SHLDQ - Sears Holdings Corp

[Guest wellmont]

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.

 

but what if people stop shopping there because they no longer get the rewards? SYW is simply a cost of doing business. it's not magic.

[heth247]

but what if people stop shopping there because they no longer get the rewards? SYW is simply a cost of doing business. it's not magic.

 

See the "Shop Your Way Retail Establishment Agreement" I posted later. Customer still get the rewards, it is just that the "cost" is now shifted to SHMC.

 

After all, LE is able to do $200MM EBITDA before SYW.

 

Btw, Land's End is the ONLY thing my wife ever bought from Sears and she was not even a SYW member when she made her buy. It was just because she like their design/price. :-)

 

[Guest wellmont]

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.

 

how much is the Fee?

how much is the reimbursement?

[CorpRaider]

Yeah I see where you are going.  The accounting for participation in the program may change but I doubt the economics will.

[heth247]

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.

 

how much is the Fee?

how much is the reimbursement?

 

I don't know. I can only guess. I would think the fee is small portion and the reward points are the big part. Here is the SYW corporate service fee:

 

General Corporate Services

 

Related party costs charged by Sears Holdings to the Company for general corporate services for 2012, 2011 and 2010 are as follows:

(in thousands)

        2012   2011     2010

Shop Your Way  4,586    4,181     —   

 

 

 

 

 

 

   

 

 

 

 

 

   

 

 

 

 

 

 

 

Total expenses

  $ 15,641     $ 17,956     $ 9,640  

[heth247]

Yeah I see where you are going.  The accounting for participation in the program may change but I doubt the economics will.

 

You are right the economics should always been there -- LE should always be able to do ~$200MM EBITDA. The SYW is just noise.

[Guest wellmont]

Yeah I see where you are going.  The accounting for participation in the program may change but I doubt the economics will.

 

yep. my thought exactly. why would eddie cut them a deal? .

[Guest wellmont]

Yeah I see where you are going.  The accounting for participation in the program may change but I doubt the economics will.

 

You are right the economics should always been there -- LE should always be able to do ~$200MM EBITDA. The SYW is just noise.

 

it's a zero sum game. if Lands End gets a break, SHLD eats the cost. I don't see why eddie would do this. my guess is that they will try to approximate the fee = to the reimbursement. the  stock is down today because people finally got a look at LE numbers and had to mark down their valuations for the shld enterprise.

 

bmichaud --- I believe eddie has been trying to sell LE for years. but the business has been in decline and we had the bust. he tried to sell OSH before the bubble burst. in each case he resorted to spin offs. interesting that this is not a rights offering. my guess is there would not be sufficient demand at a reasonable price and eddie did not want to backstop it.

 

[CorpRaider]

Yeah heth, but the EBIDTA for all of the various subs could look a helluvalot better if he wasn't plowing massive loads of cash into this program.  Seems like a continuation of the status quo to me other than the potential to skew the deal in one of the parties' favor (which I don't see why he would do since he owns the same amount of both; but then again he owned the same percentage of OSH too) or perhaps just the accounting optics.  Can you tell that I harbor ill feelings about OSH?  hah.

[Guest wellmont]

but here's the thing. if SYW goes away, so does revenue. The program brings people into the store. Think of it as R & D investment. If you stop it eventually sales go down. It may be true that cost would decline if he stopped SYW. But so would revenue and ebitda. Eddie has run the numbers and decided that's it's better to do the rewards program. So trying to value sears retail ex SYW is a fools errand.

[heth247]

it's a zero sum game. if Lands End gets a break, SHLD eats the cost. I don't see why eddie would do this. my guess is that they will try to approximate the fee = to the reimbursement.

 

I think the SYW rewards will eventually be winding down, they cannot do this forever. It is bleeding the company to death.

 

But my point was, Land's End's value did not decrease from $1.5B to $800M in just two years because the brand name has turned bad, but because of SYW.

 

Many people look at today's SEC filing and concluded that Baker street report's estimation of Land's End value was way off. It is not.

[Guest wellmont]

it's a zero sum game. if Lands End gets a break, SHLD eats the cost. I don't see why eddie would do this. my guess is that they will try to approximate the fee = to the reimbursement.

 

I think the SYW rewards will eventually be winding down, they cannot do this forever. It is bleeding the company to death.

 

But my point was, Land's End's value did not decrease from $1.5B to $800M in just two years because the brand name has turned bad, but because of SYW.

