SHLDQ - Sears Holdings Corp

[krazeenyc]

Baker Street ups stake to just over 10% of outstanding:

 

http://www.sec.gov/Archives/edgar/data/1488207/000092189513002424/0000921895-13-002424-index.htm

 

Someone is either really right, or really wrong.

 

I mean they did add meaningfully to their position -- just not as much as it seems -- basically boosted their position by appx 33%.  (I've been building a position again over the last couple days...)

[merkhet]

 

 

Baker Street ups stake to just over 10% of outstanding:

 

http://www.sec.gov/Archives/edgar/data/1488207/000092189513002424/0000921895-13-002424-index.htm

 

Someone is either really right, or really wrong.

 

 

I mean they did add meaningfully to their position -- just not as much as it seems -- basically boosted their position by appx 33%.  (I've been building a position again over the last couple days...)

 

 

Beat me to it -- they added meaningfully to both their common and options positions.

 

They've increased common holdings by 500,000 and options holdings by around 2 million or so.

[alertmeipp]

This is nice, but much better if the big L buy a bunch himself.

[FCharlie]

http://www.sec.gov/Archives/edgar/data/350698/000118143113062261/xslF345X03/rrd397076.xml

 

Eddie sells another 450,000 AutoNation shares.

 

 

[Luke 532]

http://www.sec.gov/Archives/edgar/data/350698/000118143113062261/xslF345X03/rrd397076.xml

 

Eddie sells another 450,000 AutoNation shares.

 

Seems to me the following headline gets closer and more likely by the day:

"Eddie Lampert closes hedge fund to focus full-time on Sears Holdings"

[krazeenyc]

 

 

Baker Street ups stake to just over 10% of outstanding:

 

http://www.sec.gov/Archives/edgar/data/1488207/000092189513002424/0000921895-13-002424-index.htm

 

Someone is either really right, or really wrong.

 

 

 

I mean they did add meaningfully to their position -- just not as much as it seems -- basically boosted their position by appx 33%.  (I've been building a position again over the last couple days...)

 

 

Beat me to it -- they added meaningfully to both their common and options positions.

 

They've increased common holdings by 500,000 and options holdings by around 2 million or so.

 

Yeah I mean obviously Baker Street is bullish on SHLD. But owning 9.5 million out of the money calls -- I don't consider it the roughly the same as owning the equity. If they were deep in the money calls, it'd closer.

 

http://www.sec.gov/Archives/edgar/data/350698/000118143113062261/xslF345X03/rrd397076.xml

 

Eddie sells another 450,000 AutoNation shares.

 

Seems to me the following headline gets closer and more likely by the day:

"Eddie Lampert closes hedge fund to focus full-time on Sears Holdings"

 

I was a bit surprised Lampert distributed enough SHLD stock to fall under 50%.

[Luke 532]

 

I was a bit surprised Lampert distributed enough SHLD stock to fall under 50%.

 

If memory serves correctly, he has taken both SHOS and SHLD down to 48% each.  Might not be a coincidence given that there have been case studies done in the past showing that a single shareholder owning >50% usually decreases company value.  I don't recall the specifics on why that is.

[Evolveus]

 

I was a bit surprised Lampert distributed enough SHLD stock to fall under 50%.

 

If memory serves correctly, he has taken both SHOS and SHLD down to 48% each.  Might not be a coincidence given that there have been case studies done in the past showing that a single shareholder owning >50% usually decreases company value.  I don't recall the specifics on why that is.

 

Not to be flippant about it, but is anyone really concerned that someone is going to swoop in a rest control away from Lampert even if he is only at 48%?  No one else wants it that bad - his only competition would be Berkowitz but he's betting on Lampert the Jockey so that's not happening. It just seems like the media wanted to make much bigger deal out of this than it was IMHO.

[phil_Buffett]

http://www.sec.gov/Archives/edgar/data/350698/000118143113062261/xslF345X03/rrd397076.xml

 

Eddie sells another 450,000 AutoNation shares.

 

Seems to me the following headline gets closer and more likely by the day:

"Eddie Lampert closes hedge fund to focus full-time on Sears Holdings"

 

iam also seeing this Headline on the horizon. it is definitely possibly.

