SHLDQ - Sears Holdings Corp

[krazeenyc]

I had a question about Shop Your Way -  Why would it work with a smaller retail footprint? I understand that SHLD gets all sorts of great customer information through a loyalty program that SHLD can leverage through targeted marketing etc. But why would that reduce the retail footprint? Surely they can already tell what products sell and various other correlations between products. I seem to be missing why SYW allows lampert to reduce the retail footprint?

 

All these statistics about XX% of our sales are now to SYW customers etc just seem like the kind of meaningless statistics that if some non-Lampert led management team tried to highlight - investors on this board would lampoon and call bullshit on.. The way I see it is having a shop your way membership is free similar to at most grocery stores so really not that different than a CVS, or Domincks card.  You sign-up (at the register if necessary) and get a few dollars of your purchase. Once you sign-up, you get "member" pricing but does this really drive sales? Maybe I am completely misunderstanding the American consumer but I can't imagine a lot of people are consciously picking the store they shop at based on the points earned on these programs. Heck half the time the cashier will just swipe some card they have behind the counter to make sure you get the deal if you dont have yours on you. 

 

Isn't SYW in some ways just an effort to build something that's similar to an airline rewards program.  You can rewards points at all these retailers (Burger King etc..) and use rewards points at Sears/Kmart.  This is kind of similar to Tesco's clubcard but Tesco used the information gleaned to better market and grow its retail footprint. The information that Tesco gleaned was used to micro-target consumers and reward customers with vouchers that could be used in stores to pay for items.  This was extremely innovative in the 90's when Tesco introduced it but is pretty much par for the course with retailers today.  SYW is then not an innovative way to make Sears into a cutting edge retail company but merely playing catch-up to join the Target's of the world in becoming a 21st century retailer.

 

The huge investments in SYW suggest that Lampert is NOT doing a slow liquidation of Sears Real Estate. Will he close stores along the way - sure, but I think anyone expecting the megadeals like Todd Sullivan implies in his posts is really just speculating at this point.  Lampert seems to be making another push at saving retail - closing unprofitable stores, trying to right-size the business etc but very much implementing a turnaround.  I suspect most of the cash that will be generated by various spin-offs etc will be used to try and revitalize Sears / K-mart.

 

It really depends on what you believe the problem with Sears is. If you think each Sears store needs the 100,000 + sq ft per store to achieve the sales they are achieving now -- then upside is relatively limited.

 

If you believe Sears has a profit problem due to too much overhead and wasted sq footage and  has more than enough revenues to be profitable given less stores and stores with a smaller footprint --  upside is HUGE.

[alertmeipp]

Didn't he tell us he is all return driven, if a store can be sold at a high multiple, he will do it. If a store can be restructured so part of it is sub-leases out, he will do it. If a store is losing money no matter what, he will close it down. I don't see any hidden agenda.

 

It's obvious to me he is trying to use SWY (and technologies) to drive efficiency. So far, it's a failing strategy.

[ERICOPOLY]

I had a question about Shop Your Way -  Why would it work with a smaller retail footprint? I understand that SHLD gets all sorts of great customer information through a loyalty program that SHLD can leverage through targeted marketing etc. But why would that reduce the retail footprint? Surely they can already tell what products sell and various other correlations between products. I seem to be missing why SYW allows lampert to reduce the retail footprint?

 

Well, Amazon has no retail footprint (no brick-and-mortar storefront).

 

Now, just think of SYW as somewhere in between old-school Sears and Amazon.  There will be some retail footprint, just not as much.  There will be the same amount of revenue, but some is generated online and some through the retail brick-and-mortar store.  This frees up some of the real estate assets for monetization.

 

Making the same revenues with less real estate (and hopefully less overall cost).  The trouble is, so far it hasn't achieved the goal.

[abitofvalue]

I had a question about Shop Your Way -  Why would it work with a smaller retail footprint? I understand that SHLD gets all sorts of great customer information through a loyalty program that SHLD can leverage through targeted marketing etc. But why would that reduce the retail footprint? Surely they can already tell what products sell and various other correlations between products. I seem to be missing why SYW allows lampert to reduce the retail footprint?

