SHLDQ - Sears Holdings Corp

[texual]

He also said something about Apple being saved by Microsoft with a cash injection during its bad times. Then he said something about how Fairholme would be very open to loaning cash to Sears if that day ever came.

 

Also theres no evidence suggesting he doesn't know ESL. He began investing in SHLD in 2005 but in 2008 claimed he had yet to meet or speak with Eddie. But I am pretty sure since that time they've been friendly. In 2010 ESL himself told me to 'ignore the crowd' when I asked him how to be a better investor. And in 2012 and 2013 Berkowitz has said favorable things about ESL and claims he is a ethical person and is really trying hard to make retail work.

 

By now its also obvious they live within a few miles of each other and maintain offices in the same town. I have no doubt that they are regular in their communication and that they'll be working together in some way or another.

[texual]

I'd be disappointed if Bruce made us wait to hear that hes opening a partnership for his richest clients. I don't see how that solidifies or changes his reputation going forward. After all hes like 55 years old and I guess hes got plenty of work ahead of him. But hedge funds are started by way younger guys who want 10, 20 or 30 years to really make those returns shine. ESL started his at 27. Buffett was similar. So BB opening a hedge fund just honestly sounds... stupid. He could have just run the mutual fund and gotten a reputation like Fidelity Magellan had. In fact I would say Fairholme is one of the most successful and highest quality mutual funds ever, and its still young! 2001 guys!

 

But something else seems amiss - he told Bloomberg the fund had plenty of cash (20%? in 2013) and that he wanted to have less dilution from new cash. So why exactly does he hold 20% cash if he feels so secure about not wanting more? Tough logic to follow if you ask me. If he buys more stocks going forward he has no way of really pouncing on new things with his investor base getting smaller each year. I was actually assuming he would have way less cash this year because he was fully invested and got rid of all the extra cash for withdrawals. Which leads me to another question entirely.

 

Why did he just close the fund to new people and still allows his existing investors to put in cash. Wouldn't we also see the possibility of a cash inflow if his richest clients decided they wanted to keep pouring in more? What I mean to say is - Why did he just not close the fund entirely (no additional shares can be purchased) and let it run off until he decides to sell his stocks? That way he can run these mythical 'investment vehicles' like JOE or SHLD. The way I see it, he can still wind up with a situation that he claims he doesnt want. But what do I know? Last I heard at the peak, FAIRX had about 500,000 investors. I am certain that number will get smaller as time goes on.

 

So because of that, I became a little skeptical that he would go into the operations level and run companies or become their investment manager. Its more likely at present, hes going to just run a little hedge fund of a billion and change.

[txlaw]

According to this article he is infact raising partnerhsip money

http://www.advisorone.com/2013/02/04/fairholmes-berkowitz-hints-at-mutual-fund-exit

 

Going straight to the source . . .

http://www.sec.gov/Archives/edgar/data/1566213/000091957413000300/xslFormDX01/primary_doc.xml

[biaggio]

According to this article he is infact raising partnerhsip money

http://www.advisorone.com/2013/02/04/fairholmes-berkowitz-hints-at-mutual-fund-exit

 

Going straight to the source . . .

http://www.sec.gov/Archives/edgar/data/1566213/000091957413000300/xslFormDX01/primary_doc.xml

 

Thanks for posting. Interesting.

 

Could he not run an LP and still run his mutual funds- or is there a law against that.

 

My feeling on SHLD (as well as JC Penny, FTP.TO) is what WEB says: "When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is usually the reputation of the business that remains intact."

 

I am still holding (small) but am waiting for it to transform into ESL's investment vehicle, a business with better economics- don t know that this will happen

 

[JRH]

But something else seems amiss - he told Bloomberg the fund had plenty of cash (20%? in 2013) and that he wanted to have less dilution from new cash. So why exactly does he hold 20% cash if he feels so secure about not wanting more? Tough logic to follow if you ask me.

 

In the CNBC interview he mentioned the statutory limit on how much Bank of America he can buy.  He can only have a cost basis equal to 5% of a fund, but he can let it appreciate as much as he wants.  You can see this in the elevated % of FAIRX and FAAFX represented by BAC and BAC-WTA (respectively) today.

 

He may have made it sound like a combination of factors (what did that mention of AIG have to do with anything?), but what I heard was, "BANK OF AMERICA IS SIGNIFICANTLY UNDERPRICED!!"

[texual]

Well after reading through the filing it's a near certainty he's just going to create a new pool of money that stays locked up and he does whatever he likes. Nothing more to see here. Great shame though for what could have been! I really wanted to see berkowitz escape the fund business and work within a public company and be like Buffett. Oh we'll.

[jay21]

Well after reading through the filing it's a near certainty he's just going to create a new pool of money that stays locked up and he does whatever he likes. Nothing more to see here. Great shame though for what could have been! I really wanted to see berkowitz escape the fund business and work within a public company and be like Buffett. Oh we'll.

