SHLDQ - Sears Holdings Corp

[vinod1]

 

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.

 

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.

 

 

The way I understood is that SYW is paying about 1% on sales (10 points for a dollar spent and 1000 points get you $1 in reward). Assume about 80% of sales are made to customers (current quarter rate is about 70%) who use SYW and there is a redemption rate of 80%, the max cost to Sears is about 0.64% of sales. Even if you throw in the occasional bonus points and some amount of free shipping, I would be surprised if it is more than 1% of sales.

 

I am assuming that the points for partner sales should be about breakeven.

 

Vinod

[BTShine]

 

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.

 

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.

 

 

The way I understood is that SYW is paying about 1% on sales (10 points for a dollar spent and 1000 points get you $1 in reward). Assume about 80% of sales are made to customers (current quarter rate is about 70%) who use SYW and there is a redemption rate of 80%, the max cost to Sears is about 0.64% of sales. Even if you throw in the occasional bonus points and some amount of free shipping, I would be surprised if it is more than 1% of sales.

 

I am assuming that the points for partner sales should be about breakeven.

 

Vinod

 

Per the July 9, 2012 Correspondence with the SEC, an expense is booked when the points are earned.  So, in your case .8% of all sales would be a SYWR expense.  See SEC filing here -  http://www.sec.gov/Archives/edgar/data/1310067/000119312512297483/filename1.htm

"The expense for customer points earned is recognized as customers earn them"

 

In reality, they give bonus points great than 1% of sales (see current 3% holiday bonus points promotion; 10% with ccard) and the expense is almost certainly much higher than .8% of sales.  The points typically last for 1 year, so unexpired points don't roll off for 1 year. 

 

The current 3% bonus points expire at the end of January 2014, so they will be off the books by the time the fiscal year ends.

[peridotcapital]

 

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.

 

 

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)

 

 

This analysis only works if you think Sears sells its hardlines/apparel/drugs just as profitably as Best Buy/Macys/Walgreens. It implies management is equal across every competitor. It implies Eddie Lampert (with 4 years in risk arb at Goldman and 25 years as a hedge fund manager) is just as good making retail decisions as others with decades of experience in the industry. Now, I cannot quantify exactly how much of the difference in COGS is due to the operational team (nobody can), but I think it is safe to assume that Sears is not run as well as the vast majority of their competitors. That impacts profit margins (they'll be below the industry averages).

 

And isn't SYW really just another method of promotional spending? Should we really consider SHLD's COGS ex-SYW costs? All these retailers choose to get customers in the door slightly differently, but in the end the results are what matter. Ron Johnson thought he could cut costs dramatically by getting rid of coupons. What happened? Customers fled and sales and gross margin plummeted. Maybe he was looking at JCP's COGS ex-coupon costs and said, "boy, we could really boost our margins if we didn't keep spending all this money on these coupons." Of course, look what happened.

 

 

[vinod1]

 

Per the July 9, 2012 Correspondence with the SEC, an expense is booked when the points are earned.  So, in your case .8% of all sales would be a SYWR expense.  See SEC filing here -  http://www.sec.gov/Archives/edgar/data/1310067/000119312512297483/filename1.htm

"The expense for customer points earned is recognized as customers earn them"

 

In reality, they give bonus points great than 1% of sales (see current 3% holiday bonus points promotion; 10% with ccard) and the expense is almost certainly much higher than .8% of sales.  The points typically last for 1 year, so unexpired points don't roll off for 1 year. 

 

The current 3% bonus points expire at the end of January 2014, so they will be off the books by the time the fiscal year ends.

 

I understand that. What I am saying is that Sears makes an estimate of likely redemption and that is the what would be expensed. The fact that points expire also goes into the estimate when they set the expense rate. The actual experience would be different from their estimates and this gets released or additional amounts allocated in the succeeding quarter.

 

Vinod

[BTShine]

 

Per the July 9, 2012 Correspondence with the SEC, an expense is booked when the points are earned.  So, in your case .8% of all sales would be a SYWR expense.  See SEC filing here -  http://www.sec.gov/Archives/edgar/data/1310067/000119312512297483/filename1.htm

"The expense for customer points earned is recognized as customers earn them"

 

In reality, they give bonus points great than 1% of sales (see current 3% holiday bonus points promotion; 10% with ccard) and the expense is almost certainly much higher than .8% of sales.  The points typically last for 1 year, so unexpired points don't roll off for 1 year. 

 

The current 3% bonus points expire at the end of January 2014, so they will be off the books by the time the fiscal year ends.

