SHLDQ - Sears Holdings Corp

[Guest wellmont]

Lands' End profitability is pretty weak the past couple years.

 

I wonder is SHLD will be more profitable w/out them as an operating business but rather as a tenant.

 

the stock being down on a day a company announces a significant spin off is rare event indeed. another milestone for shld.

[valuecfa]

For those in the Sears REIT camp, it will created a lease agreement in which to further help value Sears as a real estate play.

[valuecfa]

Most value shops have bought mostly on the thesis of the undervalued brands and real estate eventually being unlocked. He's finally speeding that process up significantly.

[Guest hellsten]

Most value shops have bought mostly on the thesis of the undervalued brands and real estate eventually being unlocked. He's finally speeding that process up significantly.

 

It's quite ironic that the market doesn't seem to give any value to what Eddie is doing right now. Isn't this what the market expected him to do in 2006 when SHLD was trading at $150?

[OracleofCarolina]

http://m.sfgate.com/bayarea/article/Oakland-Sears-still-hasn-t-repaired-windows-5035945.php

 

I am going to go out on a limb here, but I think Sears will sell/close this location after the holidays..lol

[Luke 532]

 

It's quite ironic that the market doesn't seem to give any value to what Eddie is doing right now. Isn't this what the market expected him to do in 2006 when SHLD was trading at $150?

 

It's nearly impossible for the average investor to understand what Sears Holdings really is and the impact of what Lampert has been doing (especially this year).  The reason is that the average investor relies on media for opinions, and the media gives a negative explanation of nearly everything Lampert does.  It's herd mentality and that leads to poor results. 

 

However, if the stock price continues to remain low while Lampert continues to make moves, that spells opportunity for those bullish on the real estate thesis.  I'm currently selling near-the-money or at-the-money puts.  Any profits from expiring premium likely to be used to gobble up more shares.  Stock continues to drop and options don't expire?  Roll them forward until they do.  SHLD is dirt cheap at current prices and the premiums are just too juicy to pass up.

[peridotcapital]

Hello everyone,

I noticed from my blog's web traffic report that many of you have read my recent posts on Sears (posted on www.peridotcapitalist.com) so I figured I would join the discussion. I was not aware that message boards of this caliber existed :) 

 

My current position (personally and for clients) is long Sears debt (2017 and 2018 maturities), and long Sears Canada. I am closely monitoring SHLD equity but believe that the Baker Street analysis was overly optimistic (Lands End financials released today further than opinion, as Baker Street's mid point valuation of $1.4B is going to be way off -- I think LE is worth 7-8x EBITDA or $700-$800M) and so I have not been long for many years (I was an early investor but became disenchanted after multiple years passed and it became clear that Eddie was going to try and make it work from a retail perspective).

 

As for today's Lands End spin news, I am a bit baffled as to why he decided to do it, especially at the current time. The way I see it, he is ridding SHLD of $100M of annual EBITDA, which will only make the retail cash burn worse in the short term (the rental income will pale in comparison to the retail EBITDA). Add that to the fact that SHLD raises no cash from the spin and I don't see why this helps SHLD today, so the stock not budging does not surprise me. To me this will only make the liquidity issue worse in the short term and put more pressure on Eddie to close and sell/sublease money-losing stores. Why he would not keep the assets that make money (SHOS/LE/etc) while he works to stem the losses elsewhere baffles me.

 

Anyway, that's my two cents... looking forward to conversing with all of you..

 

Regards,

 

Chad

 

 

 

 

[Guest hellsten]

Hello everyone,

I noticed from my blog's web traffic report that many of you have read my recent posts on Sears (posted on www.peridotcapitalist.com) so I figured I would join the discussion. I was not aware that message boards of this caliber existed :) 

 

My current position (personally and for clients) is long Sears debt (2017 and 2018 maturities), and long Sears Canada. I am closely monitoring SHLD equity but believe that the Baker Street analysis was overly optimistic (Lands End financials released today further than opinion, as Baker Street's mid point valuation of $1.4B is going to be way off -- I think LE is worth 7-8x EBITDA or $700-$800M) and so I have not been long for many years (I was an early investor but became disenchanted after multiple years passed and it became clear that Eddie was going to try and make it work from a retail perspective).

