SHLDQ - Sears Holdings Corp

[BTShine]

bmichaud,

 

Another potential upside is keeping profitable stores open.  I know there may not be many profitable stores, but it's possible 25% of their stores are worth more as operating entities than redeveloped/sold real estate. 

[merkhet]

Apologies in advance -- I didn't think this post would end up so long before I started typing...

 

Interesting to play around with the Bloomberg Industry Leaderboard this morning. (http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/bloomberg-industry-leaderboard/)

 

Check out Department Stores (http://www.bloomberg.com/visual-data/industries/detail/department-stores)

 

North America Market Share:

#1 Macy's  @ 23.4%

#2 Sears    @ 21.4%

 

Sales per Sq. Ft. - Median @ $174

Macy's        @ $183

Sears          @ $165

JC Penney    @ $117

 

Sales per Employee - Median $166,255

Macy's        @ $157,575

Sears          @ $162,008

JC Penney    @ $111,940

 

So I’m looking at these numbers, and I’m batting around various thoughts.

 

(1) Sears has too much real estate -- it’s possible, but based on the sales per square foot comparisons, it seems to be roughly in the same shape as everyone else. It’s possible that Sears’ sales per square foot is more dumbbell shaped with really productive areas and very unproductive areas.

 

(2) No one shops at Sears -- well, with 21.4% market share, someone obviously does.

 

(3) Sears just has an uncompetitive cost structure -- perhaps. Open up the following three pages in your browser tabs and make sure you're looking at percentages:

 

http://financials.morningstar.com/income-statement/is.html?t=SHLD&region=USA&culture=en-US

http://financials.morningstar.com/income-statement/is.html?t=M&region=USA&culture=en-US

http://financials.morningstar.com/income-statement/is.html?t=JCP&region=USA&culture=en-US

 

Look at the operating expenses for 2012:

 

Sears      @ 28.48%

Macy's      @ 30.65%

JC Penney @ 41.40% -- might be more instructive to look at JCP pre-Johnson

 

It's interesting to compare SHLD's advertising costs from its 2012 10-K to Macy's advertising costs in 2012.

 

Sears: http://www.searsholdings.com/invest/financial_info.htm

"Advertising costs are expensed as incurred, generally the first time the advertising occurs, and amounted to $1.6 billion, $1.9 billion and $2.0 billion for 2012, 2011 and 2010, respectively. These costs are included within selling and administrative expenses in the accompanying Consolidated Statements of Operations."

 

Macy's: http://www.macysinc.com/Assets/docs/for-investors/annual-report/2012_ar.pdf

"Advertising expense, net of cooperative advertising allowances, was $1,181 million for 2012 compared to $1,136 million for 2011."

 

That's a lot more advertising even if you adjust it for the fact that Sears has $40 billion in revenue versus Macy's $28 billion in revenue.

 

Clearly the problem rests at the COGS line:

Sears      @ 73.62%

Macy's      @ 59.73%

JC Penney  @ 68.69%

 

Here are the relevant descriptions for COGS for Sears, Macy's and JC Penney

 

Sears:

"Cost of sales, buying and occupancy are comprised principally of the costs of merchandise, buying, warehousing and distribution (including receiving and store delivery costs), retail store occupancy costs, product repair, and home service and installation costs, customer shipping and handling costs, vendor allowances, markdowns and physical inventory losses.

 

The Company has a SHOP YOUR WAY program in which customers earn points on purchases which may be redeemed to pay for future purchases. The expense for customer points earned is recognized as customers earn them and recorded in cost of sales."

 

Macy's:

"Cost of sales consists of the cost of merchandise, including inbound freight, and shipping and handling costs. An estimated allowance for future sales returns is recorded and cost of sales is adjusted accordingly."

 

JC Penney: http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MTc2ODI5fENoaWxkSUQ9LTF8VHlwZT0z&t=1

"Cost of goods sold includes all costs directly related to bringing merchandise to its final selling destination. These costs include the cost of the merchandise (net of discounts or allowances earned), sourcing and procurement costs, buying and brand development costs, including buyers’ salaries and related expenses, royalties and design fees, freight costs, warehouse operating expenses, merchandise examination, inspection and testing, store merchandise distribution center expenses, including rent, and shipping and handling costs incurred for sales via the Internet."

 

It looks like JC Penney is putting some salaries in COGS whereas Macy's & Sears do not, so that might explain some of the increase in COGS between JC Penney and Macy's...