 

I understand that. What I am saying is that Sears makes an estimate of likely redemption and that is the what would be expensed. The fact that points expire also goes into the estimate when they set the expense rate. The actual experience would be different from their estimates and this gets released or additional amounts allocated in the succeeding quarter.

 

Vinod

 

I understand it to mean that they expense a straight 1% of sales to SYWR members.  Then create a liability for when the points are redeemed.  If not redeemed, then they release the value when points expire via a gain or similar accounting (contraexpense?). 

 

I didn't take away that they create an estimate during the accounting process, but I could be wrong. 

[krazeenyc]

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.

 

Gross Margins are not apples to apples. Either in comparing Sears to Macys or JCP or Home Depot. Remember Nobody else includes occupancy in their gross margin line. Even when Sears was doing decently their gross margins weren't that great b/c of this difference in accounting. I really wish Sears would pull occupancy out of gross margins. Sears' gross margins were always lower for this reason. That being said, I can't figure out why SG&A has always been so HUGE.

[krazeenyc]

 

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.

 

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.

 

 

The way I understood is that SYW is paying about 1% on sales (10 points for a dollar spent and 1000 points get you $1 in reward). Assume about 80% of sales are made to customers (current quarter rate is about 70%) who use SYW and there is a redemption rate of 80%, the max cost to Sears is about 0.64% of sales. Even if you throw in the occasional bonus points and some amount of free shipping, I would be surprised if it is more than 1% of sales.

 

I am assuming that the points for partner sales should be about breakeven.

 

Vinod

 

Per the July 9, 2012 Correspondence with the SEC, an expense is booked when the points are earned.  So, in your case .8% of all sales would be a SYWR expense.  See SEC filing here -  http://www.sec.gov/Archives/edgar/data/1310067/000119312512297483/filename1.htm

"The expense for customer points earned is recognized as customers earn them"

 

In reality, they give bonus points great than 1% of sales (see current 3% holiday bonus points promotion; 10% with ccard) and the expense is almost certainly much higher than .8% of sales.  The points typically last for 1 year, so unexpired points don't roll off for 1 year. 

 

The current 3% bonus points expire at the end of January 2014, so they will be off the books by the time the fiscal year ends.

 

THANKS FOR THIS!!! I've been waiting to see this. They give free points ALL the time to SYW Max Customers I signed up for a free trial they've given me about $50 in SYW points over the past 6 months (not earned). The earned points often expire very very quickly -- sometimes in days/weeks. They're kind of meant to get customers to spend again quickly.

[vinod1]

 

I understand it to mean that they expense a straight 1% of sales to SYWR members.  Then create a liability for when the points are redeemed.  If not redeemed, then they release the value when points expire via a gain or similar accounting (contraexpense?). 

 

I didn't take away that they create an estimate during the accounting process, but I could be wrong.

 

Reading it again, it is not very clear to me. But if they did assume a straight 1%, it would be a very conservative estimate.

 

Credit card points are usually an estimate so I assumed that would be the case here as well.

 

Vinod

[peridotcapital]

Gross Margins are not apples to apples. Either in comparing Sears to Macys or JCP or Home Depot. Remember Nobody else includes occupancy in their gross margin line. Even when Sears was doing decently their gross margins weren't that great b/c of this difference in accounting. I really wish Sears would pull occupancy out of gross margins. Sears' gross margins were always lower for this reason. That being said, I can't figure out why SG&A has always been so HUGE.

 

Sears pays about $800M annually for its leases (~2% of sales). Their gross margin lags Macy's by 14% of sales. Even adjusting for the inclusion of occupancy costs in the GM line, the gap is 12% of sales.

[merkhet]

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)

 

This analysis only works if you think Sears sells its hardlines/apparel/drugs just as profitably as Best Buy/Macys/Walgreens. It implies management is equal across every competitor. It implies Eddie Lampert (with 4 years in risk arb at Goldman and 25 years as a hedge fund manager) is just as good making retail decisions as others with decades of experience in the industry. Now, I cannot quantify exactly how much of the difference in COGS is due to the operational team (nobody can), but I think it is safe to assume that Sears is not run as well as the vast majority of their competitors. That impacts profit margins (they'll be below the industry averages).

 

And isn't SYW really just another method of promotional spending? Should we really consider SHLD's COGS ex-SYW costs? All these retailers choose to get customers in the door slightly differently, but in the end the results are what matter. Ron Johnson thought he could cut costs dramatically by getting rid of coupons. What happened? Customers fled and sales and gross margin plummeted. Maybe he was looking at JCP's COGS ex-coupon costs and said, "boy, we could really boost our margins if we didn't keep spending all this money on these coupons." Of course, look what happened.