 

As for today's Lands End spin news, I am a bit baffled as to why he decided to do it, especially at the current time. The way I see it, he is ridding SHLD of $100M of annual EBITDA, which will only make the retail cash burn worse in the short term (the rental income will pale in comparison to the retail EBITDA). Add that to the fact that SHLD raises no cash from the spin and I don't see why this helps SHLD today, so the stock not budging does not surprise me. To me this will only make the liquidity issue worse in the short term and put more pressure on Eddie to close and sell/sublease money-losing stores. Why he would not keep the assets that make money (SHOS/LE/etc) while he works to stem the losses elsewhere baffles me.

 

Anyway, that's my two cents... looking forward to conversing with all of you..

 

Regards,

 

Chad

 

Welcome and thank you for sharing your thoughts here and on your blog.

[txlaw]

Wow, Lands' End performance appears pretty bad at first glance.  The CEO came on CNBC recently and talked about double digit growth, but that doesn't seem like such an achievement when looking at the last few years of operating results.

 

It does look like some of the valuations of that segment may have been overly optimistic.

[Luke 532]

Hello everyone,

I noticed from my blog's web traffic report that many of you have read my recent posts on Sears (posted on www.peridotcapitalist.com) so I figured I would join the discussion. I was not aware that message boards of this caliber existed :) 

 

My current position (personally and for clients) is long Sears debt (2017 and 2018 maturities), and long Sears Canada. I am closely monitoring SHLD equity but believe that the Baker Street analysis was overly optimistic (Lands End financials released today further than opinion, as Baker Street's mid point valuation of $1.4B is going to be way off -- I think LE is worth 7-8x EBITDA or $700-$800M) and so I have not been long for many years (I was an early investor but became disenchanted after multiple years passed and it became clear that Eddie was going to try and make it work from a retail perspective).

 

As for today's Lands End spin news, I am a bit baffled as to why he decided to do it, especially at the current time. The way I see it, he is ridding SHLD of $100M of annual EBITDA, which will only make the retail cash burn worse in the short term (the rental income will pale in comparison to the retail EBITDA). Add that to the fact that SHLD raises no cash from the spin and I don't see why this helps SHLD today, so the stock not budging does not surprise me. To me this will only make the liquidity issue worse in the short term and put more pressure on Eddie to close and sell/sublease money-losing stores. Why he would not keep the assets that make money (SHOS/LE/etc) while he works to stem the losses elsewhere baffles me.

 

Anyway, that's my two cents... looking forward to conversing with all of you..

 

Regards,

 

Chad

 

Welcome to the discussion, Chad.  I almost invited you via comment on your blog, but figured you were a smart guy that would do some digging and find us... made you work to find us like Eddie makes us work to figure out SHLD  :)

 

I think today's announcement makes sense if we look at SHLD as a real estate company instead of just a retailer.  LE will be a tenant for SHLD and provide rental income.  I'd be shocked if 2014/2015 doesn't include many, many more tenants renting SHLD space (and the bearish argument many make that "what big box retailer can buy it/rent it?" doesn't hold much water... information on Seritage explains that they can, among other options, break up the space into smaller pieces).  Perhaps the cash burn will be covered by reduced pension liability (due to interest rates rising), the nearly $2B of liquidity generated this year, etc. 

 

Looking at it from a big picture point of view, this is more evidence (at least in my opinion) that Lampert views SHLD as a real estate company with retail being icing on the cake if it works.  After all, he did admit this about 18 months ago...

 

"We can't deny that we're, one, a real estate company, and two, a customer company," Lampert said.

http://www.memphisdailynews.com/news/2012/may/3/sears-execs-say-retailer-financially-strong//print

 

[Guest wellmont]

Wow, Lands' End performance appears pretty bad at first glance.  The CEO came on CNBC recently and talked about double digit growth, but that doesn't seem like such an achievement when looking at the last few years of operating results.