 

Well, Amazon has no retail footprint (no brick-and-mortar storefront).

 

Now, just think of SYW as somewhere in between old-school Sears and Amazon.  There will be some retail footprint, just not as much.  There will be the same amount of revenue, but some is generated online and some through the retail brick-and-mortar store.  This frees up some of the real estate assets for monetization.

 

Making the same revenues with less real estate (and hopefully less overall cost).  The trouble is, so far it hasn't achieved the goal.

 

Yes I get the overall goal is to get somewhere between old-school retail and 100% online.  What I don't get is why SYW (a pretty standard retail rewards program at its core) helps you get there. i.e. why does SYW make online sales easier / better and free up real estate?  At its core your argument appears to be online sales are cheaper than brick & mortar sales  - yes I agree with this.  But I don't see what that has to do with SYW. 

 

Your comment also suggests that's Sears is trying to build an online competitor to Amazon - which is a pretty daunting ask imo. It's almost like Netflix vs Blockbuster.  One company is set-up for online sales and the other has to try to change its business model completely. In addition to the inherent advantages that a Amazon enjoys in online (Network effects etc.) there is also the fact that in Amazon you essentially have a large competitor that isnt even interested in earning an acceptable rate of return on its invested dollars today.  How can a profit-driven strategy compete with that?  Of course this also ignores all the other retailers that Sears competes with and can have a hybrid online-retail strategy. I am not sure how many shareholders would want to take that journey. 

 

Back to your comment though -- I completely agree that Sears needs a smaller retail footprint. It appears that they are slowly doing that.  The issue I have is that any cash-flows generated through real estate monetizations are being reinvested in building a rewards program and supporting retail operations. If the end-game is to get cash to Eddile to invest that is at odds with what what has been happening.  The argument seems to be that once SYW is built out, that will help turn around retail and will generate cash-flows for Eddie to invest.  SYW seems to be the pillar of the turnaround in retail and I am struggling to understand why SYW would suddenly lead to a retail turnaround that includes a reduced footprint.

[thepupil]

I had a question about Shop Your Way -  Why would it work with a smaller retail footprint? I understand that SHLD gets all sorts of great customer information through a loyalty program that SHLD can leverage through targeted marketing etc. But why would that reduce the retail footprint? Surely they can already tell what products sell and various other correlations between products. I seem to be missing why SYW allows lampert to reduce the retail footprint?

 

Well, Amazon has no retail footprint (no brick-and-mortar storefront).

 

Now, just think of SYW as somewhere in between old-school Sears and Amazon.  There will be some retail footprint, just not as much.  There will be the same amount of revenue, but some is generated online and some through the retail brick-and-mortar store.  This frees up some of the real estate assets for monetization.

 

Making the same revenues with less real estate (and hopefully less overall cost).  The trouble is, so far it hasn't achieved the goal.

 

Yes I get the overall goal is to get somewhere between old-school retail and 100% online.  What I don't get is why SYW (a pretty standard retail rewards program at its core) helps you get there. i.e. why does SYW make online sales easier / better and free up real estate?  At its core your argument appears to be online sales are cheaper than brick & mortar sales  - yes I agree with this.  But I don't see what that has to do with SYW. 

 

Your comment also suggests that's Sears is trying to build an online competitor to Amazon - which is a pretty daunting ask imo. It's almost like Netflix vs Blockbuster.  One company is set-up for online sales and the other has to try to change its business model completely. In addition to the inherent advantages that a Amazon enjoys in online (Network effects etc.) there is also the fact that in Amazon you essentially have a large competitor that isnt even interested in earning an acceptable rate of return on its invested dollars today.  How can a profit-driven strategy compete with that?  Of course this also ignores all the other retailers that Sears competes with and can have a hybrid online-retail strategy. I am not sure how many shareholders would want to take that journey. 

 

Back to your comment though -- I completely agree that Sears needs a smaller retail footprint. It appears that they are slowly doing that.  The issue I have is that any cash-flows generated through real estate monetizations are being reinvested in building a rewards program and supporting retail operations. If the end-game is to get cash to Eddile to invest that is at odds with what what has been happening.  The argument seems to be that once SYW is built out, that will help turn around retail and will generate cash-flows for Eddie to invest.  SYW seems to be the pillar of the turnaround in retail and I am struggling to understand why SYW would suddenly lead to a retail turnaround that includes a reduced footprint.

