SHLDQ - Sears Holdings Corp

[ERICOPOLY]

Part of the Berkshire story is to use cash flows to keep growing the number of streams of cash that together form the mighty Amazon.

 

Spinoffs are kind of like the anti-Amazon strategy.  By definition, it is unlocking value via an anti-conglomeration strategy.

 

So that's what I meant -- it looks to me like the more he spins off, the less like "next Berkshire" it is.

[ERICOPOLY]

Suppose Buffett started to spin off the various parts of Berkshire. 

 

1)  announces a spinoff of See's

2)  spins of BNSF

3)  spins off Furniture Mart

4)  spins off NetJets

5)  spins of GEICO

6)  spins off this

7)  spins off that

8)  ...

 

This is not "next Berkshire" behavior.

[bmichaud]

I don't think the thesis is a BRK redux until Lampert goes out and buys a stable, cash flow generating asset. He could have done this long ago via borrowing against the real estate (it's shocking he thought he could resuscitate a retailer after years of studying WEB) and diversifying into other lines of cash flow. Instead, he doubled down on retailing via buying back stock.

 

As a REIT, Seritage will have little in the way of discretionary cash flow, as 90% is dividended out, so doesn't seem like a very practical vehicle to build a BRK. Yes there are "taxable REIT subsidiaries", but Seritgae would have to issue stock to buy operating businesses, which would just dilute the REIT side of the company, thus resulting in a lower overall valuation for Seritage, which in turn results in more dilution as Lampert looks to grow the TRS side of the business. Likely not much debt capacity either, since it might be spun with debt and would certainly need debt to fund redevelopment.

 

If I were Lampert, I'd wind down ESL to the point of 100% ownership and just turn it into a holding company for his personal wealth. Hedge all of the SHLD securities, borrow against them and go out and buy a whole operating business that he could use as a BRK platform. Or what would be more fun is just start picking stocks again. He would have his own permanent capital ala Icahn and could take extremely long time horizons on distressed or underperforming assets.

[ERICOPOLY]

He can spin out the retailer

 

He's investing a lot into SYW.  It looks like he wants to transform and keep it.

[Luke 532]

Suppose Buffett started to spin off the various parts of Berkshire. 

 

1)  announces a spinoff of See's

2)  spins of BNSF

3)  spins off Furniture Mart

4)  spins off NetJets

5)  spins of GEICO

6)  spins off this

7)  spins off that

8)  ...

 

This is not "next Berkshire" behavior.

 

Those are all businesses that Buffett hand-picked for Berkshire.  Lampert inherited much of what is under the SHLD umbrella.  Even if he spins stuff off it doesn't mean he won't keep the majority of businesses and/or buy other companies to bring into the fold.  And even if he doesn't, as long as he uses the money SHLD produces from monetization or improving operations to invest as he sees fit, well, I'll be a happy camper.

 

I view SHLD as a real estate company with an integrated retail component, and the strong possibility of being a permanent investment vehicle for one of the only people in the world I would let make investment decisions on my behalf.

[ERICOPOLY]

I don't think the thesis is a BRK redux until Lampert goes out and buys a stable, cash flow generating asset. He could have done this long ago via borrowing against the real estate (it's shocking he thought he could resuscitate a retailer after years of studying WEB) and diversifying into other lines of cash flow. Instead, he doubled down on retailing via buying back stock.

 

As a REIT, Seritage will have little in the way of discretionary cash flow, as 90% is dividended out, so doesn't seem like a very practical vehicle to build a BRK. Yes there are "taxable REIT subsidiaries", but Seritgae would have to issue stock to buy operating businesses, which would just dilute the REIT side of the company, thus resulting in a lower overall valuation for Seritage, which in turn results in more dilution as Lampert looks to grow the TRS side of the business. Likely not much debt capacity either, since it might be spun with debt and would certainly need debt to fund redevelopment.

 

If I were Lampert, I'd wind down ESL to the point of 100% ownership and just turn it into a holding company for his personal wealth. Hedge all of the SHLD securities, borrow against them and go out and buy a whole operating business that he could use as a BRK platform. Or what would be more fun is just start picking stocks again. He would have his own permanent capital ala Icahn and could take extremely long time horizons on distressed or underperforming assets.

 

He doesn't even need to wind down ESL.  Once his partners realize that ESL is 100% invested in SHLD, they would be fools not to walk away with their SHLD shares.  Why pay a management fee for investment in ESL partnership when all it gets you is investment in SHLD (which everyone else gets for free) -- or rather, you can at least earn lending income on your SHLD shares instead of paying Eddie a fee if they rise in value.