 

It does look like some of the valuations of that segment may have been overly optimistic.

 

companies usually resort to spin offs when they can't sell a business. :(

[thepupil]

Hi Chad,

Appreciate your thoughts and detailed work that you put into your articles. I'm somewhat confused by your thoughts on SHLD and your position in the SHLD bonds. To date, every move by Eddie has been to the deterioration of SHLD as a credit. Is it not possible he is removing assets (like SHOS, SCC, Lands End) in order to have them in his hands before Sears retail bankruptcy years down the line?

 

The 2018 maturity looks like a great time for that to happen (after several years of SHLD struggling along so that there are no fraudulent conveyance issues). By then SHLD equity holders may have received a Seritage spinoff, a protection business spinoff, maybe some sort of brands royalty if the Sears Re liabilities could be taken care of with something else besides KCD and the 125 stores. Maybe other separable real estate  that can be stripped into equity holders hands in the fun game that is Sears Jenga.

 

I own SHLD (hedged w/ puts that are paid for by stock lending fees) equity and think I will make multiples of my capital at risk if the bullish thesis works out and will receive spinoffs to derisk my position. I think it's possible for SHLD to transform and satisfy all creditors and be a good investment for shareholders. But it isn't the only possibility and i question the risk/reward of the bonds. You own the bonds on which at most you'll make 8.5% YTM and the spinoffs make your position all the more precarious. It is a bit of a zero sum game here (assuming the alternative of selling assets for cash to pay down debt) which Eddie hasn't really ever done that to my knowledge and you still have the revolver and term loan in front of you which will be maxed out if Sears retail gets worse down the line.

 

So I think you're right in your analysis, for the most part. SHLD retail probably won't turn around quickly or  ever generate much cash. Baker Streets' SOTP may have been overly optimistic. But I don't understand your expression of your analysis: being a lender to Eddie. In some ways those bonds are subordinated to equity.

 

I'm not a credit or legal expert by any means and as the name implies, I'm still learning every day, so I appreciate any thoughts you have on how you get comfortable lending to SHLD to make 8.5%?

[Guest wellmont]

Most value shops have bought mostly on the thesis of the undervalued brands and real estate eventually being unlocked. He's finally speeding that process up significantly.

 

It's quite ironic that the market doesn't seem to give any value to what Eddie is doing right now. Isn't this what the market expected him to do in 2006 when SHLD was trading at $150?

 

this is very small potatoes. market wants to see real action in closing stores and stemming massive losses in retail. not getting it. lands end is stale brand. most investors are not value investors. So only a hard core value investor would even look at this thing. Most value investors want simple ideas. most want profit. most want stability. most want to free cash flow. most want dividend or buyback. So you see the audience for this security is diminishing.

 

Even very smart esl investors are getting tired of the act and are getting out. it looks terrible because it is terrible. there is no definable strategy. there is no master plan. there is no shareholder communication or treating them like equal partners. There are no profits. No ebitda. No free cash flow. There is no buyback. There is no dividend. There are spin offs of bad businesses that shareholders dump, keeping values low. The stock moves up or down 8% in a day. Most investors, rightly, want nothing to do with that.

 

When buffett was transforming berkshire, you saw progress every year. you could see the transformation play out in the annual. Buffett explained exactly what was going on and what he was doing. He treated his partners with respect and it came through in his communication. That's why smart money flocked to berkshire, and is running from shld. heck it even looks like ESL is running from shld. He doesn't even fix broken windows.  :'(

[BTShine]

ThePupil made points that I agree with.  By spinning Lands' End now the value goes to equity holders, not debtholders in the case of bankruptcy court. 

 

Did anyone see this quote in the Lands' End filing?  "The aggregate leased space of Lands’ End Shops at Sears is expected to decrease by approximately 5% on or prior to the distribution date as a result of real estate reallocation within Sears Holdings. "  http://www.sec.gov/Archives/edgar/data/799288/000119312513464144/d632333dex991.htm#fin632333_28

 

Looks like Sears is planning to close approximately 50 more stores in the near term, or 5% of their store footprint. 