 

Apologies if this is repetitive but what is not repetitive on a thread of this length...

 

I see SYW as a form of "marketing" to SHLD vendors and customers to counter the valid impression that Sears retail is shrinking. No one wants to buy appliances from a company that won't be there in 5 years. Adding a substantial online sales component and loyalty program is an expensive means of extending the life of Sears retail, reducing net investment in inventory, and recapturing a portion of lost revenue due to store closures. It is a necessary evil and an alternative to more drastic and obvious markdowns that could create the classic retail negative feedback loop where sales shrink faster on declining sentiment and vendors don't extend trade credit. SHOS and LE are also means of extending the life of Sears retail.

 

It is a gimmick with lots of optionality. "everything must go" liquidations of inventory (which are also happening) send a different message than markdowns via a loyalty program. The cash burn may seem to not make sense but it may be a necessary evil amongst a range of unattractive alternatives.

 

Yes, I am long Sears. The optionality and the possibility to get in on the early stages of a Lampert capital allocation vehicle is too much to ignore. The pension will be gone soon and the liabilities and high cost structure are of a depleting nature.

 

But I have little faith in the whole retail/member oriented experience thing. I see the retail operations as a means to an end. The middle-ground Sears stores like in the king of prussia article with a re-vamped Sears and a sublease to a Whole Foods or a Forever 21 in them are probably representative of a transition and not an end game. I don't think my kids or grandkids will shop at Sears. But they probably will shop at places where a Sears once was.

[merkhet]

Here's my sense on how SYW is driving a transition:

 

(1) Push customers towards interacting with SYW via the smartphone or online

(2) This transitions your customers to transactions in a non-real estate intensive platform

(3) As a result you need less inventory in the stores

(4) So you can reduce your retail footprint

 

This seems to vibe with what Lampert said in an article I posted a while back

(http://articles.chicagotribune.com/2013-11-24/business/ct-biz-1124-phil-lampert--20131124_1_sears-and-kmart-stores-edward-lampert)

 

"The integrated retail part of our strategy is really about how you work between online, mobile and store, not just from a customer standpoint, but from a supply-chain standpoint," Lampert said. "If we have a shirt in the store in four colors, we might have that shirt in 10 additional colors online. To have 14 colors in the store may be too risky because what you don't sell, you end up losing money on, (compared with) having a group of it online that serves all the stores so that if people want more variety, they can get more variety."

 

Also, I still maintain that SYW is probably running at higher than 1% of sales.  Check out the attached presentation from Q3 2013.  Revenue goes from $8.857 billion to $8.272 billion on page 18.  On page, 21, SYW shows a charge of $75 million or ~0.9% of sales -- but that's year-over-year margin change.  In other words, that's the SYW impact on margins on top of what existing SYW spending was happening when revenues were $8.857 billion.

[heth247]

SYW is not just a rewards program, nor something built just to compete Amazon. It is part of the "Integrated retail" idea, which I believe is Eddie's vision of the future of the retail. See this panel discussion about integrated retail, in which representatives from Sears, and Wholefoods and a couple of startups:

 

[Luke 532]

Another closing.  I wouldn't be surprised to get a TON of these announcements in the next few months.

 

http://www.therepublic.com/view/local_story/Sears-ending-8-decade-run-in-c_1388896825

 

Sears, a landmark retailer in Columbus for more than 80 years, has taken steps to close its local store and liquidate inventory.

 

Its retail store, at 222 Commons Mall, near Third and Brown streets, and auto center, 222 N. Oval Mall, south of Hotel Indigo, will close by mid-March or April, said Chris Brathwaite, a spokesman for Sears Holdings, in an email.

 

The store will remain open for customers until then, but its liquidation sale will begin Friday, Brathwaite said.