 

COGS Assumptions

Unclear re your first point. I used the COGS assumptions above to illustrate a point.

 

At some point, there is a limit.  The relative COGS can't be so bad that they add up to more than 100% of the COGS, correct? (Not even Sears can violate the laws of mathematics with badness.)

 

So let's say that the amount of SYW spend buried in COGS is somewhere on the continuum from 0% to 0.64% (vinod1) to 1% (BTShine) to 2.15% (theoretical maximum).

 

Or to put it another way, the delta between Sears and a Franken-store of Best Buy, Macy's, Walgreens, Geek Squad is around 2.15%.  Some of that 2.15% is going to be SYW spend.  Some of that 2.15% is going to be inefficiencies and/or noise differential. Some of it (good point krazeenyc) is going to be occupancy costs -- and notably, if the occupancy costs are substantial enough, then on a consolidated basis, it's possible that Sears has BETTER gross margins than the companies we're using as a basis.

 

Sears pays about $800M annually for its leases (~2% of sales). Their gross margin lags Macy's by 14% of sales. Even adjusting for the inclusion of occupancy costs in the GM line, the gap is 12% of sales.

 

Chad, if what you're saying is true, then Sears is much more efficient than the Franken-store I put together with my COGS comparisons.  Remember, you can't compare all of Sears to all of Macy's because they don't have Hardlines, Pharmacy or Services/Other.

 

Anyway, let's stick with SYW and say that the bottom limit for what they spend on SYW points is around 0.8% since I can't decide whether vinod1 is right that that there's a reserve for unspent points or if BTShine is right that it's a straight up 1% expense -- either way, I'm not 100% sure it matters in the grand scheme of things since the release of value is going to wind its way onto the income statement at some point if they expire unused.

 

Promotional Spending

On $39.85 billion in revenue, SYW points are costing Sears around $318 million a year when we use 0.8%.  So when constructive mentioned that spending on the customer experience > spending on marketing/promotions -- I thought well that's interesting. 

 

Let's assume for the moment that Sears doesn't actually need to spend more on advertising/promotions than the markdowns sans SYW in COGS & the $1.6 billion advertising in SG&A.  If you pluck out the 0.8% SYW and 1.81% non-recurring pension/store closure/severance costs, then you're going to have positive operating income.

 

Now why am I saying that we should look at COGS minus SYW spending? Again, krazeenyc mentioned a good point -- Sears has always had COGS greater than 70%.  Its low was in 2007 @ 71.34% versus 2012 @ 74.50% -- but they were able to get people in the door back then without SYW.

 

What if you were the CEO and, instead, you said screw this SYW stuff, I'm just going to dump $318 million into the capital expenditures line on the cash flow statement because I believe, as constructive does, that creating customer experience > marketing/promotional spend.  Well, your earnings would improve because of GAAP conventions, but you'd see the cost turn up in the cash flow anyway.

 

As of 2012, with an operating loss of (2.1%) and a non-recurring pension/store closure/severance cost of 1.81% and a SYW spend of 0.8% that I'm going to re-route through capital expenditures, I am operating income positive with an operating margin of 0.5%.

 

My argument in doing this thought experiment is that Eddie believes that spending on SYW is going to accrue more benefits to Sears than spending that equivalent amount on capital expenditures, and it hurts GAAP earnings as a result.

 

SYW non-points spending

 

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. 

 

Notably, this means Sears is spending even less capital expenditure on stores than people think since the $378 million of cap ex spend should be inclusive of the SYW buildout and the renovations, and the cost would then be routed through D&A.

[merkhet]

 

Gross Margins are not apples to apples. Either in comparing Sears to Macys or JCP or Home Depot. Remember Nobody else includes occupancy in their gross margin line. Even when Sears was doing decently their gross margins weren't that great b/c of this difference in accounting. I really wish Sears would pull occupancy out of gross margins. Sears' gross margins were always lower for this reason. That being said, I can't figure out why SG&A has always been so HUGE.

 

 

Perhaps you're right that the problem is more in the SG&A than the COGS.  Based on Chad's $800 million lease payment data point, it's possible that SG&A is where there's significant bloat.

 

If you take the 2% of sales and drop it to SG&A, then there's maybe a 6% differential between my Franken-store and Sears.  Even if almost 2% of that is from pension/store closing/severance, there's still a 4% delta that needs to be addressed.

[krazeenyc]

 

Gross Margins are not apples to apples. Either in comparing Sears to Macys or JCP or Home Depot. Remember Nobody else includes occupancy in their gross margin line. Even when Sears was doing decently their gross margins weren't that great b/c of this difference in accounting. I really wish Sears would pull occupancy out of gross margins. Sears' gross margins were always lower for this reason. That being said, I can't figure out why SG&A has always been so HUGE.