 

 

[merkhet]

 

I noticed from my blog's web traffic report that many of you have read my recent posts on Sears (posted on www.peridotcapitalist.com) so I figured I would join the discussion. I was not aware that message boards of this caliber existed :) 

 

 

Welcome to the board, Chad. Happy to have another point of view on Sears.

 

 

Looking at it from a big picture point of view, this is more evidence (at least in my opinion) that Lampert views SHLD as a real estate company with retail being icing on the cake if it works.

 

 

I've been thinking a lot about Sears from both the retail and real estate point of view, and I have to admit that I was flummoxed for a while on why Eddie is still shooting for a retail turnaround until I ran the numbers. (Keep in mind that these are back of the envelope calculations in whole numbers to illustrate a point.)

 

Most of us who are keeping tabs on Sears are familiar with the fact that Sears has been touting integrated retail as a way to better control inventory & possibly reduce their real estate requirements.

 

Let's say that Sears has 250 million square feet of real estate.

 

Real Estate - $10 billion

Let's assume that they can rent that real estate out at $4 per square foot with a 10% cap rate.  That translates to a valuation of $40 per square foot.

 

Real Estate - $30 billion

Let's assume that Sears has revenues of $40 billion.  That's $160 of sales per sq. ft.  Assuming a net margin of 5% (based on Eddie's previous exhortations that a good retailer should be able to do 10% EBITDA), then you should get a profit per sq. ft. of $8. At a P/E multiple of 15, that's $120 per square foot.

 

In other words, the real estate is 3x more valuable if he can make the retail operations work.

 

Moon Shot - $35 billion

Of course, in typical Eddie fashion, he's not shooting for one or the other but both.  I think he believes that he can stem the revenue decreases via integrated retail while simultaneously decreasing the footprint of Sears retail.

 

Basically, if he only needs half the retail square footage, then he can unlock $5 billion of real estate value.  At the same time, he can get the sales per sq. ft. to $320 so that the remaining square footage gets an even higher value per sq. ft of $240.

[krazeenyc]

I agree with Peridot that Lands End is worth about 7x -8x Ebitda. However, assuming they get a pretty good lease deal with SHLD (mainly leases that are fairly short term) I would expect Lands End to quickly become a takeover target at that valuation.  I imagine that there are a lot of retail specialists (either other retailers or private equity) who would believe that they could quickly improve Lands End once it is out from under SHLD.

 

I also think real estate value is hard without knowing the nitty gritty of the leases ownership details. For example in California, in South Coast Plaza, Sears owns its own store (300,000 sq ft or so if memory serves me correct) -- and they've subleased their store (actually built a new entrance for forever 21).  But I've found out they actually own 1/3 of the sq footage at that mall or 850,000 sq ft.  But I'm not sure on what terms their ownership is outside of their own store. Can they simply sell that space, does the mall's main owner have right of first refusal, are they earning income on those stores -- it's all kind of confusing. What makes it so hard also is that so much of the value is going to be concentrated in a small number of store so getting an accurate value means getting the higher value stores just right.

 

Luke, Sears has been so slow to sublease out space. What gives you confidence that they can ramp up this process?  Look at the handful of Whole Foods deals they signed... it takes a while.  Given the current rough environment in retail who are good candidates to open up 20-30 30,000 + sq ft stores or 50+ 10,000 sq ft or less stores.  I think this will be a much bigger challenge for SHLD than people think.  I'm not really worried about the Capex (as SHLD could easily have the tenant pay for the necessary renovations -- and work it into the lease agreement so that it works financially for both parties).

 

[Luke 532]

 

Luke, Sears has been so slow to sublease out space. What gives you confidence that they can ramp up this process?  Look at the handful of Whole Foods deals they signed... it takes a while.  Given the current rough environment in retail who are good candidates to open up 20-30 30,000 + sq ft stores or 50+ 10,000 sq ft or less stores.  I think this will be a much bigger challenge for SHLD than people think.  I'm not really worried about the Capex (as SHLD could easily have the tenant pay for the necessary renovations -- and work it into the lease agreement so that it works financially for both parties).

