Leverage is also expected to increase due to a need for higher borrowings to fund operations with EBITDA now under $1.5 billion. Liquidity remains adequate given availability under the company's U.S. and Canadian facilities, the ability to add $1.75 billion in secured indebtedness, and, potentially, to pull other levers over the intermediate term. However, the magnitude of decline in profitability and the lack of visibility to turn around operations remain a major concern.

[txlaw]

I wonder if these redemptions are in anticipation of possible rights offerings for Lands' End and the Sears Auto Centers. 

 

Any such offerings will require new cash to be put into the Sears assets.  And I'm guessing that ESL will be fully subscribing to any such rights offerings.

 

this would make sense if ESL goes in and buys new stock for his personal account at lower prices. no signs of that. otherwise I don't see the connection. If he wanted to fully subscribe in lands end offering for his fund and investors, he has less an opportunity because the fund holds less shares of shld. by distributing the shares he is distributing the inherent rights to lands end. in essence he is giving others the chance to subscribe.

 

the fact is one can't contort themselves into making this a positive. sometimes there are negatives to the thesis. this is one.

 

I'm not trying to make this into a positive, although it appears you're trying to make this into a negative.

 

The investors "elected to redeem all or a portion of their limited partnership interests in Partners."  These guys chose to have SHLD stock distributed to them.  They can either dump the stock, keep it and participate fully in any rights offerings, or keep it and not participate in any rights offerings.  They get to choose instead of ESL.  It may be as simple as these investors wanting to keep their exposure to SHLD on a post-spinoff basis, as opposed to contributing their pro rata portion of capital in the rights offerings.

 

The "fact" is that you can't necessarily say that this is a negative or positive development when it comes to the long run thesis. 

[Guest wellmont]

wrong. they chose to redeem their interest in the fund. They did not choose SHLD stock. In fact they are redeeming because they want nothing more to do with ESL and his fascination with a money losing retailer. And they are dumping every last share, which is why the stock has lost $10 in two days.

 

"a distribution of Holdings Common Stock by Partners on a pro rata basis to limited partners that elected to redeem all or a portion of their limited partnership interests in Partners in December 2013."

 

I just don't think you've made the linkage of this event to Lands End. btw we don't even know if there is going to be a rights offering of lands end. it's only one option.

[txlaw]

wrong. they chose to redeem their interest in the fund. They did not choose SHLD stock.

 

"a distribution of Holdings Common Stock by Partners on a pro rata basis to limited partners that elected to redeem all or a portion of their limited partnership interests in Partners in December 2013."

 

I just don't think you've made the linkage of this event to Lands End. btw we don't even know if there is going to be a rights offering of lands end. it's only one option.

 

You're right.  That language references LP investors electing to redeem their partnership interests.

 

But do we know whether or not these have LPs have a choice on how their interests are redeemed?  I assumed that they had a choice.  But perhaps that's wrong. 

 

If they do, then the possible rights offerings might be one explanation.

[merkhet]

 

http://articles.chicagotribune.com/2012-01-13/business/ct-biz-0113-sears-factor--20120113_1_sears-holdings-sears-and-kmart-sears-stock

 

Fitch Downgrades Sears Holdings' IDR to 'B'; Outlook Negative

June 21, 2011 09:14 AM Eastern Daylight Time

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded its long-term Issuer Default Ratings (IDR) on Sears Holdings Corporation (Holdings) and its various subsidiary entities to 'B' from 'B+'. The ratings on various tranches of debt have also been downgraded by a notch. The Rating Outlook is Negative. A full rating list is shown below.

 

The downgrades reflect continued deterioration in EBITDA on worse than expected top line growth, with a precipitous decline during the first quarter of 2011. As a result, credit metrics continue to be pressured and leverage could increase by an additional turn or more in 2011 from 4.6x in 2010, and be potentially higher in 2012 and 2013 (versus Fitch's prior expectation of leverage remaining under 5.0x). The revised expectations contemplate reduction in EBITDA from a latest 12-month (LTM) level of $1.2 billion. Leverage is also expected to increase due to a need for higher borrowings to fund operations with EBITDA now under $1.5 billion. Liquidity remains adequate given availability under the company's U.S. and Canadian facilities, the ability to add $1.75 billion in secured indebtedness, and, potentially, to pull other levers over the intermediate term. However, the magnitude of decline in profitability and the lack of visibility to turn around operations remain a major concern.

 

 

I was aware of that article from two years ago. Is there anything current that shows that Sears is close to going off the rails with creditors?

 

After all, Eddie was shooting for $500 million in liquidity and he hit $2 billion.  That's a pretty big "overshoot."