[phil_Buffett]

http://www.chicagobusiness.com/article/20131211/NEWS07/131219950/meet-eddie-lamperts-biggest-fan#

 

baker street Vadim Perelman still see value of sears Shares from 92$ to 169$

[FCharlie]

 

I was a bit surprised Lampert distributed enough SHLD stock to fall under 50%.

 

If memory serves correctly, he has taken both SHOS and SHLD down to 48% each.  Might not be a coincidence given that there have been case studies done in the past showing that a single shareholder owning >50% usually decreases company value.  I don't recall the specifics on why that is.

 

Not to be flippant about it, but is anyone really concerned that someone is going to swoop in a rest control away from Lampert even if he is only at 48%?  No one else wants it that bad - his only competition would be Berkowitz but he's betting on Lampert the Jockey so that's not happening. It just seems like the media wanted to make much bigger deal out of this than it was IMHO.

 

 

It's very possible the shorts will let up on SHLD once Eddie's hedge funds are wound down. They've always been gunning for him. Yes Sears and Kmart are crappy stores, but shorts always have hoped they could catch Eddie selling out and bury the price so he can't sell at a fair price.

 

My assumption is Eddie is ahead of the game. He probably knows he has no choice but to eventually distribute SHLD shares so why not surprise everyone and distribute them first... especially when the share price is relatively high? If you distribute everything else first, and Wall St. knows you have redemptions coming and you only have one, illiquid stock to left to sell/distribute, they will do everything they can to bury you.

 

 

[Luke 532]

One of COB&F's newest users, Chad (Peridot Capital), was mentioned in the recent article.  Congrats, Chad!

http://www.chicagobusiness.com/article/20131211/NEWS07/131219950/meet-eddie-lamperts-biggest-fan

[peridotcapital]

One of COB&F's newest users, Chad (Peridot Capital), was mentioned in the recent article.  Congrats, Chad!

http://www.chicagobusiness.com/article/20131211/NEWS07/131219950/meet-eddie-lamperts-biggest-fan

 

Thanks!

 

As far as the article goes, yes, the top floors are worth "something" but since they are office space they are worth far, far less than the retail space in a premier mall. As a result, even including that space would not get you anywhere close to $590M.

 

While I agree with Baker Street on some of their thesis (solid margin of safety based on the asset base), we simply disagree on estimated intrinsic value for SHLD today. I actually think their real estate value estimate is much closer to the right number than their valuation for the retail-related assets.

 

For instance, the break-up analysis assumes no future losses for the retail stores, which makes no sense as they are burning through hundreds of millions per year. It also appears that there is a typo on slide 37 (the breakdown of the break-up valuation). He appears to overestimate the value of the Sears/Kmart retail operations by $400M-$800M via a summing miscalculation, which is also suspect.

 

Overall, I think he is looking at the right things, just coming up with numbers that are materially too high.

[phil_Buffett]

One of COB&F's newest users, Chad (Peridot Capital), was mentioned in the recent article.  Congrats, Chad!

http://www.chicagobusiness.com/article/20131211/NEWS07/131219950/meet-eddie-lamperts-biggest-fan

 

Thanks!

 

As far as the article goes, yes, the top floors are worth "something" but since they are office space they are worth far, far less than the retail space in a premier mall. As a result, even including that space would not get you anywhere close to $590M.

 

While I agree with Baker Street on some of their thesis (solid margin of safety based on the asset base), we simply disagree on estimated intrinsic value for SHLD today. I actually think their real estate value estimate is much closer to the right number than their valuation for the retail-related assets.

 

For instance, the break-up analysis assumes no future losses for the retail stores, which makes no sense as they are burning through hundreds of millions per year. It also appears that there is a typo on slide 37 (the breakdown of the break-up valuation). He appears to overestimate the value of the Sears/Kmart retail operations by $400M-$800M via a summing miscalculation, which is also suspect.

 

Overall, I think he is looking at the right things, just coming up with numbers that are materially too high.

 

peridotcapital could i ask you about your estimate instrinsic value of sears?

 

btw nice that you are in the article, congrats  :)

[krazeenyc]

One of COB&F's newest users, Chad (Peridot Capital), was mentioned in the recent article.  Congrats, Chad!

http://www.chicagobusiness.com/article/20131211/NEWS07/131219950/meet-eddie-lamperts-biggest-fan

 

Thanks!