 

What gives me confidence is that it looks like Lampert is finally serious about monetizing more assets at a quicker pace.  If he's more serious about monetizing SHLD on the whole then perhaps sub-leasing will ramp up. 

 

It will definitely be a challenge and it will take time.  Don't confuse my earlier statement to mean I think he'll complete real estate monetization in 2014/2015, I just meant I think he takes it to another level.  Once he does that the market might begin to finally realize that SHLD is getting closer to being a real estate company (in part) and further from being a traditional bricks-and-mortar retailer (which is how the market views SHLD currently).  It's also important to remember that selling/leasing to other department stores and/or smaller retailers is not the only option.  I would imagine a mix of that in addition to data centers, disaster recovery, and probably a bunch of stuff that hasn't been discussed yet. 

 

The only point I'm trying to make with all of this is that Lampert is ramping up monetization efforts.  What form will those come in?  I don't know.  But a master capital allocator is making those decisions and I'm very comfortable with that fact.

[peridotcapital]

Hello everyone,

I noticed from my blog's web traffic report that many of you have read my recent posts on Sears (posted on www.peridotcapitalist.com) so I figured I would join the discussion. I was not aware that message boards of this caliber existed :) 

 

My current position (personally and for clients) is long Sears debt (2017 and 2018 maturities), and long Sears Canada. I am closely monitoring SHLD equity but believe that the Baker Street analysis was overly optimistic (Lands End financials released today further than opinion, as Baker Street's mid point valuation of $1.4B is going to be way off -- I think LE is worth 7-8x EBITDA or $700-$800M) and so I have not been long for many years (I was an early investor but became disenchanted after multiple years passed and it became clear that Eddie was going to try and make it work from a retail perspective).

 

As for today's Lands End spin news, I am a bit baffled as to why he decided to do it, especially at the current time. The way I see it, he is ridding SHLD of $100M of annual EBITDA, which will only make the retail cash burn worse in the short term (the rental income will pale in comparison to the retail EBITDA). Add that to the fact that SHLD raises no cash from the spin and I don't see why this helps SHLD today, so the stock not budging does not surprise me. To me this will only make the liquidity issue worse in the short term and put more pressure on Eddie to close and sell/sublease money-losing stores. Why he would not keep the assets that make money (SHOS/LE/etc) while he works to stem the losses elsewhere baffles me.

 

Anyway, that's my two cents... looking forward to conversing with all of you..

 

Regards,

 

Chad

 

Welcome to the discussion, Chad.  I almost invited you via comment on your blog, but figured you were a smart guy that would do some digging and find us... made you work to find us like Eddie makes us work to figure out SHLD  :)

 

I think today's announcement makes sense if we look at SHLD as a real estate company instead of just a retailer.  LE will be a tenant for SHLD and provide rental income.  I'd be shocked if 2014/2015 doesn't include many, many more tenants renting SHLD space (and the bearish argument many make that "what big box retailer can buy it/rent it?" doesn't hold much water... information on Seritage explains that they can, among other options, break up the space into smaller pieces).  Perhaps the cash burn will be covered by reduced pension liability (due to interest rates rising), the nearly $2B of liquidity generated this year, etc. 

 

Looking at it from a big picture point of view, this is more evidence (at least in my opinion) that Lampert views SHLD as a real estate company with retail being icing on the cake if it works.  After all, he did admit this about 18 months ago...

 

"We can't deny that we're, one, a real estate company, and two, a customer company," Lampert said.

http://www.memphisdailynews.com/news/2012/may/3/sears-execs-say-retailer-financially-strong//print

 

I agree with your overall assessment for sure. But considering how much cash the retail side has burned over the last 12 months (and the fact that such a rate is unlikely to abate in the short term) I think it may hurt shareholders quite a bit to sell off the profitable pieces. The result is that debt will increase short term (I doubt they can completely offset retail losses in 2014 with asset sales/monetizations). The total debt balance is already up quite a bit since the Baker Street presentation, which reduces the equity value even further. But maybe I'm wrong, maybe Eddie can really ramp up the real estate income quickly. It definitely has accelerated but still seems immaterial today, and likely to remain that way for another 1-2 years at least.