 

Many people look at today's SEC filing and concluded that Baker street report's estimation of Land's End value was way off. It is not.

 

if that's true the stock would have gone up today. I don't think you've proven that argument. I like your argument. And it would be nice. But I don't see the evidence. I wonder how shld investor relations would answer the question if you asked them? I don't know how you end a rewards program. It's a promise to customers. How do you put toothpaste back into the tube?

[CorpRaider]

it's a zero sum game. if Lands End gets a break, SHLD eats the cost. I don't see why eddie would do this. my guess is that they will try to approximate the fee = to the reimbursement.

 

I think the SYW rewards will eventually be winding down, they cannot do this forever. It is bleeding the company to death.

 

But my point was, Land's End's value did not decrease from $1.5B to $800M in just two years because the brand name has turned bad, but because of SYW.

 

Many people look at today's SEC filing and concluded that Baker street report's estimation of Land's End value was way off. It is not.

 

Yeah, I see what you are saying but he destroying all of that cash if SYW ends up being worth nothing. 

[Luke 532]

Many people look at today's SEC filing and concluded that Baker street report's estimation of Land's End value was way off. It is not.

 

if that's true the stock would have gone up today.

 

Chapter 8 of The Intelligent Investor!  :D  The people trading the stock today apparently didn't like the news of the spin-off.  But it's important to remember that people that have opinions aren't necessarily making trades on a day-to-day basis.  For example, I like that Lampert is monetizing more assets, yet I didn't buy any stock today so my vote wasn't tallied.  To look at one day of stock price movement is taking the votes from people that chose to vote today, nothing more.

[heth247]

if that's true the stock would have gone up today. I don't think you've proven that argument. I like your argument. And it would be nice. But I don't see the evidence. I wonder how shld investor relations would answer the question if you asked them? I don't know how you end a rewards program. It's a promise to customers. How do you put toothpaste back into the tube?

 

I don't know what is in Eddie's mind on the timeline for SYW. I suppose it is something to get people hooked up to his "social media shopping" to grow revenue big enough to offset the cost? Whether that succeed or not, how long does it take, I don't know.

 

But I think for KCD + Land's End, they can survive on their own without SYW. Ultimately, it is the product that people want to buy, not the rewards points. Walmart, Target, Amazon, their business can sustain without rewards points, Sears retail need to eventually get to that point as well.

 

And if it does not get there, I suppose Eddie will let the retail go bankrupt after spin off the valuable assets, like ThePupil suggested earlier.

 

 

[alertmeipp]

Many people look at today's SEC filing and concluded that Baker street report's estimation of Land's End value was way off. It is not.

 

if that's true the stock would have gone up today.

 

Chapter 8 of The Intelligent Investor!  :D  The people trading the stock today apparently didn't like the news of the spin-off.  But it's important to remember that people that have opinions aren't necessarily making trades on a day-to-day basis.  For example, I like that Lampert is monetizing more assets, yet I didn't buy any stock today so my vote wasn't tallied.  To look at one day of stock price movement is taking the votes from people that chose to vote today, nothing more.

 

Very well said.

[krazeenyc]

it's a zero sum game. if Lands End gets a break, SHLD eats the cost. I don't see why eddie would do this. my guess is that they will try to approximate the fee = to the reimbursement.

 

I think the SYW rewards will eventually be winding down, they cannot do this forever. It is bleeding the company to death.

 

But my point was, Land's End's value did not decrease from $1.5B to $800M in just two years because the brand name has turned bad, but because of SYW.

 

Many people look at today's SEC filing and concluded that Baker street report's estimation of Land's End value was way off. It is not.

 

if that's true the stock would have gone up today. I don't think you've proven that argument. I like your argument. And it would be nice. But I don't see the evidence. I wonder how shld investor relations would answer the question if you asked them? I don't know how you end a rewards program. It's a promise to customers. How do you put toothpaste back into the tube?

 

FWIW Shop your way is not exclusive to Sears/Kmart/Lands End. You can earn it from a lot of merchants. It's a rewards program on its own - like Amex Membership Rewards. I can get Shop Your Way points at my local farmers market or at Burger King.

 

Companies change/devalue/discontinue/start new programs all the time.

[heth247]

Many people look at today's SEC filing and concluded that Baker street report's estimation of Land's End value was way off. It is not.