[merkhet]

SYW is not just a rewards program, nor something built just to compete Amazon. It is part of the "Integrated retail" idea, which I believe is Eddie's vision of the future of the retail. See this panel discussion about integrated retail, in which representatives from Sears, and Wholefoods and a couple of startups:

 

 

I think the Hointer website referenced in the video you posted is very telling for where Sears is headed with this Integrated Retail thing.

 

http://www.hointer.com

 

Integrated Retail can free up a lot of real estate and allow for some downsizing so that there won't be the need for as many employees per customer -- while maintaining a similar and comfortable customer experience.

[abitofvalue]

Thanks to Merkhet, heth247 and the other responses re: SYW.  The videos and links are very helpful.  Will need to dig in some more and understand the ability of Sears to actually accomplish this transition.  Feels like this is going to take a lot of cash to accomplish and I worry that most of the cash generated from the real estate monetizations will be used here for the near future. Thanks for the links and information though.

 

[merkhet]

Thanks to Merkhet, heth247 and the other responses re: SYW.  The videos and links are very helpful.  Will need to dig in some more and understand the ability of Sears to actually accomplish this transition.  Feels like this is going to take a lot of cash to accomplish and I worry that most of the cash generated from the real estate monetizations will be used here for the near future. Thanks for the links and information though.

 

No need to worry about whether he will or won't -- Eddie straight up says that he's going to keep investing in SYW (unless it becomes financially imprudent to do so) -- check out the "headers" and "footers" to the slides from page 13 to page 15 of the 3Q slide deck.

 

(http://searsholdings.com/invest/docs/Q3_2013_Webcast.pdf)

 

I don't know if it will be all the monetizations that will go into SYW or just part of them -- but he'll continue to invest until he is satisfied that it works or doesn't.

[thinkpad]

Look at this  : http://www.searslabs.com/

 

I don't know what to think about that :)

 

[texual]

Slice it up all you like SYW is not a viable strategy or rewards program.

 

1. they are literally giving cash away - I have never found their email blasts particularly inspiring or worth me even looking at them because Sears and kmart are still more expensive than the places I shop for the same stuff.

 

2. Even if people use SYW and 'interact' with the physical aspect of the stores such as buying online and picking up in store - the customer has an awful experience because Sears itself never changed. I considered this a lot in my mind as a customer who reacts positively to free cash (as I expect that most customers who shop here regularly may be entirely different than me)... but thats where it ends.

 

The SYW customer is going to the same associates and crummy store that Sears was 10, 5 and 1 year ago. Nothing changed on the physical end to entice customers to continue this interaction.

 

Once you leave the online component of SYW you have to ask yourself what the hell is special about ESL's SYW that Amazon customers who have had a great service since 1994 need those stores for?

 

Its mindless. ESL is either delusional or just buying time and distracting everyone until he can buy enough shares to basically run this thing himself after his partners are gone. I'm betting he has really no great expectations for SYW or at the very least he can sell the SYW membership database or network to someone else. No way is SYW going to be relevant more than it is now. With every year that SHLD goes downhill SYW can grow 30% year over year but it means nothing to the big picture.

 

Hes got to have a better idea than this.

[ERICOPOLY]

You shop at Home Depot online, and you pick it up in the store (or have it shipped to you).  You shop at Nordstrom online, have it shipped to you, and if it doesn't fit you return it to the store.

 

I don't see Sears doing anything unique with Shop Your Way.  It's just keeping up with the Jones'.

 

[Myth465]

From reading this thread it kind of comes off that SYW is a revolutionary way of retailing when its just a mediocre me too rewards scheme.....

Sears may be undervalued or may not, but SYW isnt critical to the Sears thesis inmo...

 

Very similar to the amount of bandwidth QNX gets in the BBRY thread...

[ERICOPOLY]

Myth,

You are right.  There is nothing special about SYW.

 

It would impress somebody in 1994.

 

 

[krazeenyc]

Myth,

You are right.  There is nothing special about SYW.

 

It would impress somebody in 1994.

 

 

SYW is not supposed to revolutionary or special -- it's a means to an end.  They're integrating a bunch of programs that other retailers have used very successfully.  SYW is simply the program that (hopefully) will allow their retail operations to (eventually) be efficient and utilizing a much smaller footprint (both per and in total stores) -- freeing their real estate for other items.