[ERICOPOLY]

Suppose Buffett started to spin off the various parts of Berkshire. 

 

1)  announces a spinoff of See's

2)  spins of BNSF

3)  spins off Furniture Mart

4)  spins off NetJets

5)  spins of GEICO

6)  spins off this

7)  spins off that

8)  ...

 

This is not "next Berkshire" behavior.

 

Those are all businesses that Buffett hand-picked for Berkshire.  Lampert inherited much of what is under the SHLD umbrella.  Even if he spins stuff off it doesn't mean he won't keep the majority of businesses and/or buy other companies to bring into the fold.  And even if he doesn't, as long as he uses the money SHLD produces from monetization or improving operations to invest as he sees fit, well, I'll be a happy camper.

 

I view SHLD as a real estate company with an integrated retail component, and the strong possibility of being a permanent investment vehicle for one of the only people in the world I would let make investment decisions on my behalf.

 

He once had billions in cash at SHLD.  Did he purchase a SINGLE new operating business with that cash?

 

So far, it looks like strategy:

a)  hedge fund manager buys company and uses all excess cash to purchase more of each productive piece (theory is that the market was only valuing SHLD based on it's productive pieces, so that's all he was buying)

b)  hedge fund manager strips it of it's productive assets piece by piece (via spinoffs)

c)  leaves only crappy retailer behind in the end

 

So it's just another company raided by a hedge fund to unlock value, leaving the carcass behind.

[Luke 532]

 

He doesn't even need to wind down ESL.  Once his partners realize that ESL is 100% invested in SHLD, they would be fools not to walk away with their SHLD shares.  Why pay a management fee for investment in ESL partnership when all it gets you is investment in SHLD (which everyone else gets for free) -- or rather, you can at least earn lending income on your SHLD shares instead of paying Eddie a fee if they rise in value.

 

Exactly.  If I was a partner in ESL I would get out, too.  It seems pretty obvious that he isn't spending much time doing anything other than selling off pretty much everything he owns.  Why not just cash out and then follow his lead... I mean if I'm invested in ESL I am because I like Lampert's investment acumen.  If he isn't (apparently) spending much time studying new possible investments, why stay in ESL?  I just don't see ESL being around for much longer, unless, as Eric states, Eddie just keeps 100% ownership.  Although I'm not sure if that provides advantages/disadvantages for him personally when compared to just investing his personal accounts.

[bmichaud]

I meant wind down ESL via let everyone just leave, then it's only Lampert remaining.

[Luke 532]

 

So it's just another company raided by a hedge fund to unlock value, leaving the carcass behind.

 

OK, so let's say he raids it, doesn't use it as a permanent vehicle, and shareholders are left with a sum-of-the-parts value for the shares they own.  Shareholders buying today still win.  THAT's the downside protection.  It'll take time but Lampert would have to either (1) panic, or (2) have lost all common sense, for a sum-of-the-parts (even if it takes a few years) to not provide meaningful returns for existing shareholders.

[ERICOPOLY]

 

So it's just another company raided by a hedge fund to unlock value, leaving the carcass behind.

 

OK, so let's say he raids it, doesn't use it as a permanent vehicle, and shareholders are left with a sum-of-the-parts value for the shares they own.  Shareholders buying today still win.  THAT's the downside protection.  It'll take time but Lampert would have to either (1) panic, or (2) have lost all common sense, for a sum-of-the-parts (even if it takes a few years) to not provide meaningful returns for existing shareholders.

 

See, it's back to my line of thinking that if the SHLD downside is secure, what's the most likely way to earn 2x your money in two years.  Is it to take the upside of SHLD or something else where the timeframe of upside is more visible?

 

That's all I was saying.  Then I was defending against the "miss the next Berkshire Hathaway" argument by showing how Eddie's spinoff strategy doesn't look at all like Berkshire Hathaway.

 

You don't start to build the mighty Amazon by diverting it's flows for irrigation.  What Eddie is doing bit by bit to SHLD looks more like it will create the mighty Colorado river (think about the mud trickle that actually reaches the ocean).

[Cardboard]

I have to agree with Ericopoly. IMO, if you can't figure out your upside, how it will occur and some timing then move on.

 

How much time have investors wasted already holding on to this thing? The opportunity cost is staggering.

 

The way the stock market works, there will be plenty of time to get in once the situation becomes clearer. There are always naysayers and investors happy to recuperate their initial capital on a pop that sellers will show up. Sure, you may miss the first 50% from here on some announcement but, it won't jump something like 300% in one day or right to true value for whatever it is. Then you will be able to move in with confidence and strike true gold.