 

As far as the article goes, yes, the top floors are worth "something" but since they are office space they are worth far, far less than the retail space in a premier mall. As a result, even including that space would not get you anywhere close to $590M.

 

While I agree with Baker Street on some of their thesis (solid margin of safety based on the asset base), we simply disagree on estimated intrinsic value for SHLD today. I actually think their real estate value estimate is much closer to the right number than their valuation for the retail-related assets.

 

For instance, the break-up analysis assumes no future losses for the retail stores, which makes no sense as they are burning through hundreds of millions per year. It also appears that there is a typo on slide 37 (the breakdown of the break-up valuation). He appears to overestimate the value of the Sears/Kmart retail operations by $400M-$800M via a summing miscalculation, which is also suspect.

 

Overall, I think he is looking at the right things, just coming up with numbers that are materially too high.

 

Peridot, I look at SHLD slightly differently.

 

I look at the pieces of the puzzle (not in any particular order) -- Real Estate, Retail (excluding Land's End and Auto), KCD (Brand Value) , Land's End, Debt and Pension.

 

I believe Eddie Lampert didn't liquidate b/c it's simply not practical if you want to get max $$ for your real estate -- you can't flood the market with 200 million square feet of real estate at once. I also believe that Sears/Kmart will be the largest tenant of SHLD real estate at least for the next few years. Of course I expect Eddie to continue selling super valuable stores (relative to their EBITDA generation), leave bad leases, etc.  But the stores that are left, I expect them to dramatically cut their footprint per store and look for tenants to subdivide the store similar to their Whole Foods, Forever 21, Nordstroms deals.

 

This is where my view with most differ.  I often hear everyone talking about how the retail operations are continually burning SHLD's cash -- this is simply not quite true. The retail operations have not been burning the cash that people talk about.  What has been the real cash burner?

 

1) The Pension. The pension is frozen. Whether or not the retail operations continued these costs would have to be paid. Last year alone they contributed over $500 million in cash in pension related costs.

2) Store Closing Severance. Closing stores and letting people go are expensive. This is not a cost of the retail operations but the cost of winding them down. Last year over $200 million went toward this cost. But in reality the store closing are not a cash flow negative event as they are balanced out with the inventory that is cleared. Also store closings reduce future expenses through ending leases or bring cash to the coffers via sale transactions.

3) Debt - Over $330 million toward debt repayments.

3) SYW - this is the only portion of the retail operations truly BURNING cash -- as it has cost them hundreds of millions of dollars -- but I believe Eddie sees this part as crucial to transitioning to his integrated retail solution that uses smaller stores.

 

I consider the pension in the same manner as the debt as a fixed negative.  The store closings/severance I consider to be a negative against the Real estate value, BUT ... if this can continue to cash neutral via a reduction in net inventory required as the store count decreases it's not really a negative at all (as long as they can actually survive on less net inventory).

 

I expect Eddie to continue shrinking the store count (to 1500??? not sure what the final number will look like).  The current Sears store averages 136,000 sq ft and the current kmart averages 94,000 square feet. If they can shrink the average footprint of stores to something like 90,000 sq ft and 60,000 sq ft -- I believe that not only will they be generating a nice income from their real estate it'll move Sears and Kmart solidly into the black as well.  I'm still not exactly sure how their going to find tenants for 70-80 million square feet of real estate. This is actually what I think is the biggest hole in my thesis.

[peridotcapital]

One of COB&F's newest users, Chad (Peridot Capital), was mentioned in the recent article.  Congrats, Chad!

http://www.chicagobusiness.com/article/20131211/NEWS07/131219950/meet-eddie-lamperts-biggest-fan

 

Thanks!

 

As far as the article goes, yes, the top floors are worth "something" but since they are office space they are worth far, far less than the retail space in a premier mall. As a result, even including that space would not get you anywhere close to $590M.

 

While I agree with Baker Street on some of their thesis (solid margin of safety based on the asset base), we simply disagree on estimated intrinsic value for SHLD today. I actually think their real estate value estimate is much closer to the right number than their valuation for the retail-related assets.

 

For instance, the break-up analysis assumes no future losses for the retail stores, which makes no sense as they are burning through hundreds of millions per year. It also appears that there is a typo on slide 37 (the breakdown of the break-up valuation). He appears to overestimate the value of the Sears/Kmart retail operations by $400M-$800M via a summing miscalculation, which is also suspect.