 

I'm very impressed with Shop Your Way Max (their Amazon prime) -- I got a 6 month trial.  My experience with other retailers, even most internet based retailers have not been as efficient and quick as Sears' SYW Max (Ie they get it to me quick without having to use 2 day air or pay for faster service). Other brick and mortar retailers seem to take forever to get me my items (to be fair their stores are much nicer lol).

[merkhet]

It's a slow news day, so I've been pondering something...

 

I always thought it was odd that ESL reduced his stake in SHOS to about 48% in Q2 2013 since I think SHOS probably has a good runway ahead of it.  Then last month ESL took his stake (via redemptions) in SHLD down to 48%.  Odd coincidence, huh?

[Luke 532]

It's a slow news day, so I've been pondering something...

 

I always thought it was odd that ESL reduced his stake in SHOS to about 48% in Q2 2013 since I think SHOS probably has a good runway ahead of it.  Then last month ESL took his stake (via redemptions) in SHLD down to 48%.  Odd coincidence, huh?

 

It's interesting, but most likely nothing...

 

 

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

 

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

 

Anybody know where I might have read that?  Shame on me for not keeping good notes.

[Luke 532]

SYW is not just a rewards program, nor something built just to compete Amazon. It is part of the "Integrated retail" idea, which I believe is Eddie's vision of the future of the retail. See this panel discussion about integrated retail, in which representatives from Sears, and Wholefoods and a couple of startups:

 

 

Thanks for the video heth247.  Here are some notes from it:

Andy Chu is from Sears Holdings...

 

6:30 (Chu): “if you have items, merchandises ready to pick up, you’re running our apps in the background, driving around going to stores, we actually send you a notification when you’re actually near a store, asking you if you want that item delivered to your car.”

 

8:30 (Todd Sherman, Point Inside): Deloitte study, “$700B in 2014 would be influenced by mobile devices that people use at some point along the shopping process, they don’t execute the conversion on the device but they actually buy from the point of sale, from the checkout counter.  That compares to the predictions for e-commerce which are about $260B in the same year, in 2014.”

 

9:15 (Neil Crist, Venuelabs): paraphrased 54% of consumers use their mobile phone while in a store.  On average look at 8 different places to get info on the item they’re looking at.

 

13:30 (Chu): paraphrased… started investing big in technology 4-5 years ago, invest heavily in Shop Your Way loyalty program and very significant portion of our $40B of sales comes through that because it comes down to a set of data.

 

17:40 (Chu): “Over 40%, 50% of our sales buy online and pick up in the store.”

 

21:15 (Chu): “All brands we measure return on investment very closely.”

 

26:00: (Todd Sherman, Point Inside): “the opportunity of other retailers (other than Amazon) is huge.  When I mentioned the numbers earlier most retail, 90-92% depending on who you talk to, is still done in stores.  And at this point having a physical presence is an asset that can be leveraged by retailers… taking a page or two out of the Amazon book in terms of what is happening with technology, what is happening with how people are shopping, smart phones, online, and then bringing that to bear in the physical store is really the way to look at it.  I think going toe-to-toe with Amazon is not always a fool’s errand, but it very often puts a retailer in position they don’t have the assets, don’t have the leverage, don’t have the tools that Amazon has to compete effectively.”

 

30:30 (Interviewer): “so one of the big buzz word in retail is the omni-channel consumer and the notion that if someone shops with you on more than one platform that they’ll be a better customer for you… what is Sears seeing with a person engaging with you on multiple platforms, better customer for you?” 

(Chu): “Oh, definitely, definitely.  We have a loyalty program, Shop Your Way, and the majority of our sales are through local members.  So we have a single source of truth, if you will, for a customer, of the profile we understand where these customers are, and we call it integrated retail I know the buzzword now is omni-channel. From an omni-channel perspective we definitely see if someone engaged online, PC, mobile that they’re more engaged with us.  Because we understand this customer… we can show online purchases and offline purchases in their order history.”