 

Cardboard

[muscleman]

Suppose Buffett started to spin off the various parts of Berkshire. 

 

1)  announces a spinoff of See's

2)  spins of BNSF

3)  spins off Furniture Mart

4)  spins off NetJets

5)  spins of GEICO

6)  spins off this

7)  spins off that

8)  ...

 

This is not "next Berkshire" behavior.

 

Those are all businesses that Buffett hand-picked for Berkshire.  Lampert inherited much of what is under the SHLD umbrella.  Even if he spins stuff off it doesn't mean he won't keep the majority of businesses and/or buy other companies to bring into the fold.  And even if he doesn't, as long as he uses the money SHLD produces from monetization or improving operations to invest as he sees fit, well, I'll be a happy camper.

 

I view SHLD as a real estate company with an integrated retail component, and the strong possibility of being a permanent investment vehicle for one of the only people in the world I would let make investment decisions on my behalf.

 

He once had billions in cash at SHLD.  Did he purchase a SINGLE new operating business with that cash?

 

So far, it looks like strategy:

a)  hedge fund manager buys company and uses all excess cash to purchase more of each productive piece (theory is that the market was only valuing SHLD based on it's productive pieces, so that's all he was buying)

b)  hedge fund manager strips it of it's productive assets piece by piece (via spinoffs)

c)  leaves only crappy retailer behind in the end

 

So it's just another company raided by a hedge fund to unlock value, leaving the carcass behind.

 

Yeah. I also wondered why he did not buy any new operating business at all when he had billions of cash at first.

I think he made a mistake at that time, and then he made a bigger mistake putting that billions of cash to buy back SHLD shares above $100 later.

Now we have a cash strained business, so the only viable option is to spin off the good assets and let the retailer die.

But if this is the case, why put billions into SWY rewards? It does seem like he wants the transformation to succeed instead of the spin off and run plan.

[Luke 532]

How much time have investors wasted already holding on to this thing? The opportunity cost is staggering. 

 

But how does that impact the decision to invest today?  It doesn't.  Windshield vs rear-view mirror, right? Look at what Lampert has done in the past 18 months vs. the previous 8 years.

 

The way the stock market works, there will be plenty of time to get in once the situation becomes clearer. There are always naysayers and investors happy to recuperate their initial capital on a pop that sellers will show up. Sure, you may miss the first 50% from here on some announcement but, it won't jump something like 300% in one day or right to true value for whatever it is. Then you will be able to move in with confidence and strike true gold.

 

Cardboard

 

It comes back to the accumulation question.  If it pops 50% on something in the near term, then that is a TON less shares that you would otherwise have owned.  And if Lampert is able to compound the investment and value of SHLD like I think he's capable of, then that would even drive the point home further.  It's risky to me to assume the stock would fall back down on those that wanted to capture short-term gains... predicting vs pricing.  I guess it helps to mention that when I invest I try to make decisions with this in mind: "20 years from now, looking back, which decision would I have rather made today."

 

With that said, I do own a boatload of BAC and AIG and they are in a 3-way-tie for my largest holding (along with SHLD). 

[wisdom]

Those who keep saying he made a mistake buying back shares over 100 need to go back and look at facts:

 

from 2007 AR

 

As a retailer, Holdings’ primary source of operating cash flows is the sales of goods and services to

customers, while the primary use of cash in operations is to fund the purchase of merchandise inventories.

Holdings generated approximately $1.5 billion in operating cash flows during fiscal 2007, as compared to

$1.4 billion in fiscal 2006. The increase in net operating cash flows generated during fiscal 2007 as compared to

fiscal 2006 primarily reflects a cash inflow of $66 million related to merchandise inventories in 2007 versus cash

used of $835 million in 2006, offset by an increase in cash used for income and other taxes, as well as decreased

net income.

 

At that rate SHLD would be generating close to $14 per share in cashflow from operations. ESL unfortunately, did not have a crystal ball and did not know this is what the next few years would look like.

 

The decision was not that bad, based on the facts at that time.

[Cardboard]

"But how does that impact the decision to invest today?  It doesn't.  Windshield vs rear-view mirror, right? Look at what Lampert has done in the past 18 months vs. the previous 8 years."

 

It sure does because it could continue for another 5 years.

 

With BAC and AIG, you know where they are trying to go. The odds are quite high that they will get there with the only obstacle being the economy which would also affect SHLD negatively. Despite that being obvious, they still trade cheaply. Don't you think that SHLD will also trade cheaply after all these negative years once the obvious becomes visible?

 

Cardboard

[ERICOPOLY]

It does seem like he wants the transformation to succeed instead of the spin off and run plan.