 

Overall, I think he is looking at the right things, just coming up with numbers that are materially too high.

 

peridotcapital could i ask you about your estimate instrinsic value of sears?

 

btw nice that you are in the article, congrats  :)

 

You'll have to pardon me for not sharing my exact figures, but I believe Baker Street's low end of ~$90 is too high based on what we know today. And the numbers can wildly change based on what Eddie decides to do (focus on maintaining smaller Sears locations and subleasing the rest of the space, vs selling stores/leases outright, etc). While my numbers are above the current stock price, the gap is not large enough for me to be bullish on the stock today.

 

I just think it's too early in the transformation and bulls may be underestimating both the time it is going to take to get to a sustainable free cash flow positive position as well as how many of the assets are going to need to be monetized simply to replace the losses from the retail operations over the next couple of years.

 

As long as the retail is burning cash and on top of that you have $1B+ of annual cash needs relating to three other items (pension, interest, and capex), intrinsic value is going to decline every single quarter. The reason is that asset sales will be required to simply allow SHLD to maintain a stable financial condition (net debt would be my metric), while the asset base will be getting smaller (which will reduce future free cash flow and therefore intrinsic value per share).

[krazeenyc]

Of course another part of the equation is exactly what pieces of the pie can be distributed to shareholders and out of the SHLD umbrella. Despite everything I've read and looked at, I'm just not sure.

[phil_Buffett]

One of COB&F's newest users, Chad (Peridot Capital), was mentioned in the recent article.  Congrats, Chad!

http://www.chicagobusiness.com/article/20131211/NEWS07/131219950/meet-eddie-lamperts-biggest-fan

 

Thanks!

 

As far as the article goes, yes, the top floors are worth "something" but since they are office space they are worth far, far less than the retail space in a premier mall. As a result, even including that space would not get you anywhere close to $590M.

 

While I agree with Baker Street on some of their thesis (solid margin of safety based on the asset base), we simply disagree on estimated intrinsic value for SHLD today. I actually think their real estate value estimate is much closer to the right number than their valuation for the retail-related assets.

 

For instance, the break-up analysis assumes no future losses for the retail stores, which makes no sense as they are burning through hundreds of millions per year. It also appears that there is a typo on slide 37 (the breakdown of the break-up valuation). He appears to overestimate the value of the Sears/Kmart retail operations by $400M-$800M via a summing miscalculation, which is also suspect.

 

Overall, I think he is looking at the right things, just coming up with numbers that are materially too high.

 

peridotcapital could i ask you about your estimate instrinsic value of sears?

 

btw nice that you are in the article, congrats  :)

 

You'll have to pardon me for not sharing my exact figures, but I believe Baker Street's low end of ~$90 is too high based on what we know today. And the numbers can wildly change based on what Eddie decides to do (focus on maintaining smaller Sears locations and subleasing the rest of the space, vs selling stores/leases outright, etc). While my numbers are above the current stock price, the gap is not large enough for me to be bullish on the stock today.

 

I just think it's too early in the transformation and bulls may be underestimating both the time it is going to take to get to a sustainable free cash flow positive position as well as how many of the assets are going to need to be monetized simply to replace the losses from the retail operations over the next couple of years.

 

As long as the retail is burning cash and on top of that you have $1B+ of annual cash needs relating to three other items (pension, interest, and capex), intrinsic value is going to decline every single quarter. The reason is that asset sales will be required to simply allow SHLD to maintain a stable financial condition (net debt would be my metric), while the asset base will be getting smaller (which will reduce future free cash flow and therefore intrinsic value per share).

 

thank you for your answer. one thing i dont understand is, you said shareholders have a solid margin of safety on the asset base, in the other paragraph you said you cant be bullish on the stock at current prices

 

ok and i say on your Website in the last article that you said sears is likely not worth more than 60$.

[peridotcapital]

One of COB&F's newest users, Chad (Peridot Capital), was mentioned in the recent article.  Congrats, Chad!

http://www.chicagobusiness.com/article/20131211/NEWS07/131219950/meet-eddie-lamperts-biggest-fan

 

Thanks!

 

As far as the article goes, yes, the top floors are worth "something" but since they are office space they are worth far, far less than the retail space in a premier mall. As a result, even including that space would not get you anywhere close to $590M.