 

He has more flexibility to do something like that in a partnership than a mutual fund.

[muscleman]

Well after reading through the filing it's a near certainty he's just going to create a new pool of money that stays locked up and he does whatever he likes. Nothing more to see here. Great shame though for what could have been! I really wanted to see berkowitz escape the fund business and work within a public company and be like Buffett. Oh we'll.

 

He has more flexibility to do something like that in a partnership than a mutual fund.

 

Nice! I am looking forward to that! I admire him a lot and I have SHLD/AIG/MBI all because of my trust in his judgement.

[txlaw]

Sears conducting new Mygofer test:

http://www.chicagotribune.com/business/ct-biz-0214-sears-20130214,0,3631851.story

 

Still can't stand that name.

[ERICOPOLY]

I think that if I were a billionaire money manager that was averse to paying more taxes, now would be a good time to put into place my "tax laundering" strategy, as Ericopoly would put it, for the following reasons:

 

-Personal income taxes almost certainly to go up going forward

-Carried interest loophole ought to go away

-Corporate taxes could possibly go down

-NOLs are plentiful at some companies and can be used to shelter corporate income, including financial investment-related income (anyone want to start an insurance co?), when turning the ships around or transforming them

-Debt capital for acquisitions and working capital is cheapest we might see in the US for a long time (maybe our life times)

 

So maybe "tax laundering" is an additional reason for these guys to shut down their funds and get permanent capital.  I love this word, btw, which I believe Ericopoly may have coined.

 

Tax laundering might be your term if you want to claim it -- I think I was using "dividend laundering".  Well, whatever, they're both good things!  If only more managers would wake up to the idea instead of paying cash dividends.  Just keep buying back shares until you die, then your heirs get all the accumulated dividends tax free. 

 

You can even pay 200% of intrinsic value for the shares where it's still not necessarily worse than paying a dividend (provided you are paying a 50% tax rate on the dividend, which you just might be in the near future in a place like California).

 

In a more normal scenario, anytime the shares are perhaps only modestly overvalued (say 10% or so), it's an obvious slam dunk to buy in the shares and to NOT pay the dividend in cash.  Especially clear is this strategy if this is going to be your investment vehicle going forward and you plan to hold onto the shares until your death.

 

Yes, we've all heard Warren Buffett claim a company should pay the cash dividend instead unless it's extremely undervalued... but he's in a special situation where he holds his passive investments within portfolios of insurance companies.  In other words, the dividend tax is only like 14.5% for him.  But the capital gains tax is 35%.  I can understand his point of view better and might even agree with him if I too had those skewed tax incentives to form my opinion. 

 

 

 

 

[muscleman]

Sears conducting new Mygofer test:

http://www.chicagotribune.com/business/ct-biz-0214-sears-20130214,0,3631851.story

 

Still can't stand that name.

 

The name is weird, but I think it is a good idea to order online and pickup at a store.

[texual]

And yet warren is buying back Berkshire Hathaway and not giving dividends. He loves when his companies pay him with dividends because it gives him immediate purchasing power and he never has to sell a share of coca cola or whatever. But he also loves that IBM will buy back tons of stock. In theory he said he'd be happy when IBM shares outstanding reach his 65 million shares. Sears works identically in that the earnings per share is what matters to the long term owners. For you see, they never sell shares, they just cash out the shareholders who elect to sell. Buying back shares is a vote of confidence to both parties so they can sell back to the company and it means the world to permanent owners. Or you just wait till the company buys back everything you bought originally like autozone did and boom, your a billionaire.

[ERICOPOLY]

He loves when his companies pay him with dividends because it gives him immediate purchasing power and he never has to sell a share of coca cola or whatever.

 

Yes (aside from the 35% tax rate upon selling shares) I suppose he'd hate to have the press always asking him if his opinion had soured on Coca Cola.

 

Otherwise (ignoring taxes and press issues) he could just sell some shares and not care too much either way.

[Matson125]

Baker Street buys 7.1 million shares

http://www.sec.gov/Archives/edgar/data/1310067/000092189513000470/0000921895-13-000470-index.htm

[Guest wellmont]

not exactly.

Consists of the Shares owned directly by BSC LP, including the 7,000,000 Shares underlying certain options exercisable within 60 days.

[texual]

Beat me to it! Further proof that this is the best group of investors on the planet and I'm only sad I didn't find it earlier.

 

But hot damn these guys bought over 7 million shares that is impressive. Anyone know who they are? Interesting stuff.

[texual]

Keep this thread going because we are within a day of ESL's letter to the shareholders and I expect it'll be a interesting discussion for SHLD tomorrow. Anything could happen.

[muscleman]

Baker Street buys 7.1 million shares

http://www.sec.gov/Archives/edgar/data/1310067/000092189513000470/0000921895-13-000470-index.htm

 

Who is Baker Street? Is that a super investor fund?