[peridotcapital]

Hi Chad,

Appreciate your thoughts and detailed work that you put into your articles. I'm somewhat confused by your thoughts on SHLD and your position in the SHLD bonds. To date, every move by Eddie has been to the deterioration of SHLD as a credit. Is it not possible he is removing assets (like SHOS, SCC, Lands End) in order to have them in his hands before Sears retail bankruptcy years down the line?

 

The 2018 maturity looks like a great time for that to happen (after several years of SHLD struggling along so that there are no fraudulent conveyance issues). By then SHLD equity holders may have received a Seritage spinoff, a protection business spinoff, maybe some sort of brands royalty if the Sears Re liabilities could be taken care of with something else besides KCD and the 125 stores. Maybe other separable real estate  that can be stripped into equity holders hands in the fun game that is Sears Jenga.

 

I own SHLD (hedged w/ puts that are paid for by stock lending fees) equity and think I will make multiples of my capital at risk if the bullish thesis works out and will receive spinoffs to derisk my position. I think it's possible for SHLD to transform and satisfy all creditors and be a good investment for shareholders. But it isn't the only possibility and i question the risk/reward of the bonds. You own the bonds on which at most you'll make 8.5% YTM and the spinoffs make your position all the more precarious. It is a bit of a zero sum game here (assuming the alternative of selling assets for cash to pay down debt) which Eddie hasn't really ever done that to my knowledge and you still have the revolver and term loan in front of you which will be maxed out if Sears retail gets worse down the line.

 

So I think you're right in your analysis, for the most part. SHLD retail probably won't turn around quickly or  ever generate much cash. Baker Streets' SOTP may have been overly optimistic. But I don't understand your expression of your analysis: being a lender to Eddie. In some ways those bonds are subordinated to equity.

 

I'm not a credit or legal expert by any means and as the name implies, I'm still learning every day, so I appreciate any thoughts you have on how you get comfortable lending to SHLD to make 8.5%?

 

A few thoughts. One, the SRAC debt is weighted appropriately so as to compensate for the risk, so I would not pull a huge amount of money into it. Two, I am using it in fixed income oriented accounts, so I am not looking at it on an absolute basis compared with every other investment options out there. If I was, 8-10% YTMs on the bonds might not seem all that impressive (why not just own the equity if you believe in the end result). Within the corporate bond asset class though, I like the risk-reward.

 

Now, will the 2018 SRAC debt default? I'm betting not for a couple reasons. One, if memory serves its less than $50M of debt. The longer dated maturities are $250M+ in total, I believe. Would Eddie default on <$50M of debt just because he can? The money-maker in you might say yes, and I would not disagree. However, I believe that investors might be underestimating how much of the value in Sears' various assets is actually heavily tied directly to Sears retail. If that is also the case in a few years, the financial hit from BK'ing the retail business (in terms of how much it impacts the value of the retail related assets --- Sears warranties, Sears home services, KCD branded merchandise) would likely outweigh the benefit of getting off the hook for some of the debt. It's bad enough that those assets are losing money every day already (SHLD's retail sales are constantly declining -- a big reason I think Baker Street was overly upbeat on their values), but the publicity from a BK filing would accelerate that erosion from a sales and traffic perspective.

 

I also find it interesting that in many of the plans for Seritage, the goal is to keep the Sears store open at the mall (albeit in a smaller format), and have it coexist with third party subleased spaces. So while I think the store count will shrink, I don't think we will find ourselves in a scenario where KCD products are sold in other retailers but not Sears/Kmart, and therefore again, I think the upside of BK-ing Sears is less than many believe. But you have to view it in relation to the other moving parts, not just the financial incentive from the debt specifically.

