SHLDQ - Sears Holdings Corp

[Guest hellsten]

Well said. The "ALSO" is the key. If they can get to the point where there is strong evidence that the retail side can make a little bit of money (e.g. several hundred million of annual free cash flow consistently) and it is sustainable, I will be on the SHLD equity bandwagon. Until they get there, however, the asset monetizations are just replenishing the capital lost by the retail side... no shareholder value is realized and the intrinsic value per share gets smaller (fewer assets, same number of shares).

 

What would Peter Lynch do?

Fifth, seek evidence before you invest in a turnaround. Peter Lynch does not shy away from turnarounds, as they can produce spectacular investment returns. However, he warns of the difficulties facing businesses that undergo a turnaround. Lynch admonishes us not to take success for granted in a turnaround, but rather to wait for some evidence that the turnaround is likely to succeed.

http://www.beyondproxy.com/peter-lynch/

 

Maybe he would ask himself "Are we there yet?". I would also ask myself if Sears is the exception to the rule.

 

Interesting to see that Chou Opportunity has a 26.5% position in Sears:

http://www.chouamerica.com/Opportunity.html#FE0

[heth247]

not sure if this has been posted somewhere on the site, but bishop research and analytics just came out with part two of their valuation of SHLD on seeking alpha today:

 

http://seekingalpha.com/article/1900481-sears-holdings-valuation-part-two-credit-flows-for-subsidiaries-inside-a-permanently-embedded-capital-structure?source=feed

 

It has been posted earlier today but been flushed away by a long string of posts on options trading strategy.

[JBird]

SHLD trades at approximately $44 today.

 

Suppose you have $44 in cash.

 

The Feb $44 put contract can be written for $5.35 bid.

The Feb $44 call contract can be purchased for $4.70 ask.

 

The call is cheaper than the put.

 

The upside is cheaper than the downside.  So for every $1 of downside you write, you can purchase more than $1 of upside.

 

Luke is getting penny wise and pound foolish by thinking it will be better to just pocket the premium from the put and invest it in the common.  It looks more profitable than putting it in the call if the price of SHLD stagnates and the call premium deteriorates.  But he also thinks the stock is worth like $200+, so the day the stock hits that price the real cost of his strategy will be plain to see.  Except he then asks how he could possibly be losing out if the stock is up $200.

 

I don't know, perhaps he expects the stock to stagnate forever -- that's where his strategy is optimal.  But it doesn't mesh with his other comments on SHLD where he doesn't want to part with it for $60.

 

Simple enough, thanks. As long as these conditions exist doesn't it make sense to buy the synthetic long rather than just buy the stock?

[constructive]

Except if the market even SUSPECTS evidence a retail turnaround combined with a decent ROI on their real estate the stock will be 2x to 3x higher than it is today. (BIG IF OF COURSE).

 

Regarding deleveraging -- if you are like me and look at the pension obligations and the operating lease commitments in the future as debt, they have been deleveraging and in a big way.

 

Liability reductions have been accompanied by asset sales, declining revenue and spinoffs, so they have not been deleveraging on any metric I see.

[ScottHall]

not sure if this has been posted somewhere on the site, but bishop research and analytics just came out with part two of their valuation of SHLD on seeking alpha today:

 

http://seekingalpha.com/article/1900481-sears-holdings-valuation-part-two-credit-flows-for-subsidiaries-inside-a-permanently-embedded-capital-structure?source=feed

 

Thanks, Luck.

 

Yeah, most of us have seen it. I think it's really disappointing, personally. It's not quite garbage because there's some stuff there those who aren't familiar with Sears may not know, but it adds basically nothing to those of us who have read the credit agreements.

 

And a lot of it is, as Kraven says, filler. That stuff is entirely useless.

[Guest wellmont]

Except if the market even SUSPECTS evidence a retail turnaround combined with a decent ROI on their real estate the stock will be 2x to 3x higher than it is today. (BIG IF OF COURSE).

 

Regarding deleveraging -- if you are like me and look at the pension obligations and the operating lease commitments in the future as debt, they have been deleveraging and in a big way.

 

Liability reductions have been accompanied by asset sales, declining revenue and spinoffs, so they have not been deleveraging on any metric I see.