[sswan11]

http://www.scribd.com/doc/79854534/Baker-Street-Investor-Presentation

[dcollon]

Here's a link to the results and letter:

 

http://www.searsholdings.com/invest/#letter

 

 

 

[JRH]

Here's a link to the results and letter:

 

http://www.searsholdings.com/invest/#letter

 

"Now, let's look at the stores we have closed to see how much profit they contributed in 2006, our peak operating earnings year. While we have closed just over 300 domestic stores since 2006, we have retained most of the stores that contributed significantly to our profitability in that year. We calculate that the amount of EBITDA that the closed stores generated in 2006 was a little more than $100 million of the $3.2 billion in domestic Adjusted EBITDA that the company had in 2006. Through a combination of net inventory and real estate proceeds, we estimate that we have generated roughly $1 billion in value from these stores. While we closed these stores at different times over the past six years, if you combined their performance for the twelve months prior to the start of the process to close each store, they generated an EBITDA loss of over $50 million in aggregate."

 

It seems to me that Lampert becomes a little more explicit every year in his outline of the liquidation value of the company's assets.

 

EDIT: even though that seems to be his only mention of the liquidation idea in this year's letter.

[BTShine]

I think his point was that the future profitability of Sears should not be hurt by the stores that have closed.  By showing that the 300 closed stores only generated $100 Million of EBITDA at their peak in 2006, we can assume that the historical sources of Sears profitability are still intact.  I think his point is that the closing of these 300 stores did not impair Sears' ability to generate profits in the future. 

 

The 300 stores were kept open because Lampert hoped that they could turn a profit someday.  In the end, they never turned a profit, but stores were still very valuable when liquidated. 

 

Best of both world here.  1) Close the break even stores and liquidate for a ton of money.    2)  Retain the stores that are profitable during a normal environment. 

 

I'd argue that we are not in a normal environment for sears, since they do best when the housing market is normal.  When we get to 1.5 million housing completions I think it will be a normal environment for Sears.  Appliances are sold when homes are completed and Sears dominates the appliance market.  Currently we are seeing approx. 950,000 starts, which means we are about 6 months from seeing 950,000 completions.  Currently housing completions are about 700,000.

 

 

 

[sampr01]

Are these results adjusted for spin offs and closed stores during last years?.

Thanks

I think his point was that the future profitability of Sears should not be hurt by the stores that have closed.  By showing that the 300 closed stores only generated $100 Million of EBITDA at their peak in 2006, we can assume that the historical sources of Sears profitability are still intact.  I think his point is that the closing of these 300 stores did not impair Sears' ability to generate profits in the future. 

 

The 300 stores were kept open because Lampert hoped that they could turn a profit someday.  In the end, they never turned a profit, but stores were still very valuable when liquidated. 

 

Best of both world here.  1) Close the break even stores and liquidate for a ton of money.    2)  Retain the stores that are profitable during a normal environment. 

 

I'd argue that we are not in a normal environment for sears, since they do best when the housing market is normal.  When we get to 1.5 million housing completions I think it will be a normal environment for Sears.  Appliances are sold when homes are completed and Sears dominates the appliance market.  Currently we are seeing approx. 950,000 starts, which means we are about 6 months from seeing 950,000 completions.  Currently housing completions are about 700,000.

[texual]

Overall letter was a disappointment. I had hoped for more personality and some gentle rants. What took me a hour to read a few years ago is now a 10 or 15 minute affair. I did not expect him to write another treatise but gosh he didn't event mention the word craftsman or lands end. No mention of the annual meeting coming up either. He also didn't prove that he has those skills or abilities which all retailers are going to need in their leadership. On the whole read through I just wished he had said listen to me and I will get us to the other side. Or that he was confident they were making a breakthrough on these initiatives.

 

It felt like his excuse was he set up shop your way as a startup inside sears and it latched into the

Organization through every way and oh by the way it now matters because our size makes it a huge program. I get that it matters but it seemed as if it was destined to become a big thing just from all the customers who signed up. Did he mention anything related to its growth or sales potential? Profitability? No. He just said it matters to the future of retail and that they want to be there to change the game so to speak. Well, I guess there's my rant. What gives, Eddie?

[bargainman]

I agree it was a very uninspiring letter.  There didn't seem to be any shared insights or anything of note.  my bet is that this a housing recovery bet, and a liquidation bet.  I was thinking about what the end game could or would be here.  I think eventually he is going to do something either with the assets or spin offs.  I can't see him blowing the assets into a bottomless pit.  I guess the big question is when does he finally monetize the assets and start investing them as he would his hedge fund?  And what is the chance he loses his opportunity to do this because he can't put the brakes on the losses.  Plus what is the opportunity cost of leaving money in shld while he either figures how to make shld work, or gives up and monetizes?  not sure I'm making much sense here...