 

They're not mutually exclusive.  Maybe he just wants the bag left behind (the retailer) to have value.

 

It doesn't mean he isn't going to spin off everything else.

 

Why spin off Land's End if his goal is to build the next Berkshire Hathaway?  Huh?  Makes no damn bit of sense.

[ERICOPOLY]

I believe he said something to the effect of being entitled to earn an acceptable return on each asset.

 

Spin off the retailer, today?  Seriously?  It would go bust immediately.

 

He can only give it the old college try with SYW to turn it around so he isn't remembered as the asshole who fired everyone.  And he stands to benefit if it works out -- he might even believe that it will.  He preserves jobs by shrinking the square footage of the store occupied by the existing bare-bones staff of the retailer (the smaller store, by comparison, appears to be well staffed).  The rest of the real estate, he can spin off in Seritage to earn an acceptable return.

 

Once the retail transformation is complete (standing on it's own), everything else remaining can be spun off/liquidated.  Any and all real estate not consumed by the retailer can then be monetized (by redevelopment or otherwise).

 

So the strategy is simply:

1) shrink the real estate needs of the retailer via SYW strategy  (and redevelop or otherwise monetized the freed-up real estate)

2) deconglomerate via spinoffs

3) if 1 succeeds he not only makes more money (from the retailer), but avoids looking like the jerk who fired everyone for a quick liquidation

[wisdom]

As far as spin offs and buybacks are concerned in my opinion ESL behaves more like Singleton than Buffett.

 

If the shares ever get overvalued - like Singelton I expect him to use shares as currency for purchases.

[bmichaud]

Cardboard,

 

Ur last post makes the case for SHLD right now. SHLD right now is BAC and AIG between 5 and 8 and 25 and 30. The capital raising and cost cutting were obvious for BAC at those prices, and the massive buyback program was obvious for AIG at those prices....yet the market was late to the party that everyone here had already toasted to.

 

The SOTP valuation is a no brainer and Lampert is moving rapidly to break it up....yet the market doesn't care. Once SHLD is at $100, it will be more akin to BAC and AIG at their current levels. Still very undervalued based on the work remaining to develop the Seritage REIT, but not at the extreme discount caused by a seemingly unstoppable cancerous retail tumor.

 

I'm actually quite surprised ur not more on board with this idea at these levels given your event-oriented nature, the recent sell-off and on going proof Lampert is moving to liquidate (in the form of the Canadian real estate sales, Seritage, lands end and the warranty business).

[hyten1]

folks was there ever any indication from lampert himself that he wants a brk like vehicle? like articles, interviews, during annual meeting that he might of mention or stated?

 

hy

[Aberhound]

I believe he said something to the effect of being entitled to earn an acceptable return on each asset.

 

Spin off the retailer, today?  Seriously?  It would go bust immediately.

 

He can only give it the old college try with SYW to turn it around so he isn't remembered as the asshole who fired everyone.  And he stands to benefit if it works out -- he might even believe that it will.  He preserves jobs by shrinking the square footage of the store occupied by the existing bare-bones staff of the retailer (the smaller store, by comparison, appears to be well staffed).  The rest of the real estate, he can spin off in Seritage to earn an acceptable return.

 

Once the retail transformation is complete (standing on it's own), everything else remaining can be spun off/liquidated.  Any and all real estate not consumed by the retailer can then be monetized (by redevelopment or otherwise).

 

So the strategy is simply:

1) shrink the real estate needs of the retailer via SYW strategy  (and redevelop or otherwise monetized the freed-up real estate)

2) deconglomerate via spinoffs

3) if 1 succeeds he not only makes more money (from the retailer), but avoids looking like the jerk who fired everyone for a quick liquidation

 

I agree this is the strategy. I sold because I believe that the retail losses will escalate due to a poorer middle class, the deteriorating stores, the difficulty closing and moving inventory of numerous stores, and the expectation that Amazon will smell blood and pull out all stops to destroy a potential competitor. I read what happened to the diapers company who tried to compete then sold out to Amazon. I also expect a downturn in 2014 so the stock price downside on any weakness will be magnified. Further, Sears and Kmart no doubt has a lot of dog stores which will cause large losses when they are closed. If Lambert has to step up the closures due to a worsening retail situation will he be forced to incur losses which arise from breaking leases? After the painful transition of the retail business is accomplished, the stock will be a good buy depending what Lambert does with Seritage. Seritage is the undervalued jewel so if it is spun out the better strategy might be to buy only Sertiage upon the spin out.