 

you are correct sir. the bonds are weaker now, after this "de-leveraging," than they have been in years. Of course, the retail operations have been headed due south for over two years. It looks to me like eddie is creating equity vehicles that are going to survive and live on, and leaving open questions in the holding company, which puts doubt in the minds of creditors. He also dropped his holdings under 50% prompting further questions into his motives.

[Luke 532]

What would Peter Lynch do?

Fifth, seek evidence before you invest in a turnaround. Peter Lynch does not shy away from turnarounds, as they can produce spectacular investment returns. However, he warns of the difficulties facing businesses that undergo a turnaround. Lynch admonishes us not to take success for granted in a turnaround, but rather to wait for some evidence that the turnaround is likely to succeed.

 

Maybe he would ask himself "Are we there yet?". I would also ask myself if Sears is the exception to the rule.

 

From the blog of one of the COB&F users I respect most, PlanMaestro:

"Now, if they decide to liquidate abruptly or in willful steps … well, that’s not a turnaround."

http://variantperceptions.wordpress.com/2012/12/04/buffett-on-the-imperfect-turnaround/

 

Since SHLD is liquidating some of their locations perhaps SHLD is the exception.

 

Also, muscleman mentioned this awhile back...

I once read some article or book recommended by PlanMaestro, which mentioned that over 66% or so successful turnarounds come from closing unprofitable operations and keep the profitable ones run. SHLD seems to be on this track.

 

Interesting to see that Chou Opportunity has a 26.5% position in Sears:

http://www.chouamerica.com/Opportunity.html#FE0

 

Chou Associates increased to 803,526 shares (from 683,700) in Q3.

[ERICOPOLY]

I don't know, perhaps he expects the stock to stagnate forever -- that's where his strategy is optimal.  But it doesn't mesh with his other comments on SHLD where he doesn't want to part with it for $60.

 

Of course I don't expect the stock to stagnate forever, but the point of the trade is to get PAID in case it does (I don't have your gift of being a master timer of the market, but I like to profit regardless).  My original post on this topic is below... the entire point of the trade is that it "pays you for waiting" for the SHLD thesis to play out.

 

I completely understand the mentality because I've been there before.  I have, however, been cured of that disease.  Imagine how it would feel to write WFC puts in March 2009 at the bottom, making 50% yield.  The "genius" of the strategy wears off after the stock is up 200% in 6 months.  Believe me, it's at that time that you know who the patsy is.

 

Lending your shares is a way to get paid to wait, and also fully profit all the way to $200+, but you aren't doing that. 

 

The reason why you are getting such a high put premium is BECAUSE of the high lending fees.  It keeps the put/call out of parity, with the puts being the more expensive of the two.

 

So why don't you get paid to wait that way?

 

 

[Luke 532]

I completely understand the mentality because I've been there before.  I have, however, been cured of that disease.  Imagine how it would feel to write WFC puts in March 2009 at the bottom, making 50% yield.  The "genius" of the strategy wears off after the stock is up 200% in 6 months.  Believe me, it's at that time that you know who the patsy is.

 

Remember, the point of the strategy is to get paid IF the stock doesn't move.  Unlikely, yes, I'm aware.  I have 30% of my portfolio in common so don't worry about me being too upset for just getting an extra X number of shares by reinvesting the put premium.

 

Lending your shares is a way to get paid to wait, and also fully profit all the way to $200+, but you aren't doing that. 

 

The reason why you are getting such a high put premium is BECAUSE of the high lending fees.  It keeps the put/call out of parity, with the puts being the more expensive of the two.

 

So why don't you get paid to wait that way?

 

This reason for one (although the possibility is likely remote)...

"We have recently stopped lending out our shares because we are increasingly concerned that there could be a fail-to-deliver problem if there happens to be a short squeeze based on the market better recognizing the company’s underlying value as a result of real estate deals..."

http://www.oldwestim.com/files/media/Download%20this%20site/Commentaries%20and%20Investor%20Letters%202013.02.04.pdf

[ERICOPOLY]

I completely understand the mentality because I've been there before.  I have, however, been cured of that disease.  Imagine how it would feel to write WFC puts in March 2009 at the bottom, making 50% yield.  The "genius" of the strategy wears off after the stock is up 200% in 6 months.  Believe me, it's at that time that you know who the patsy is.