[bmichaud]

I bet buyout shops and/or something like a VF Corp are licking their chops at Lands End, assuming that LE is a viable brand. I have no idea - never shopped there. Is it a J Crew type of operation? If so....

 

J Crew was bought out around 8.5X EBITDA: http://dealbook.nytimes.com/2010/12/10/j-crew-buyout-raises-questions/

 

J Crew's EBITDA margins were projected to be 18.5% in 2012: http://www.reuters.com/article/2012/06/11/idUSWNB181720120611

 

PE playbook:

 

1. Grow sales in 50% to $2.4B in 2018

2. Boost EBITDA margins to 15%, EBITDA $360MM

3. Sell for 7X EBITDA, or a $2.52B EV

4. Exit with 3X Debt/EBITDA, debt $1,080

5. Achieve a 20% 5y IRR on equity investment

6. Exit equity value $1.44B, initial equity $579MM discounted back 5 years at 20%

 

So a PE shop could lever up say 6 times LE's current $100MM EBITDA in order to offer equity holders $1,179. But that assumes Eddie is nice. SHLD is desperate and will I assume load LE up with at least 2 times D/EBITDA. Say he loads up to 3x, then the hypothetical PE offer price would fall by $300MM to $879MM.

 

This seems too easy though, especially since LE would be far more attractive to a VF Corp than a PE shop. As Wellmont suggested, perhaps SHLD is spinning LE b/c it could not find a buyer.....

[alertmeipp]

Who would have thought a liquidity even will take the stock down?

[LC]

Land's end is the budget version of J. crew.

[heth247]

Anyone find it interesting that Lands End derives zero/negative ebitda from their retail locations? Of course they will be entering into an agreement to rent out all the Lands End stores in Sears..I also wonder what kind of terms they'll negotiate.

 

Going through LE's financials, its EBITDA decreased almost by half from 2010 to 2012, due to a 5% decrease in gross margins:

          Ebitda

2010 - $206MM

2011 - $144MM

2012 - $107MM

 

And the reason -- they started to participate SYW in 2011! LE even has to pay a $4MM/year corporate service fee to SHLD for SYW  in 2011 and 2012!

 

So without SYW, LE could be a $1.5B sale.

 

[heth247]

Btw, they did not beak out the "cost of sales" but did state that SYW expense is added to the cost of sales. And by looking at the difference between 2010 and 2011/2012, I cannot think of anything else other than SYW that contributes to the 5% GM and 50% EBITDA decline.

 

 

Going through LE's financials, its EBITDA decreased almost by half from 2010 to 2012, due to a 5% decrease in gross margins:

          Ebitda

2010 - $206MM

2011 - $144MM

2012 - $107MM

 

And the reason -- they started to participate SYW in 2011! LE even has to pay a $4MM/year corporate service fee to SHLD for SYW  in 2011 and 2012!

 

So without SYW, LE could be a $1.5B sale.

[heth247]

Here is the "cost of sales" statement:

 

Cost of sales are comprised principally of the costs of merchandise, in-bound freight, duty, warehousing and distribution (including receiving, picking, packing and store delivery costs), customer shipping and handling costs and physical inventory losses.

 

The Company participates in Sears Holdings’ Shop Your Way member loyalty program. The expenses for this program are recorded in Cost of sales, as described in Note 11—Related Party.

 

 

Here is the what happened to SYW after spin-off

Shop Your Way Retail Establishment Agreement

 

Lands’ End and SHMC expect to enter into a Shop Your Way retail establishment agreement in connection with the spin-off that will govern our participation in the Shop Your Way program. Under this agreement, SHMC will issue rewards points to all of its members when they purchase merchandise and services from us and, for each qualifying purchase, we will pay SHMC an agreed-upon fee. In addition, SHMC will (1) authorize us to redeem points for Shop Your Way program members as part or all of the purchase prices paid by Shop Your Way program members when they make qualifying purchases and (2) reimburse us for the value of points redeemed.

 

Looks like after spin-off, the SYW will be removed from the cost of sales and EBITDA will get a big boost, if I understand it correctly.