 

 

Perhaps you're right that the problem is more in the SG&A than the COGS.  Based on Chad's $800 million lease payment data point, it's possible that SG&A is where there's significant bloat.

 

If you take the 2% of sales and drop it to SG&A, then there's maybe a 6% differential between my Franken-store and Sears.  Even if almost 2% of that is from pension/store closing/severance, there's still a 4% delta that needs to be addressed.

For Sears Roebuck (post Discover/Dean Witter Spin off)

in 1994 and 1995 the gross Margins were 27.1% and 26.6% and SG&A was $6.7 Billion and $6.8 Billion  22.8% and 21.6% respectively. Just not sure what they have in that SG&A that is so high. I mean JCP which is notoriously inefficient has SG&A at $5 billion or so and that includes occupancy. (I know they have less stores).

 

 

[merkhet]

For Sears Roebuck (post Discover/Dean Witter Spin off)

in 1994 and 1995 the gross Margins were 27.1% and 26.6% and SG&A was $6.7 Billion and $6.8 Billion  22.8% and 21.6% respectively. Just not sure what they have in that SG&A that is so high. I mean JCP which is notoriously inefficient has SG&A at $5 billion or so and that includes occupancy. (I know they have less stores).

 

That's the strange part as I always think of SG&A as being largely a controllable aspect of a company.  And in the case of Eddie, I'm rather surprised that he hasn't gotten it under control.

 

The problem, I believe rests largely with Sears. I think Kmart is running at around 22% operating expense while Sears Domestic & Sears Canada run in the high 20s (maybe 29% and 27% or so) -- and this is all sans leasing costs.

[vinod1]

I think with SYW Lambert is taking a leaf out of Tesco's playbook where it used its Clubcard program to leapfrog over its rivals in the early 1990s.

 

Tesco basically used the data generated from the Clubcard program to understand its existing customers and drive greater sales from each customer by targeted promotions. There is a story of how one of Clubcard members found out that his teenage daughter was pregnant only after  Tesco sent promotional baby products their house. This program is widely credited in Tesco's rise and there had been a popular book on this subject "Scoring Points".

 

Since Lambert seems to be a data oriented guy, this would appeal to him. So I think he would continue with SYW for quite a while and it is not something he is going to dial back on quickly.

 

Vinod

[merkhet]

 

Tesco basically used the data generated from the Clubcard program to understand its existing customers and drive greater sales from each customer by targeted promotions. There is a story of how one of Clubcard members found out that his teenage daughter was pregnant only after  Tesco sent promotional baby products their house. This program is widely credited in Tesco's rise and there had been a popular book on this subject "Scoring Points".

 

 

I think the story you're referencing is actually from Target's loyalty program.

[alertmeipp]

I assume quite of bit of recent selling is coming from the fund redemption, we will know very soon whether the short sellers took the opportunities to cover their short or some long funds got those shares.

 

[vinod1]

 

Tesco basically used the data generated from the Clubcard program to understand its existing customers and drive greater sales from each customer by targeted promotions. There is a story of how one of Clubcard members found out that his teenage daughter was pregnant only after  Tesco sent promotional baby products their house. This program is widely credited in Tesco's rise and there had been a popular book on this subject "Scoring Points".

 

 

I think the story you're referencing is actually from Target's loyalty program.

 

You are right!  :-[

 

Vinod

[heth247]

That's the strange part as I always think of SG&A as being largely a controllable aspect of a company.  And in the case of Eddie, I'm rather surprised that he hasn't gotten it under control.

 

The problem, I believe rests largely with Sears. I think Kmart is running at around 22% operating expense while Sears Domestic & Sears Canada run in the high 20s (maybe 29% and 27% or so) -- and this is all sans leasing costs.

 

Doesn't SHLD include pension plan expenses and store closing/severance expense into SGA?

 

[merkhet]

Yes, but it's not enough to account for all of the difference.

 

On page 35 of the 2012 10-K, you'll see that Sears Domestic revenues came in at $20.977 billion and SG&A came in at $6.184 billion giving Sears Domestic an SG&A percentage of 29.7%. On page 36, you'll find that

 

"Sears Domestic’s selling and administrative expenses increased $142 million in 2012 as compared to 2011. Selling and administrative expenses for 2012 were impacted by expenses of $617 million related to pension plans and $30 million related to store closings and severance, while 2011 was impacted by expenses of $74 million related to pension plans and $76 million related to store closings and severance. Selling and administrative expenses for 2012 also included $9 million of transaction costs associated with strategic initiatives while 2011 included expense of $12 million related to hurricane losses. Excluding these items, selling and administrative expenses decreased $352 million due to declines in advertising and payroll expenses."