 

Remember, the point of the strategy is to get paid IF the stock doesn't move.  Unlikely, yes, I'm aware.  I have 30% of my portfolio in common so don't worry about me being too upset for just getting an extra X number of shares by reinvesting the put premium.

 

Lending your shares is a way to get paid to wait, and also fully profit all the way to $200+, but you aren't doing that. 

 

The reason why you are getting such a high put premium is BECAUSE of the high lending fees.  It keeps the put/call out of parity, with the puts being the more expensive of the two.

 

So why don't you get paid to wait that way?

 

This reason for one (although the possibility is likely remote)...

"We have recently stopped lending out our shares because we are increasingly concerned that there could be a fail-to-deliver problem if there happens to be a short squeeze based on the market better recognizing the company’s underlying value as a result of real estate deals..."

http://www.oldwestim.com/files/media/Download%20this%20site/Commentaries%20and%20Investor%20Letters%202013.02.04.pdf

 

I once lent FFH shares at Charles Schwab.  I was issued a letter of credit from ANZ bank as insurance against counterparty default.

 

So, not sure why they can't arrange the same.

 

[plato1976]

http://finance.yahoo.com/blogs/daily-ticker/the-worst-ceos-of-2013--according-to-dartmouth-business-professor-sydney-finkelstein-145035471.html

 

cheers

 

I completely understand the mentality because I've been there before.  I have, however, been cured of that disease.  Imagine how it would feel to write WFC puts in March 2009 at the bottom, making 50% yield.  The "genius" of the strategy wears off after the stock is up 200% in 6 months.  Believe me, it's at that time that you know who the patsy is.

 

Remember, the point of the strategy is to get paid IF the stock doesn't move.  Unlikely, yes, I'm aware.  I have 30% of my portfolio in common so don't worry about me being too upset for just getting an extra X number of shares by reinvesting the put premium.

 

Lending your shares is a way to get paid to wait, and also fully profit all the way to $200+, but you aren't doing that. 

 

The reason why you are getting such a high put premium is BECAUSE of the high lending fees.  It keeps the put/call out of parity, with the puts being the more expensive of the two.

 

So why don't you get paid to wait that way?

 

This reason for one (although the possibility is likely remote)...

"We have recently stopped lending out our shares because we are increasingly concerned that there could be a fail-to-deliver problem if there happens to be a short squeeze based on the market better recognizing the company’s underlying value as a result of real estate deals..."

http://www.oldwestim.com/files/media/Download%20this%20site/Commentaries%20and%20Investor%20Letters%202013.02.04.pdf

 

I once lent FFH shares at Charles Schwab.  I was issued a letter of credit from ANZ bank as insurance against counterparty default.

 

So, not sure why they can't arrange the same.

[RichardGibbons]

I completely understand the mentality because I've been there before.  I have, however, been cured of that disease.  Imagine how it would feel to write WFC puts in March 2009 at the bottom, making 50% yield.  The "genius" of the strategy wears off after the stock is up 200% in 6 months.  Believe me, it's at that time that you know who the patsy is.

 

Lending your shares is a way to get paid to wait, and also fully profit all the way to $200+, but you aren't doing that. 

 

The reason why you are getting such a high put premium is BECAUSE of the high lending fees.  It keeps the put/call out of parity, with the puts being the more expensive of the two.

 

So why don't you get paid to wait that way?

 

I think that this is a good approach for SHLD, and it has worked for me.  Several times, I've converted from a long to a synthetic long because I could get paid 15%-20% a year to do so.

 

When it hit $30 in 2012, I also did something like a synthetic long, but with different strike prices, at the money for the short put, out of the money for the long calls (to increase the leverage).  That worked out pretty well, much better than the puts alone would have.  That said, this is just anecdotal evidence.

 

The main downsides of the synthetic long compared to the actual long are:

[*]You're more likely to have taxable events periodically

[*]It's hard to get out of the position at anything other than expiration of the options.  Otherwise, spreads will kill you.  If you're confident that you want to own the shares for at least the duration of the options, it's not a big deal.  But things do change.

 

[20ppy]

A little change of subject ---

 

Why wouldn't Eddie have wanted to wait a little longer to liquidate the RE assets to a time when the anticipated high inflation materializes? By then, the RE values would fly as high as the inflation. I hold RE properties for ths reason and this reason only for the next forseeable period of time. There are excess money all around and high inflation may not be too far down the road.

