SHLDQ - Sears Holdings Corp

[wisdom]

The RE questions make sense for a retailer liquidating. I do not believe SHLD is liquidating.

 

Plans are to keep growing sears.com, SYW, LE, SAC, SHOS, sears home services, etc.

 

The RE valuation is an exercise in providing you a base value in case everything fails and nothing else at this stage.

 

Have you considered the SSS numbers might be dropping because of all the stores that are going to be closed in the near future as another poster pointed out earlier.

 

SHLD does not provide a breakdown, but,  once they close all the stores that are a drag - they will be cashflow positive and only be left with the profitable businesses. In the meantime, the profitable businesses are hidden under a strategic withdrawal from certain markets.

 

SHLD still has sales of $38 B or so. It is ridiculous to think that none of the businesses are making any money on revenues of $38 B.

[VAL9000]

From the 10-K:

We also maintain a broad apparel offering including such well known labels as ... the Kardashian Kollection

 

Ugh.. what the hell am I getting myself into here?

 

 

[wisdom]

Sears has been getting $100s of millions for stores that it leases where the landlord thinks it would be more profitable to buyout that lease as SHLD pays under market rates that do not escalate as they were the main anchor when they signed these leases.

 

Check out some of the Canadian leases that have been cancelled over the last 2 years.

[stahleyp]

From the 10-K:

We also maintain a broad apparel offering including such well known labels as ... the Kardashian Kollection

 

Ugh.. what the hell am I getting myself into here?

 

Style...duh!  ;D ;D ;D

[ERICOPOLY]

Have you considered the SSS numbers might be dropping because of all the stores that are going to be closed in the near future as another poster pointed out earlier.

 

They decline every year.  Are you expecting SSS to jump YoY if he stops liquidating stores?

 

Sales declined something like 9%.  Is he currently liquidating 9% of stores and do they have zero in sales?

[finetrader]

But you can't sell a store that you are leasing.

 

Yeah but we have seen Sears putting back the lease to the landlord(mall owner) for a profit. Because they have a below-market lease rate. But they probably don't realize as much profit than if they'd owned it.

[ERICOPOLY]

But you can't sell a store that you are leasing.

 

Yeah but we have seen Sears putting back the lease to the landlord(mall owner) for a profit. Because they have a below-market lease rate. But they probably don't realize as much profit than if they'd owned it.

 

I bet you're right about the Sears stores, but most of the leases are actually KMart stores.

[vinod1]

So Shop Your Way is built in a way that is quite generic... you won't know it's from Sears. I wonder if this can potentially be a spin off asset down the road.

 

Also, it looks like the site is designed to scale, you can add more brands, stores, departments etc.. wonder if the longer term plan is to scale this out other companies and brands and carry more non-traditional products. Once you have the members and infrastructure, scaling up on revenue will turn to profit (OSTK like cycle)

 

You can also see their have built a social network features around the site.

 

But I check their facebook and twtr followers, number is dismal even when compare to Sears itself. Long way to go but just a thought as billions of dollar will be put in to build it.

 

Thoughts?

 

I do not think SYW would be a viable standalone business.

 

IMO it is a near certainty that SYW would fail. It is a rewards program with an online storefront.

 

1. Rewards Program: I think looking at Tesco's clubcard program would provide some insight into how this might or might not work for Sears. Tesco's program has high frequency contact with customers i.e. each of its customers bought 20-30 items every week or so. That provided a lot of insight for Tesco to target individual preferences so that it did not have to do across the board discounts. It could just tailor targeted promotions to individual customers.

 

Sears's SYW customers maybe shop once a month and buy a couple of items. By the time Sears gets good insight into a customer their preferences and markets would have changed. So it is unlikely that Sears would be able to leverage SYW anywhere near the level of Tesco's clubcard.

 

Clubcard's results were visible within six months of introduction. There is no evidence that SYW helping Sears in any material way so far and it has been a while since it was introduced.

 

For a rewards program to generate loyalty, a great deal also depends on the shopping experience. I think most would agree that shopping at Sears is not a pleasant experience. So this would also be a headwind for SYW.

 

2. Storefront: The online store is pretty poorly built and I cannot see people using it. Many of the companies that use this also use Amazon and Ebay.

 

My main concern is what it would take for Lambert to realize that SYW is not working and shut it down.

 

Vinod

[alertmeipp]

So Shop Your Way is built in a way that is quite generic... you won't know it's from Sears. I wonder if this can potentially be a spin off asset down the road.