[Luke 532]

folks was there ever any indication from lampert himself that he wants a brk like vehicle? like articles, interviews, during annual meeting that he might of mention or stated?

 

hy

 

He's not the type to overtly say it, but here's one quote that comes to mind...

 

http://money.cnn.com/2006/02/03/news/companies/investorsguide_lampert/index.htm

Could Sears Holdings evolve into another Berkshire Hathaway? "One of the unspoken secrets about business leaders is that they often have no idea about where they're going to end up," Lampert says coyly. "I know the right direction. Whether we end up at the destination -- rebuilding Sears Holdings into a great company on many dimensions -- I don't know. But we're headed in that direction."

[peridotcapital]

Suppose Buffett started to spin off the various parts of Berkshire. 

 

1)  announces a spinoff of See's

2)  spins of BNSF

3)  spins off Furniture Mart

4)  spins off NetJets

5)  spins of GEICO

6)  spins off this

7)  spins off that

8)  ...

 

This is not "next Berkshire" behavior.

 

Those are all businesses that Buffett hand-picked for Berkshire.  Lampert inherited much of what is under the SHLD umbrella.  Even if he spins stuff off it doesn't mean he won't keep the majority of businesses and/or buy other companies to bring into the fold.  And even if he doesn't, as long as he uses the money SHLD produces from monetization or improving operations to invest as he sees fit, well, I'll be a happy camper.

 

I view SHLD as a real estate company with an integrated retail component, and the strong possibility of being a permanent investment vehicle for one of the only people in the world I would let make investment decisions on my behalf.

 

He once had billions in cash at SHLD.  Did he purchase a SINGLE new operating business with that cash?

 

So far, it looks like strategy:

a)  hedge fund manager buys company and uses all excess cash to purchase more of each productive piece (theory is that the market was only valuing SHLD based on it's productive pieces, so that's all he was buying)

b)  hedge fund manager strips it of it's productive assets piece by piece (via spinoffs)

c)  leaves only crappy retailer behind in the end

 

So it's just another company raided by a hedge fund to unlock value, leaving the carcass behind.

 

Yeah. I also wondered why he did not buy any new operating business at all when he had billions of cash at first.

I think he made a mistake at that time, and then he made a bigger mistake putting that billions of cash to buy back SHLD shares above $100 later.

Now we have a cash strained business, so the only viable option is to spin off the good assets and let the retailer die.

But if this is the case, why put billions into SWY rewards? It does seem like he wants the transformation to succeed instead of the spin off and run plan.

 

The realization that buying other businesses was really not in the cards is what made me sell my position years ago (I paid around 50 for Kmart stock and believed he would use the cash flow to diversify away from the dying Sears/Kmart assets. I remember in 2007 when he bid for Restoration Hardware. At the time I said to myself, "ok, this is it, this is the start of the master plan and it is going to work out very well for many, many years." Then he gave up pretty easily on RH (it didn't seem like he really wanted it all that much). At that point I threw in the towel and sold. Haven't owned it since. Interestingly, RH sold out to the PE firm for $175M in 2008. They turned the business around and IPO'd again this year (business is on fire, comp store sales up 30% last quarter). RH's current market cap is $2.5B (about half of that of SHLD). I can only imagine where the SHLD stock would be today...

 

 

[peridotcapital]

Those who keep saying he made a mistake buying back shares over 100 need to go back and look at facts:

 

from 2007 AR

 

As a retailer, Holdings’ primary source of operating cash flows is the sales of goods and services to

customers, while the primary use of cash in operations is to fund the purchase of merchandise inventories.

Holdings generated approximately $1.5 billion in operating cash flows during fiscal 2007, as compared to

$1.4 billion in fiscal 2006. The increase in net operating cash flows generated during fiscal 2007 as compared to

fiscal 2006 primarily reflects a cash inflow of $66 million related to merchandise inventories in 2007 versus cash

used of $835 million in 2006, offset by an increase in cash used for income and other taxes, as well as decreased

net income.

 

At that rate SHLD would be generating close to $14 per share in cashflow from operations. ESL unfortunately, did not have a crystal ball and did not know this is what the next few years would look like.

 

The decision was not that bad, based on the facts at that time.

 

Despite positive cash flow, same store sales were declining and anyone could have told you that Sears and Kmart were dying a slow death as retail brands. Of course, Eddie is the last person to understand the typical Kmart/Sears shopper and likely has never bought a think from them in his life (much like Ron Johnson at JCP). While  he should not have known that $1.5B in OCF would evaporate, he should have know that his brands were melting like an ice cube and he should have known that he needed to diversify his asset base. Now its 6 years later and he still doesn't get it. Not good.