[ZenaidaMacroura]

A little change of subject ---

 

Why wouldn't Eddie have wanted to wait a little longer to liquidate the RE assets to a time when the anticipated high inflation materializes? By then, the RE values would fly as high as the inflation. I hold RE properties for ths reason and this reason only for the next forseeable period of time. There are excess money all around and high inflation may not be too far down the road.

At the risk of being witty, why wouldn't you wait a little longer to buy shld, such as the time right before the share price moves up dramatically?  ;)

[Luke 532]

Off-topic... does anybody else live in Northern Virginia?  One other member and I have met a couple times in the past few months for breakfast to discuss SHLD and value investing in general.  Send a private message if you'd like.

[Luke 532]

There's been a good amount of discussion as to whether or not it makes sense to invest now vs. waiting.  Pages 52-53 of Baker Street's report asks and answers some common questions... it's an interesting Q&A on those two pages.  Here's the part on "Catalysts"...

 

Consensus: Nothing is happening inside Sears to realize the value of its separate pieces.

 

Reality: Real Estate value is being actively monetized through sales and in house redevelopment.

 

Consensus: Even if SHLD is worth more, why do I have to own it now?

 

Reality: Sears has spun off two large assets in the past 12 months and is evaluating business unit recapitalizations and strategic alternatives.

 

Personally, I just sleep better at night when I know I have X shares in a company that I really want to own for the long-haul.  It might sound perverse, but the tradeoff of potentially losing $5, $10, $15 per share in the interim is worth ensuring that I have those shares in my back-pocket (full-disclosure: my average price is $49.xx).  I have a bad habit of being early, but that also has helped me to develop the habit of always having a full position (and not only getting half) when a given thesis plays out.  Eddie has a history in his investing career of making surprising moves and I wouldn't discount his ability to do the same with SHLD.

[ScottHall]

Off-topic... does anybody else live in Northern Virginia?  One other member and I have met a couple times in the past few months for breakfast to discuss SHLD and value investing in general.  Send a private message if you'd like.

 

I do, unfortunately. By the nearly abandoned mall in Alexandria.

[wisdom]

http://www.bloomberg.com/news/2013-12-17/sears-may-close-more-stores-amid-urban-retreat-corporate.html?cmpid=yhoo

 

- retreat to rural and suburban markets - target middle class families

- align costs with drop in revenue

- sell properties where it  makes sense

[Luke 532]

Cohen, former CEO of Sears Canada, coming up on CNBC.  I'm sure he'll have some choice words about Lampert.

 

Video earlier this year with Cohen...

http://www.bloomberg.com/video/sears-in-death-spiral-under-lampert-cohen-says-Y~K9HiLBTO2kWNnM8dmv4g.html

 

2-minute mark in June 2013: “He has a viable strategy for himself and he has done a brilliant job of stripping the assets of the enterprise since he’s taken over.  So he’s doing fine, he and his cohorts will come away with tremendous gains.”

 

Watch the video and you’ll get a sense of how much Cohen loathes Lampert.  It sounds an awful lot like Cohen is just crying because he knows Sears as we know it today won’t exist in the same form in the future.  But it’s pretty telling that he knows that Lampert will make tremendous gains.  As a capitalistic investor (shareholders), the latter should be more important than the former.  As a man (Cohen) whose very profession depends on the current format being preserved, you can see why he wants to preserve the status quo and has a heavy dislike for the capitalistic Lampert. 

[20ppy]

A little change of subject ---

 

Why wouldn't Eddie have wanted to wait a little longer to liquidate the RE assets to a time when the anticipated high inflation materializes? By then, the RE values would fly as high as the inflation. I hold RE properties for ths reason and this reason only for the next forseeable period of time. There are excess money all around and high inflation may not be too far down the road.

At the risk of being witty, why wouldn't you wait a little longer to buy shld, such as the time right before the share price moves up dramatically?  ;)

 

If the average store sales decline 3% annually, but the RE value increases by 5% also annually, why liquidate fast?