 

...but I'm really struggling to see what accounts for the almost 5% differential between JC Penney & Sears?  Keep in mind that Sears ran a (2.1%) operating loss in 2012.

 

The only thing that I can think of is greater discounting either via SYW or regular markdowns. However, is Sears really marking things down that much more than JC Penney?

 

Let's ask the question another way.

 

To some extent, SYW is a technological buildout. Let's say Eddie was a shady CEO and capitalized his SYW expenses despite SYW being correctly recognized as they occur in COGS.  Would that have allowed Sears to be profitable?

 

Then the next question is -- does Sears really need $1.6 billion in advertising spend + X million in SYW points to keep people coming into the store? On the one hand, SSS keep dropping despite that spend, so maybe -- but on the other hand... maybe not?

 

Thoughts?

[peridotcapital]

Apologies in advance -- I didn't think this post would end up so long before I started typing...

 

Interesting to play around with the Bloomberg Industry Leaderboard this morning. (http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/bloomberg-industry-leaderboard/)

 

Check out Department Stores (http://www.bloomberg.com/visual-data/industries/detail/department-stores)

 

North America Market Share:

#1 Macy's  @ 23.4%

#2 Sears    @ 21.4%

 

Sales per Sq. Ft. - Median @ $174

Macy's        @ $183

Sears          @ $165

JC Penney    @ $117

 

Sales per Employee - Median $166,255

Macy's        @ $157,575

Sears          @ $162,008

JC Penney    @ $111,940

 

So I’m looking at these numbers, and I’m batting around various thoughts.

 

(1) Sears has too much real estate -- it’s possible, but based on the sales per square foot comparisons, it seems to be roughly in the same shape as everyone else. It’s possible that Sears’ sales per square foot is more dumbbell shaped with really productive areas and very unproductive areas.

 

(2) No one shops at Sears -- well, with 21.4% market share, someone obviously does.

 

(3) Sears just has an uncompetitive cost structure -- perhaps. Open up the following three pages in your browser tabs and make sure you're looking at percentages:

 

http://financials.morningstar.com/income-statement/is.html?t=SHLD&region=USA&culture=en-US

http://financials.morningstar.com/income-statement/is.html?t=M&region=USA&culture=en-US

http://financials.morningstar.com/income-statement/is.html?t=JCP&region=USA&culture=en-US

 

Look at the operating expenses for 2012:

 

Sears      @ 28.48%

Macy's      @ 30.65%

JC Penney @ 41.40% -- might be more instructive to look at JCP pre-Johnson

 

It's interesting to compare SHLD's advertising costs from its 2012 10-K to Macy's advertising costs in 2012.

 

Sears: http://www.searsholdings.com/invest/financial_info.htm

"Advertising costs are expensed as incurred, generally the first time the advertising occurs, and amounted to $1.6 billion, $1.9 billion and $2.0 billion for 2012, 2011 and 2010, respectively. These costs are included within selling and administrative expenses in the accompanying Consolidated Statements of Operations."

 

Macy's: http://www.macysinc.com/Assets/docs/for-investors/annual-report/2012_ar.pdf

"Advertising expense, net of cooperative advertising allowances, was $1,181 million for 2012 compared to $1,136 million for 2011."

 

That's a lot more advertising even if you adjust it for the fact that Sears has $40 billion in revenue versus Macy's $28 billion in revenue.

 

Clearly the problem rests at the COGS line:

Sears      @ 73.62%

Macy's      @ 59.73%

JC Penney  @ 68.69%

 

Here are the relevant descriptions for COGS for Sears, Macy's and JC Penney

 

Sears:

"Cost of sales, buying and occupancy are comprised principally of the costs of merchandise, buying, warehousing and distribution (including receiving and store delivery costs), retail store occupancy costs, product repair, and home service and installation costs, customer shipping and handling costs, vendor allowances, markdowns and physical inventory losses.

 

The Company has a SHOP YOUR WAY program in which customers earn points on purchases which may be redeemed to pay for future purchases. The expense for customer points earned is recognized as customers earn them and recorded in cost of sales."

 

Macy's:

"Cost of sales consists of the cost of merchandise, including inbound freight, and shipping and handling costs. An estimated allowance for future sales returns is recorded and cost of sales is adjusted accordingly."