 

Even if you back out the pension/store closing/severance costs in Sears Domestic, you only get to $5.493 billion of SG&A or a 26.83% SG&A.  Add another 2% to the cost to account for the cost of leases and you've got Sears Domestic running at an adjusted SG&A percentage of 28.38% versus my calculation of 22.94% for a Franken-Store Domestic.

 

Sears Canada recorded $23 million for pension/store closing/severance costs, which brings its adjusted SG&A to 29.12% (including lease charges).  Compared to 24.40% for a Franken-Store Canada.

 

Kmart recorded $55 million of charges for store closing and severance, which brings its adjusted SG&A to 24.17% (including lease charges).  Compared to a 24.64% for a K-Franken-Store.

 

So, basically, only Kmart seems to be matching (beating) our Franken-Store's SG&A

 

(If you compare against the Franken-Store GM, though, it looks like Sears does better there and K-Mart loses ground to the Franken-Store.)

 

I mean JCP which is notoriously inefficient has SG&A at $5 billion or so and that includes occupancy. (I know they have less stores).

 

It's funny that you mention JCP.

 

Pre-Ron Johnson JCP did $17.76 billion of revenue with SG&A of $5.617 billion for a 31.63%

Sears Domestic does about $20.99 billion of revenue w/ adjusted SG&A of $5.537 billion so a little better. (Maybe 3% or so.)

[krazeenyc]

 

Gross Margins are not apples to apples. Either in comparing Sears to Macys or JCP or Home Depot. Remember Nobody else includes occupancy in their gross margin line. Even when Sears was doing decently their gross margins weren't that great b/c of this difference in accounting. I really wish Sears would pull occupancy out of gross margins. Sears' gross margins were always lower for this reason. That being said, I can't figure out why SG&A has always been so HUGE.

 

 

Perhaps you're right that the problem is more in the SG&A than the COGS.  Based on Chad's $800 million lease payment data point, it's possible that SG&A is where there's significant bloat.

 

If you take the 2% of sales and drop it to SG&A, then there's maybe a 6% differential between my Franken-store and Sears.  Even if almost 2% of that is from pension/store closing/severance, there's still a 4% delta that needs to be addressed.

For Sears Roebuck (post Discover/Dean Witter Spin off)

in 1994 and 1995 the gross Margins were 27.1% and 26.6% and SG&A was $6.7 Billion and $6.8 Billion  22.8% and 21.6% respectively. Just not sure what they have in that SG&A that is so high. I mean JCP which is notoriously inefficient has SG&A at $5 billion or so and that includes occupancy. (I know they have less stores).

 

Kmart is its own story... and I consider Sears Canada as an asset rather than part of the core operations.

 

Sears Domestic Gross Margins 2012 - 28.1%. actually better than in 1994 (this is WITH SYW). 

The problem is now SG&A is $6.184 -- 29.5%!  Even with the one time charges it's very high.

 

(YOU Beat me to it).

[Luke 532]

I've added to my common shares position this week.

[heth247]

I've added to my common shares position this week.

 

Just curious, other than Luke, Chou fund, Baker street, anybody else has a 20%+ position of this sucker? :)

 

Disclosure: I am at 10%.

[Luke 532]

I've added to my common shares position this week.

 

Just curious, other than Luke, Chou fund, Baker street, anybody else has a 20%+ position of this sucker? :)

 

Disclosure: I am at 10%.

 

Lampert  ;)

[merkhet]

I've added to my common shares position this week.

 

Just curious, other than Luke, Chou fund, Baker street, anybody else has a 20%+ position of this sucker? :)

 

Disclosure: I am at 10%.

 

Yes, my allocation is greater than 20%.

[Luke 532]

Not that anybody cares, but at the current price of $44 here's the way I look at it.  I believe there's really no way Lampert won't extract at least $40 for shareholders even if everything blows up in his face (he can extract value via spinoffs, monetizing real estate, and all the stuff we've been discussing on this thread).  So, $4 of downside (yes, I'm well aware that the stock could trade below $40) vs. an upside we can't even calculate.  I know some disagree but I believe the fact that we can't quantify the max upside is a good thing.  I'm not saying I agree with any of the following valuations, but let's look at the risk/reward odds based on what you might think SHLD is worth.  The "At $XX" is the amount you think SHLD is worth.

 

At $60 it's 4:1 ratio in your favor ($16 upside vs $4 downside)

At $80 it's 9:1

At $100 it's 14:1

At $150 it's 26:1

...and so on.