 

While I agree with Baker Street on some of their thesis (solid margin of safety based on the asset base), we simply disagree on estimated intrinsic value for SHLD today. I actually think their real estate value estimate is much closer to the right number than their valuation for the retail-related assets.

 

For instance, the break-up analysis assumes no future losses for the retail stores, which makes no sense as they are burning through hundreds of millions per year. It also appears that there is a typo on slide 37 (the breakdown of the break-up valuation). He appears to overestimate the value of the Sears/Kmart retail operations by $400M-$800M via a summing miscalculation, which is also suspect.

 

Overall, I think he is looking at the right things, just coming up with numbers that are materially too high.

 

Peridot, I look at SHLD slightly differently.

 

I look at the pieces of the puzzle (not in any particular order) -- Real Estate, Retail (excluding Land's End and Auto), KCD (Brand Value) , Land's End, Debt and Pension.

 

I believe Eddie Lampert didn't liquidate b/c it's simply not practical if you want to get max $$ for your real estate -- you can't flood the market with 200 million square feet of real estate at once. I also believe that Sears/Kmart will be the largest tenant of SHLD real estate at least for the next few years. Of course I expect Eddie to continue selling super valuable stores (relative to their EBITDA generation), leave bad leases, etc.  But the stores that are left, I expect them to dramatically cut their footprint per store and look for tenants to subdivide the store similar to their Whole Foods, Forever 21, Nordstroms deals.

 

This is where my view with most differ.  I often hear everyone talking about how the retail operations are continually burning SHLD's cash -- this is simply not quite true. The retail operations have not been burning the cash that people talk about.  What has been the real cash burner?

 

1) The Pension. The pension is frozen. Whether or not the retail operations continued these costs would have to be paid. Last year alone they contributed over $500 million in cash in pension related costs.

2) Store Closing Severance. Closing stores and letting people go are expensive. This is not a cost of the retail operations but the cost of winding them down. Last year over $200 million went toward this cost. But in reality the store closing are not a cash flow negative event as they are balanced out with the inventory that is cleared. Also store closings reduce future expenses through ending leases or bring cash to the coffers via sale transactions.

3) Debt - Over $330 million toward debt repayments.

3) SYW - this is the only portion of the retail operations truly BURNING cash -- as it has cost them hundreds of millions of dollars -- but I believe Eddie sees this part as crucial to transitioning to his integrated retail solution that uses smaller stores.

 

I consider the pension in the same manner as the debt as a fixed negative.  The store closings/severance I consider to be a negative against the Real estate value, BUT ... if this can continue to cash neutral via a reduction in net inventory required as the store count decreases it's not really a negative at all (as long as they can actually survive on less net inventory).

 

I expect Eddie to continue shrinking the store count (to 1500??? not sure what the final number will look like).  The current Sears store averages 136,000 sq ft and the current kmart averages 94,000 square feet. If they can shrink the average footprint of stores to something like 90,000 sq ft and 60,000 sq ft -- I believe that not only will they be generating a nice income from their real estate it'll move Sears and Kmart solidly into the black as well.  I'm still not exactly sure how their going to find tenants for 70-80 million square feet of real estate. This is actually what I think is the biggest hole in my thesis.

 

Actually, after reading that I don't think we are looking at things all that differently. I agree with your version of the direction SHLD seems to be moving (smaller stores that could have better margins plus sublease income that could potentially reduce their net lease expense to zero). In that scenario, the real estate has the largest chunk of value, which is what Baker Street is assuming, and I would agree.

 

However, you still to discount the pension expense, which will be another $500M in 2014 (granted it will not continue at that rate) as well as the interest, capex and SYW costs, which are recurring items. CapEx has been cut to the bone and is still over $300M per year. Interest is a similar amount annually.  The stores themselves might not be losing a ton of money on a percentage basis (maybe 1% of sales), but in order for SHLD to reach free cash flow positive the operations (retail sales plus subleasing income) have to earn a profit of ~$1B per year.

 

That is where your self-identified "hole" comes in. With the strategy you envision, how long does it take to get to $1 billion of annual cash flow from operations? I would argue 3-5 years minimum. How many assets will be sold and how much cash will the retail segment burn until then? If you factor that in you may be surprised what number you get when you add up the values of each business division.