 

JC Penney: http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MTc2ODI5fENoaWxkSUQ9LTF8VHlwZT0z&t=1

"Cost of goods sold includes all costs directly related to bringing merchandise to its final selling destination. These costs include the cost of the merchandise (net of discounts or allowances earned), sourcing and procurement costs, buying and brand development costs, including buyers’ salaries and related expenses, royalties and design fees, freight costs, warehouse operating expenses, merchandise examination, inspection and testing, store merchandise distribution center expenses, including rent, and shipping and handling costs incurred for sales via the Internet."

 

It looks like JC Penney is putting some salaries in COGS whereas Macy's & Sears do not, so that might explain some of the increase in COGS between JC Penney and Macy's...

 

...but I'm really struggling to see what accounts for the almost 5% differential between JC Penney & Sears?  Keep in mind that Sears ran a (2.1%) operating loss in 2012.

 

The only thing that I can think of is greater discounting either via SYW or regular markdowns. However, is Sears really marking things down that much more than JC Penney?

 

Let's ask the question another way.

 

To some extent, SYW is a technological buildout. Let's say Eddie was a shady CEO and capitalized his SYW expenses despite SYW being correctly recognized as they occur in COGS.  Would that have allowed Sears to be profitable?

 

Then the next question is -- does Sears really need $1.6 billion in advertising spend + X million in SYW points to keep people coming into the store? On the one hand, SSS keep dropping despite that spend, so maybe -- but on the other hand... maybe not?

 

Thoughts?

 

You are right that gross margin is largely the problem. It's very rare to have a consistently and solidly profitable retail company with GM in the 20's. Safeway has comparable GM to Sears and we all know how lousy/low-margin the traditional grocery store business is.

 

The revenue mix explains a lot of the delta vs Macy's and JCP. Think about how much of SHLD's revenue is appliances. Macy's and JCP don't have that category. That skews the market share figures. Sears looks close to Macy's in terms of market share, but if you adjust for the revenue mix (expensive appliances at Sears), then Macy's actually sells far more items and has better inventory turnover. That likely explains a huge portion of the gross margin differential.

[heth247]

Apologies in advance -- I didn'

Clearly the problem rests at the COGS line:

Sears      @ 73.62%

Macy's      @ 59.73%

JC Penney  @ 68.69%

 

Here are the relevant descriptions for COGS for Sears, Macy's and JC Penney

 

Sears:

"Cost of sales, buying and occupancy are comprised principally of the costs of merchandise, buying, warehousing and distribution (including receiving and store delivery costs), retail store occupancy costs, product repair, and home service and installation costs, customer shipping and handling costs, vendor allowances, markdowns and physical inventory losses.

 

The Company has a SHOP YOUR WAY program in which customers earn points on purchases which may be redeemed to pay for future purchases. The expense for customer points earned is recognized as customers earn them and recorded in cost of sales."

 

That's the same problem I see from Land's End financials. Their EBITDA declined 50% from $200MM to $100M because of 5% of GM decline (COGS increase) since 2010. It is also coincident that they started to participate SYW in that year. If it is all due to mark downs, I don't quite understand why they have to start to mark things down that much all of sudden.

[peridotcapital]

Apologies in advance -- I didn'

Clearly the problem rests at the COGS line:

Sears      @ 73.62%

Macy's      @ 59.73%

JC Penney  @ 68.69%

 

Here are the relevant descriptions for COGS for Sears, Macy's and JC Penney

 

Sears:

"Cost of sales, buying and occupancy are comprised principally of the costs of merchandise, buying, warehousing and distribution (including receiving and store delivery costs), retail store occupancy costs, product repair, and home service and installation costs, customer shipping and handling costs, vendor allowances, markdowns and physical inventory losses.

 

The Company has a SHOP YOUR WAY program in which customers earn points on purchases which may be redeemed to pay for future purchases. The expense for customer points earned is recognized as customers earn them and recorded in cost of sales."

 

That's the same problem I see from Land's End financials. Their EBITDA declined 50% from $200MM to $100M because of 5% of GM decline (COGS increase) since 2010. It is also coincident that they started to participate SYW in that year. If it is all due to mark downs, I don't quite understand why they have to start to mark things down that much all of sudden.

 

Retail is getting more competitive every year. Remember when retailers would make 60-80% of their profit for the year during Q4? Those days are over. Most stores are now willing to break-even on much of their holiday sales (doorbusters!) just to compete for shopper traffic (I have no idea why, personally). I was in a JCP over the weekend and every rack was 40% off. Even the specialty stores in the mall... it's 40-50% everything in the store. And a company like LE is losing share and becoming less relevant. This all leads to more promotions and lower gross margin.