 

 

 

 

[Luke 532]

Whole Foods co-CEO's said today "I think we're thinking internally that we can do maybe 1,200 stores in the united states at this point, yeah. just because the world is continuing to change. that's an exclusive sound bite he just gave you because we haven't said that before. thank you very much. i got it from him. there's a road map out there that looks to us like there's -- all these markets are available to us and we're going to go for it."

http://video.cnbc.com/gallery/?video=3000226761

 

Just speculation, of course, but they do have a relationship with SHLD.  Wonderful, now I have to set up a Google news alert for Whole Foods and watch my inbox get flooded.  :P

[merkhet]

 

Whole Foods co-CEO's said today "I think we're thinking internally that we can do maybe 1,200 stores in the united states at this point, yeah. just because the world is continuing to change. that's an exclusive sound bite he just gave you because we haven't said that before. thank you very much. i got it from him. there's a road map out there that looks to us like there's -- all these markets are available to us and we're going to go for it."

 

http://video.cnbc.com/gallery/?video=3000226761

 

Just speculation, of course, but they do have a relationship with SHLD.  Wonderful, now I have to set up a Google news alert for Whole Foods and watch my inbox get flooded.  :P

 

 

That's rather interesting given that they're only at 362 stores as of 9/2013. (http://www.wholefoodsmarket.com/sites/default/files/media/Global/Company%20Info/PDFs/WFM-2013-10-K.pdf) -- Page 5

[heth247]

I just read the Bishop's second report again last night. So far the comments on this board is that it is a disappointment because he did not go into details on topic such as guarantor/non-guarantor. But I am surprised that no more comments on the new view that he is offering in the report.

 

We have been guessing what Eddie's plan is, most popular thinking is selling off the RE, wind down ESL and then sort of make SHLD as a permanent vehicle to invest. But according to Bishop's second report, these are not in the cards (at least not in the short term). The credit agreement has limited how fast Eddie can sell off inventory and close stores, and ESL has been playing an important role as a "lubricant" for the capital flow among SHLD's various parts. The "grand plan" of Eddie, is to use his "financial economist" side to provide cheap capital for the transformation of the retail, then we can talk about big monetizing of RE.

 

Although nobody knows what Eddie's truly plan (might be evolving as well) is, but I do think Bishop's view does align with what Eddie is currently doing. Thoughts?

[bmichaud]

Couple of interesting comps for Seritage:

 

1. GGP trades at approximately $260/SF on an EV/SF basis. Assuming Seritage is worth $200/SF, "fair" enterprise value is $13.6B, and the fair equity value is $8.2B assuming debt of $80/SF, or ~$76 per share.

 

2. ARCP, COLE and GGP generate approximately $8/SF of adjusted funds from operations. GGP trades at a 5% dividend yield assuming a "normalized" payout of 80% of AFFO. At $8/SF, Seritage would generate ~$552MM of AFFO - at an 80% payout and 5% "fair value" dividend yield, the equity fair value is ~$83 per share.

 

Using #1 above, I come up with a SHLD SOTP valuation of ~$77. I use Baker's estimates for Brands, Home, Auto, remaining real estate, SHLD's share of SCC market cap and the to-be-paid dividend, adj. working capital, my FV estimate for Lands End (8X $150MM EBITDA), book value of debt and pension and lastly, $3.3B estimate cost to wind down the 1636 non-core properties.

 

Upside to this estimate:

 

1. Lower than estimated all-in cost to liquidate unprofitable stores (not just the wind down costs but also the losses incurred getting to the wind down point)

2. Accretive debt buybacks

3. Reduction in the pension via rising rates

4. Seritage's EV/SF multiple rising from $200

5. Lower-than-estimated Seritage development costs, currently estimated at $80/SF. Perhaps future tenants will fund redevelopment? Or at least help? Not sure.

SHLD_SOTP_-_Corner.pdf

[Luke 532]

Thanks for that work, bmichaud.

5. Lower-than-estimated Seritage development costs, currently estimated at $80/SF. Perhaps future tenants will fund redevelopment? Or at least help? Not sure.

 

Not sure if this is apples and oranges, but Parsad mentioned this awhile back.  Could be setting a good precedent?

They are selling 50% of the land for $140M, and will not be responsible for raising the capital for the project.  They would be lucky if they made $140M net profit from that store over the next 15-20 years!  Cheers!