 

if that's true the stock would have gone up today.

 

I don't know how many people really dig into the financials and search for the truth. I first looked at it and say "WTF, how come Land's End is only worth $800MM today?" Then I started to look for the reason why its EBITDA declined 50% from 2010 to 2012. So far my conclusion is SYW, although not completely proven.

[bmichaud]

Wellmont,

 

Given your commentary and typically keen eye for a declining business, I'm surprised you are invested in SHLD equity. Are you banking on the potential hidden REIT or just Eddie pulling a rabbit out of his hat?

[heth247]

Wellmont,

 

Given your commentary and typically keen eye for a declining business, I'm surprised you are invested in SHLD equity. Are you banking on the potential hidden REIT or just Eddie pulling a rabbit out of his hat?

 

Wellmont once said he is a long who likes to constantly bashing his idea.  :) Actually I appreciate such challenge, it makes your rethink your idea in both ways.

[heth247]

FYI - Here is the management discussion on Gross Margin 2011 Compared to 2010. They did not mention SYW, but "higher commodity costs and increased markdown".

 

 

Total gross margin for 2011 was $766.0 million compared to $822.0 million in the prior year. As a percentage of total revenues, gross margin declined to 44.4% of total revenues in 2011 compared to 49.6% in 2010.

 

Direct segment gross margin was $645.6 million, or 45.2% of total Direct segment revenues, compared to $704.3 million, or 51.1% of total Direct segment revenues, for 2011 and 2010, respectively. The Direct segment gross margin rate decreased 590 basis points in 2011, mainly due to higher commodity costs and increased markdowns primarily in our U.S. consumer and International businesses.

 

Retail segment gross margin was $120.1 million, or 40.4% of total Retail segment revenues, compared to $117.1 million or 42.5% of total Retail segment revenues for 2011 and 2010, respectively. The Retail segment gross margin rate decreased 210 basis points in 2011 primarily due to higher commodity costs and increased markdowns.

[peridotcapital]

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.

 

Gross margin for a retail company is typically most directly correlated to the level of markdown activity. If you are being more promotional and selling goods at closer to cost, your gross margin suffers. Just look at JCP's gross margins lately... they're down huge because everything in the store from the Ron Johnson era has been put on sale.

 

There is no way SYW can increase the cost of an item to LE by 10% (gross margins going from 50% to 45% means the item you sell for $100 cost you $55 instead of $50). How can the cost of participating in SYW equate to $5 for every $100 item sold? That makes no sense given how the program works... customers don't earn $5 of rewards for every $100 they spend. Less demand and therefore more markdowns needed to clear inventory likely make up the bulk of the gross margin erosion.

[heth247]

 

Gross margin for a retail company is typically most directly correlated to the level of markdown activity. If you are being more promotional and selling goods at closer to cost, your gross margin suffers. Just look at JCP's gross margins lately... they're down huge because everything in the store from the Ron Johnson era has been put on sale.

 

There is no way SYW can increase the cost of an item to LE by 10% (gross margins going from 50% to 45% means the item you sell for $100 cost you $55 instead of $50). How can the cost of participating in SYW equate to $5 for every $100 item sold? That makes no sense given how the program works... customers don't earn $5 of rewards for every $100 they spend. Less demand and therefore more markdowns needed to clear inventory likely make up the bulk of the gross margin erosion.

 

You are right. I have realized that. Sorry for all the confusing posts so far.

 

[muscleman]

It looks like I made a good decision selling SHLD all out at $61 and using that proceeds to buy BPOP at $26. :D

I would be careful not to pay too high a price for SHLD because we all know eventually ESL will be shut down, so it is likely a lot of the SHLD shares will flood into the market.

[Guest wellmont]

Wellmont,

 

Given your commentary and typically keen eye for a declining business, I'm surprised you are invested in SHLD equity. Are you banking on the potential hidden REIT or just Eddie pulling a rabbit out of his hat?

 

I think it's a liquidation -- but I just can't figure out what he's trying to do at the moment. He might try to end up with one very nice business that he can use as his permanent vehicle. like the Munger idea of chipping away at everything else inside shld, until he uncovers something worth keeping. in short I think it's a hunk of undervalued assets that a smart guy is eventually going to create some value with. it's not a bad thing to own in this kind of market. and it's not an outsized position for me in any case. I do think eddie has finally stepped up the pace of financial engineering. and maybe he will continue in 2014.