 

It would be nice to think that it's because of SYW, and that maybe those costs are more one-time in nature and not recurring (I would disagree with both points), but I think that ignores the overall competitive environment within retail these days, as well as the market share erosion in SHLD's core brands. The company is simply poorly positioned in a very competitive industry (not a good combination). The fact that their crown jewel (appliances) is showing huge share loss is the prime example.

[constructive]

Then the next question is -- does Sears really need $1.6 billion in advertising spend + X million in SYW points to keep people coming into the store? On the one hand, SSS keep dropping despite that spend, so maybe -- but on the other hand... maybe not?

 

Yes in my opinion.

 

There's a reason every successful retailer spends more on store capex than Sears. Improving the customer experience is much more cost effective than spending on marketing or promotions. SYW is not just a loyalty program, it's also an ongoing promotion because Sears customers are increasingly price sensitive as the brand value degrades.

[vinod1]

Beginner question. Could anyone please tell what is the difference between SHC Realty and Seritage? They both seem to be leasing or selling either a closed or operating store.

 

Thanks

 

Vinod

[bmichaud]

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!

 

that's where that came from - was trying to remember who had mentioned the partnering with tenants.

[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

 

 

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

 

Here's an article on this topic from Todd Sullivan, a small hedge fund manager:

http://www.valueplays.net/2013/12/17/sears-seritage-whole-foods/

[bmichaud]

bmichaud,

 

Another potential upside is potentially keeping profitable stores open.  I know there may not be many profitable stores, but it's possible 25% of their stores are worth more as operating entities than redeveloped/sold real estate.

 

Very true. Would be interesting to see in a post-1636 remaining stores liquidation world how much of the 69MM "core" SF would be occupied by a slimmed-down SHLD.

 

Say SHLD had a quarter of that SF, or ~17MM SF. Using Merkhet's median sales/SF figure of $174, and a hypothetical net profit margin of 2%, earnings would be ~$59MM. At a 10X PE, that's $5.50 of upside per share.

[heth247]

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

 

Here's an article on this topic from Todd Sullivan, a small hedge fund manager:

http://www.valueplays.net/2013/12/17/sears-seritage-whole-foods/

 

During the interview they mentioned that they have 94 stores in development now, but we know only 4 have been converted from Sears.

 

[Luke 532]

 

During the interview they mentioned that they have 94 stores in development now, but we know only 4 have been converted from Sears.

 

For what it's worth, at that rate it would still mean 51 Whole Foods inside SHLD.

[indythinker85]

No position but find the story interesting here is more on that topic http://www.valuewalk.com/2013/12/wfmi-taking-real-estate-sears/

[Luke 532]

No position but find the story interesting here is more on that topic http://www.valuewalk.com/2013/12/wfmi-taking-real-estate-sears/

 

Same as this one I posted earlier, just re-routed through a different source...

Here's an article on this topic from Todd Sullivan, a small hedge fund manager:

http://www.valueplays.net/2013/12/17/sears-seritage-whole-foods/

[heth247]

 

During the interview they mentioned that they have 94 stores in development now, but we know only 4 have been converted from Sears.

 

For what it's worth, at that rate it would still mean 51 Whole Foods inside SHLD.

 

Yeah, but how long does it takes get get to that point... 6-7 years? Not fast enough to count on for me as a Sears investor.

[Luke 532]

 

During the interview they mentioned that they have 94 stores in development now, but we know only 4 have been converted from Sears.

 

For what it's worth, at that rate it would still mean 51 Whole Foods inside SHLD.

 

Yeah, but how long does it takes get get to that point... 6-7 years? Not fast enough to count on for me as a Sears investor.

 

If that was the ONLY business they were doing, then definitely not fast enough.  They are considering a lot of different options and Lampert, with his actions the past 18 months or so, has seemingly gotten serious about monetizing.

 

The media likes to float the argument "who needs all that real estate?  who will buy that from them?"  The answer: nobody can/will buy it ALL, but they don't need one company to buy it all.  They can repurpose it in pieces and do quite well.

[CorpRaider]

He needs the cash so he can plow it into SYWR and amusing advertisements.  (They have been absolutely carpet bombing my TV over the past several months).

[heth247]

If that was the ONLY business they were doing, then definitely not fast enough.  They are considering a lot of different options and Lampert, with his actions the past 18 months or so, has seemingly gotten serious about monetizing.