[krazeenyc]

Here is a big question mark imo. How much of capex has been maintenance cap ex fixing stores and such and how much capex has gone into expanding fulfillment capabilities (as well as the development of SYW) -- for their integrated retail strategy -- given the state of their stores I would guess that much of this capex is actually the latter. 

[peridotcapital]

One of COB&F's newest users, Chad (Peridot Capital), was mentioned in the recent article.  Congrats, Chad!

http://www.chicagobusiness.com/article/20131211/NEWS07/131219950/meet-eddie-lamperts-biggest-fan

 

Thanks!

 

As far as the article goes, yes, the top floors are worth "something" but since they are office space they are worth far, far less than the retail space in a premier mall. As a result, even including that space would not get you anywhere close to $590M.

 

While I agree with Baker Street on some of their thesis (solid margin of safety based on the asset base), we simply disagree on estimated intrinsic value for SHLD today. I actually think their real estate value estimate is much closer to the right number than their valuation for the retail-related assets.

 

For instance, the break-up analysis assumes no future losses for the retail stores, which makes no sense as they are burning through hundreds of millions per year. It also appears that there is a typo on slide 37 (the breakdown of the break-up valuation). He appears to overestimate the value of the Sears/Kmart retail operations by $400M-$800M via a summing miscalculation, which is also suspect.

 

Overall, I think he is looking at the right things, just coming up with numbers that are materially too high.

 

peridotcapital could i ask you about your estimate instrinsic value of sears?

 

btw nice that you are in the article, congrats  :)

 

You'll have to pardon me for not sharing my exact figures, but I believe Baker Street's low end of ~$90 is too high based on what we know today. And the numbers can wildly change based on what Eddie decides to do (focus on maintaining smaller Sears locations and subleasing the rest of the space, vs selling stores/leases outright, etc). While my numbers are above the current stock price, the gap is not large enough for me to be bullish on the stock today.

 

I just think it's too early in the transformation and bulls may be underestimating both the time it is going to take to get to a sustainable free cash flow positive position as well as how many of the assets are going to need to be monetized simply to replace the losses from the retail operations over the next couple of years.

 

As long as the retail is burning cash and on top of that you have $1B+ of annual cash needs relating to three other items (pension, interest, and capex), intrinsic value is going to decline every single quarter. The reason is that asset sales will be required to simply allow SHLD to maintain a stable financial condition (net debt would be my metric), while the asset base will be getting smaller (which will reduce future free cash flow and therefore intrinsic value per share).

 

thank you for your answer. one thing i dont understand is, you said shareholders have a solid margin of safety on the asset base, in the other paragraph you said you cant be bullish on the stock at current prices

 

ok and i say on your Website in the last article that you said sears is likely not worth more than 60$.

 

Actually, the $60 figure I mentioned was based on applying a 10% discount rate to Baker Street's valuation. Their presentation seemed to imply that if the assets are monetized and are worth $92, and you can buy the stock at $44, then it's a great investment. My point was that it very much depends on how long it takes you to actually monetize them. You can't wave a magic wand and do so overnight.

 

As for the margin of safety issue, you can feel good about minimal chance of permanent loss of capital, and at the same time not think the stock will provide superior returns. Let's say you run a bunch of projections trying to determine how much you think SHLD stock will be worth in 5 years. Worst case you think SHLD will be worth $40 and best case you think it'll be worth $70. With the stock trading at $46 today your margin of safety is quite high. However, if you buy it today and your best case scenario plays out, you will end up making annualized returns of between 8-9%. That might not even beat the S&P 500. So you can have a relatively low risk of capital loss and still not earn a return good enough to warrant buying the stock.

[thepupil]

One reason I like SHLD is many of the liabilities are of a depleting nature, while many of the assets are not, namely the trophy real estate in crowded, booming A malls.

 

The pension is 100 bps of change in discount rate and $1B more of contributions away from being completely gone. That pension is not worth a -500MM/year every year in perpetuity. I know I'm stating the obvious there, but I see many (not anyone here, not Chad) extrapolating cash burn from what amount to cash flows resembling principal payments on depleting liabilities, rather than interest.

 

The lease obligations go down every year. The retail gets smaller every year. The way I see SHLD longs winning (though it isn't a given by any means) is over the next 5 years, the pension will be gone, the retail losses are funded by a combo of inventory liquidation, Sears Canada liquidation, and select real estate sales.