 

39:40 (Chu) “I think you’ll see a lot of experimentation, I can’t talk about what we’re doing, but a lot of experimentation that you see a lot of big box retailers will do in this area.  How to use technology to enhance that buying experience.”

 

40:50 (Susan Livingston, Whole Foods): “…we’re at 365 stores going to 1,000 globally in next 5 years.  We’re growing like crazy.”

 

[oddballstocks]

Myth,

You are right.  There is nothing special about SYW.

 

It would impress somebody in 1994.

 

And expensive!  I had never used the site so I decided to do some comparison shopping for a few minutes.  My wife has been looking at small vacuums, the hand held variety.  The prices are consistently 20% more on SYW over Amazon, sometimes much more.  My wife picked up a new belt for the vacuum this weekend, $5.50 at Target.  They're $4.50-4.80 on Amazon, and $8-14 on SYW, same product.

 

This is my first experience with the site, it looks fine, but my impression is that Sears is expensive, so why would I continue to go back there and compare items.  I can do a store pickup at Target which is the same distance as Sears and pay 30% less, or order from Amazon and wait two days.

 

I have no idea if their other items are as expensive, but seeing this price difference I'm not sure I even care to look.  I have nothing against Sears, this is just a consumer comparison. 

 

One other data point re Sears.  A friend was talking about the trouble with finding non trashy clothes for their daughter.  She said "Lands End makes some modest clothes that aren't as trendy but they're very expensive."  I don't have daughters so I have no idea what girls clothes are like out there or prices, but maybe Sears has a market for moms looking for modest clothes for daughters. 

[constructive]

8:30 (Todd Sherman, Point Inside): Deloitte study, “$700B in 2014 would be influenced by mobile devices that people use at some point along the shopping process, they don’t execute the conversion on the device but they actually buy from the point of sale, from the checkout counter.  That compares to the predictions for e-commerce which are about $260B in the same year, in 2014.”

 

9:15 (Neil Crist, Venuelabs): paraphrased 54% of consumers use their mobile phone while in a store.  On average look at 8 different places to get info on the item they’re looking at.

 

17:40 (Chu): “Over 40%, 50% of our sales buy online and pick up in the store.”

 

Don't these quotes strike you as questionable? These guys are selling themselves and their services pretty hard.

 

When you go shopping, do you see half of people look at 8 different websites before buying a product? Not even close, that is imaginary.

[ERICOPOLY]

It's a slow news day, so I've been pondering something...

 

I always thought it was odd that ESL reduced his stake in SHOS to about 48% in Q2 2013 since I think SHOS probably has a good runway ahead of it.  Then last month ESL took his stake (via redemptions) in SHLD down to 48%.  Odd coincidence, huh?

 

 

Regarding the "next Berkshire" thesis:

 

How many investors are there now at ESL?

 

A company will be ruled as a "Personal Holding Company" if 5 or fewer shareholders own more than 50% of the shares, and if greater than 60% of the income is from passive investments (including rents).

 

http://www.answers.com/topic/personal-holding-company

 

Contrary to what you would otherwise believe, Eddie and his buddies can't take it private unless they enjoy paying dividend tax (distributing out the earnings) or unless they enjoy paying the additional tax on undistributed profits.

 

So he's not doing a slow takeover of the company if he eliminates Sears retail and starts leasing out the real estate (where the rents would then be greater than 60% of the profits).

 

So when he finally decides that the profits will come from leasing the real estate rather than from Sears retail profits, then he will have to make sure that 5 individuals don't collectively own more than 50% of the shares.

[bmichaud]

It's a slow news day, so I've been pondering something...

 

I always thought it was odd that ESL reduced his stake in SHOS to about 48% in Q2 2013 since I think SHOS probably has a good runway ahead of it.  Then last month ESL took his stake (via redemptions) in SHLD down to 48%.  Odd coincidence, huh?

 

i.e. he could be bailing? or what are you thinking?

[muscleman]

There was 30 pages about short squeeze, and all of a sudden, no body talks about them anymore.

I checked IB's lending rate for SHLD, and I was surprised that it is only 5% now, instead of 25%. I remember someone said it has been around 25% for years.

Now it is 5%, and there were like 800,000 shares available for lending.