 

The media likes to float the argument "who needs all that real estate?  who will buy that from them?"  The answer: nobody can/will buy it ALL, but they don't need one company to buy it all.  They can repurpose it in pieces and do quite well.

 

Sure, I know but so far we have not seen enough signs of the success of Seritage on a large scale although people here have been throwing all kinds of valuations on it.

 

The whole foods news this morning (and the way people are spinning it) makes you think that by growing from 392 stores to 1200 stores, they are going to potentially take over lots of Sears RE. But I just want to point out some numbers (4/94) to keep our head cool.

[peridotcapital]

If that was the ONLY business they were doing, then definitely not fast enough.  They are considering a lot of different options and Lampert, with his actions the past 18 months or so, has seemingly gotten serious about monetizing.

 

The media likes to float the argument "who needs all that real estate?  who will buy that from them?"  The answer: nobody can/will buy it ALL, but they don't need one company to buy it all.  They can repurpose it in pieces and do quite well.

 

Sure, I know but so far we have not seen enough signs of the success of Seritage on a large scale although people here have been throwing all kinds of valuations on it.

 

The whole foods news this morning (and the way people are spinning it) makes you think that by growing from 392 stores to 1200 stores, they are going to potentially take over lots of Sears RE. But I just want to point out some numbers (4/94) to keep our head cool.

 

And keep in mind that WFM is one of the fastest growing retailers out there. Let's say they average 8% unit growth annually from 2014 through 2031, which gets them to saturation. At that rate it will take them 18 years to reach 1,200 stores!

 

Just for fun, let's assume SHLD provides them 10% of their new store space over that entire time (an optimistic assumption, but not outrageous). That's 80 stores over 18 years, or 4-5 stores a year. Let's assume 35,000 sf/store and $14/sf in rent (WFM's average currently across their entire store base). That gets SHLD to $39M in annual rent from WFM in 2031. Put an 8% cap rate (rates will rise over time) on that income stream and you get a value of ~$500M. Discount that value back at 10% and you get around $75M of value today for that 2.8M sf of leasable space.

 

That's $0.70 per share of value.

 

And that's for one of the best tenants SHLD could hope to have. How many times can they replicate that model realistically? And how many times would be required to generate significant shareholder value?

[tombgrt]

Peridotcapital & others, I don't think the WFM news is very important as a metric here. It's to hard to determine final outcomes in RE sales if Lampert is really pushing for it now. For example, last week Carrefour bought 127 properties (each at least 2500m², they are meant to become "supermarchés") for €2B in a single transaction.

One of these major transactions on weaker Sears locations and you could get a much different picture very quickly. The question is whether this is going to happen anytime soon. At the current rate the sales are just making up for the terrible operations so you get nowhere. I'm not sure that is going to change anytime soon and even if that happens it's hard to determine what you'll ultimately will be left with and where this is going.

[bmichaud]

With American consumer deleveraging largely complete, economic growth is set to accelerate next year.

 

Baker outlined on pages 28-32 of their report that high quality asset supply is constrained. They didn't cherry pick the data - it's commentary straight from REIT executives.

 

Seems to be a decent environment to redevelop quality locations.

[merkhet]

 

You are right that gross margin is largely the problem. It's very rare to have a consistently and solidly profitable retail company with GM in the 20's. Safeway has comparable GM to Sears and we all know how lousy/low-margin the traditional grocery store business is.

 

The revenue mix explains a lot of the delta vs Macy's and JCP. Think about how much of SHLD's revenue is appliances. Macy's and JCP don't have that category. That skews the market share figures. Sears looks close to Macy's in terms of market share, but if you adjust for the revenue mix (expensive appliances at Sears), then Macy's actually sells far more items and has better inventory turnover. That likely explains a huge portion of the gross margin differential.

 

 

So here's the thing. Sears has four categories of service:

 

(1) Hardlines

(2) Apparel

(3) Food & Drug

(4) Service & Other (includes SHO)

 

Let's focus on Q2 2013 results for Sears Domestic:

 

(1) Hardlines            2,458

(2) Apparel                1,120

(3) Food & Drug              3

(4) Service & Other    1,202

 

General COGS benchmarks: http://www.paulweyland.com/gross_profit_margins.pdf

 

(1) Hardlines              75%  (Best Buy)

(2) Apparel                60% (Macy's, JCP pre-Ron, Dillards)

(3) Food & Drug          75% (Walgreens, CVS, Rite Aid)

 

If you apply those COGS to each of the top 3, you'll come up with a sum of 2,517.75 for the COGS, but the total COGS is 3,544 meaning you have to account for 1,026.25 of COGS in Service & Other. Take out 22 for the SHO royalty, and you've still got 1,004.25 to account for amongst Service & Other.