 

As the non-debt (pension and leases and operating losses) liabilities are depleted, the real estate becomes more and more unencumbered by Sears retail and can eventually be used to refi the debt taken on while this transition takes place; equity offerings of an eventually cleaner and higher multiple real estate story may also play a role. Who would lend to hypothetical Sears REIT in its current cash burning state? Not many.  But in 5 years, on a smaller cleaner, leaner, company with fewer scary liabilities, the picture may be different.

 

The picture may also be different if SHLD issued equity to buy a completely unrelated operating business to utilize the giant tax asset w/i Sears. Of course there is not evidence of that happening and the trend is to strip things out of Sears (which reduces risk to equity via capital return and improves the IRR issue that Chad just pointed out. As one of the more vocal Lampert critics, CS's Balter puts it, it is a game of "Sears Jenga".

 

 

[peridotcapital]

One reason I like SHLD is many of the liabilities are of a depleting nature, while many of the assets are not, namely the trophy real estate in crowded, booming A malls.

 

The pension is 100 bps of change in discount rate and $1B more of contributions away from being completely gone. That pension is not worth a -500MM/year every year in perpetuity. I know I'm stating the obvious there, but I see many (not anyone here, not Chad) extrapolating cash burn from what amount to cash flows resembling principal payments on depleting liabilities, rather than interest.

 

The lease obligations go down every year. The retail gets smaller every year. The way I see SHLD longs winning (though it isn't a given by any means) is over the next 5 years, the pension will be gone, the retail losses are funded by a combo of inventory liquidation, Sears Canada liquidation, and select real estate sales.

 

As the non-debt (pension and leases and operating losses) liabilities are depleted, the real estate becomes more and more unencumbered by Sears retail and can eventually be used to refi the debt taken on while this transition takes place; equity offerings of an eventually cleaner and higher multiple real estate story may also play a role. Who would lend to hypothetical Sears REIT in its current cash burning state? Not many.  But in 5 years, on a smaller cleaner, leaner, company with fewer scary liabilities, the picture may be different.

 

The picture may also be different if SHLD issued equity to buy a completely unrelated operating business to utilize the giant tax asset w/i Sears. Of course there is not evidence of that happening and the trend is to strip things out of Sears (which reduces risk to equity via capital return and improves the IRR issue that Chad just pointed out. As one of the more vocal Lampert critics, CS's Balter puts it, it is a game of "Sears Jenga".

 

I think you are right on with this. For me it's not a question of if I might want to buy the stock at some point (I very well may), it's a matter of when. If it takes 5 years for that scenario to play (which I think is certainly possible), there might be better times to buy along the way when the exact path, timetable, and ultimate cash flow of what is left are all easier to estimate. Obviously you don't want to wait too long, but for me there are still too many question marks (and more importantly, too much cash left to be burned) to pull the trigger.

[valuecfa]

The float/short dynamics are rather interesting with SHLD. Should be pretty volatile if shares keep getting snatched up

[Luke 532]

 

I think you are right on with this. For me it's not a question of if I might want to buy the stock at some point (I very well may), it's a matter of when. If it takes 5 years for that scenario to play (which I think is certainly possible), there might be better times to buy along the way when the exact path, timetable, and ultimate cash flow of what is left are all easier to estimate. Obviously you don't want to wait too long, but for me there are still too many question marks (and more importantly, too much cash left to be burned) to pull the trigger.

 

For what it's worth, I've debated (with myself) the timing aspect of an investment in SHLD countless times.  I keep coming to the conclusion that the opportunity cost of the time it takes for Lampert to really get this moving is worth it to not miss a great price today if there is some news that sends the stock much higher in short-order.  Who knows how the market would react to Lampert shutting down ESL or some other announcement?  To me, having a solid margin of safety means the only reasonable long-term risk is opportunity cost.  I'd much rather live with the regret of being a few years early than buying at double the current price (even if the odds of being early are 90% and paying double is just 10%... would much rather have slow bleed on my IRR than giving up valuable share count).  I want to make sure I have my shares in my back-pocket no matter what.  That's just me, and I can totally understand the viewpoint of waiting. 

 

Edit: one can also sell options around a core holding to essentially get paid for waiting.