 

We know that they sold 726 in 2012 and 1,202 in 2013 for an increase of 476 and we know that they sold 450 to SHO, so then 752 of the Services & Other in 2013 is not SHO.

 

(4) Service (sans Other)  60% (check the PDF linked above for service/repairs)

 

So then the 752 that's not SHO contributed 451 in COGS + 450 in COGS from SHO for a grand total of 901.2.

 

Where's the other 103.05 come from?  That's about 2.15% of revenues. Maybe it's SYW.

Let's assume that's the percentage that they also spent in 2012 for SYW.

 

In 2012, pension, store closing & severance totaled 725 or 1.81% of revenues.

In 2012, depreciation & amortization totaled 830 and actual capital expenditures ran at 378 for a difference of 452 or 1.13%.

 

Again, operating loss was 838 or 2.1% in 2012.  And you've got 1.81% of one-time costs in pension & 1.13% in the cap-ex/D&A delta -- so they seemingly had turned a corner in 2012.

 

And it's my guess that SYW might be running at 800M+ a year, so depending on how you feel about that, you can keep it or take it out.

 

Another question to ponder. Say I'm right, and they're running SYW at 800M+ a year. CorpRaider made a good point that maybe they need SYW because they don't sink cap ex into repairing their stores.

 

http://images.bwbx.io/cms/2013-07-10/feature_sears29__02__inline605.jpg

 

If Eddie threw it all into capital expenditures, then he'd be spending over $1.2 billion a year, and they'd be in the range of the retailers above.  And there'd be the GAAP convention of the fact that he'd be showing earnings because he'd be pushing the "spending" onto the cash flow statement.

 

Something to ponder.

2013-08-03_10-Q.pdf

2013-08-22_2Q_2013_Presentation.pdf

[merkhet]

Another thing to note about their capital expenditures.

 

I honestly don't think it gets spread about evenly. Maybe they're only spending 1/4 of what Macy's does because only 1/4 of the properties are worth investing in anyway. (I'm recalling Eddie's lamentations in this year's Chairman's Letter about spending $3 million per store on the 300 closed stores.)  In which case they ARE spending almost $5-6 per square foot in the stores in which it's worth spending that amount.

[Luke 532]

Peridotcapital & others, I don't think the WFM news is very important as a metric here. It's to hard to determine final outcomes in RE sales if Lampert is really pushing for it now. For example, last week Carrefour bought 127 properties (each at least 2500m², they are meant to become "supermarchés") for €2B in a single transaction.

One of these major transactions on weaker Sears locations and you could get a much different picture very quickly. The question is whether this is going to happen anytime soon. At the current rate the sales are just making up for the terrible operations so you get nowhere. I'm not sure that is going to change anytime soon and even if that happens it's hard to determine what you'll ultimately will be left with and where this is going.

 

Good point.  I think we're all giving almost zero possibility to a large transaction, and that might be a mistake on our part.  In September 2012 Berkowitz probably wouldn't have said the following if it's not at least a possibility (even if not very probable): "One good deal may create more wealth than 10 years of brilliant operations."

http://www.investmentnews.com/article/20120918/BLOG06/120919939

[CorpRaider]

Nice balanced discussion.  Thanks for the comments on both sides guys.  Good point merk; other than the actual points redeemed for discounts on items sold, it seems like investments in the websites, databases and programs should be capitalized and amortized (almost like a customer list) if one were looking for a better picture of the operations from an income perspective.  Also, don't forget…they bought some tablets for associates. 

 

RE the WFMI:I would also just point out, while I recognize it is impossible to quantify and am not willing to put actual cash at risk because of it, each WFM likely does have a larger impact on the value of the entire commercial real estate tract than just the rent they pay for their portion.  They drive traffic like you would not believe.  I remember reading an appraisal on a proposed mixed use development  one time and in the opinion of at least this one MAI appraiser the new WFMI as good for a ~20-30% step increase in market value of the residential units for about a block area (if I recall correctly).  Granted, this was before the great recession, but if you've ever been to WFM in union square...good lord man! and there's like three freaking gristedes within two blocks of there.