 

Also, it looks like the site is designed to scale, you can add more brands, stores, departments etc.. wonder if the longer term plan is to scale this out other companies and brands and carry more non-traditional products. Once you have the members and infrastructure, scaling up on revenue will turn to profit (OSTK like cycle)

 

You can also see their have built a social network features around the site.

 

But I check their facebook and twtr followers, number is dismal even when compare to Sears itself. Long way to go but just a thought as billions of dollar will be put in to build it.

 

Thoughts?

 

I do not think SYW would be a viable standalone business.

 

IMO it is a near certainty that SYW would fail. It is a rewards program with an online storefront.

 

1. Rewards Program: I think looking at Tesco's clubcard program would provide some insight into how this might or might not work for Sears. Tesco's program has high frequency contact with customers i.e. each of its customers bought 20-30 items every week or so. That provided a lot of insight for Tesco to target individual preferences so that it did not have to do across the board discounts. It could just tailor targeted promotions to individual customers.

 

Sears's SYW customers maybe shop once a month and buy a couple of items. By the time Sears gets good insight into a customer their preferences and markets would have changed. So it is unlikely that Sears would be able to leverage SYW anywhere near the level of Tesco's clubcard.

 

Clubcard's results were visible within six months of introduction. There is no evidence that SYW helping Sears in any material way so far and it has been a while since it was introduced.

 

For a rewards program to generate loyalty, a great deal also depends on the shopping experience. I think most would agree that shopping at Sears is not a pleasant experience. So this would also be a headwind for SYW.

 

2. Storefront: The online store is pretty poorly built and I cannot see people using it. Many of the companies that use this also use Amazon and Ebay.

 

My main concern is what it would take for Lambert to realize that SYW is not working and shut it down.

 

Vinod

 

Not as pure standalone, but scale up to include non-Sears items.

 

From the way the site is structured, it does seems he is indeed trying an something new.. no wonder he was talking about patents etc.

 

I agree SYW is likely money wasted as it is.

[Vish_ram]

What about the overhead costs? What if the overhead costs are not coming down at same rate? the SG&A as % of sales has only one up in the last 5 years.

 

The second effect is the diseconomies of scale. SHLD's procurement may get less volume discount on purchases. This is what is called a death spiral.

 

The idea that if sears has say 50% loss making stores and 50% profitable ones, and closing all loss making stores will make the whole company profitable may not hold water. The loss making stores still support the vast infrastructure and cover so much OH and other costs. Once they are gone, the profitable ones start becoming loss making as they can't support the cost structure.

 

Lampert is still keen on mixing turds (retail) and raisins (RE).

 

 

SHLD does not provide a breakdown, but,  once they close all the stores that are a drag - they will be cashflow positive and only be left with the profitable businesses. In the meantime, the profitable businesses are hidden under a strategic withdrawal from certain markets.

 

[finetrader]

This is from the lawsuit I posted above:

 

On August 23, 2004, Kmart announced the final agreement for the sale of 18

stores to Home Depot for $271 million in cash. That agreement was comprised of a sale of 4 owned stores for $59 million, or $14.75 million per store. It also included the sale of 14 leased

stores for $212 million, or $15.143 million per store.

 

73. On September 30, 2004, Kmart announced it had completed the sale of50 stores

to Sears, Roebuck (4 owned stores, 45 leases transferred and 1 owned store leased to Sears,

Roebuck) for $575.9 million . This equates to a per store value of$11.520 million. While

Lampert's sales ofthose 68 Kmart stores represented the sale ofonly 4.49% ofKmart's real

estate assets, those sales fetched the astonishing sum of $846.9 million.

 

Did they sold the best locations back then or has the value of the leased stores decreased since then I don't know but they were able to received significant cash for their leased stores.

 

EDIT: the Kmart stores count went from about 2100 to 1200  from 2002 to 2012. I don't think they received 900*10M$/store= 9B$  from those closed/sold stores like the lawsuit seemed to imply. (above 10M$/store value.)

[ERICOPOLY]

My main concern is what it would take for Lambert to realize that SYW is not working and shut it down.

 

Vinod

 

 

Look at his wordpress blog.  He posted links to two articles about leadership stuff. 

 

The "Do vs Can't Do Cultures" article really struck me.  He even highlighted a paragraph out of that with the line "truly innovative ideas often look like bad ideas at the time".

 

This is Eddie getting defensive to outside criticism.  Being defensive is when you shut down to critics.  Not a sign that he is moving in the right direction.

 

In his mind he is truly innovative and the critics are just the people who say it is a bad idea at the time.  So he is dismissing criticism this way, digging in.

 

Quoting an article on great leadership to defend what he is doing... doesn't look good.

 

[bmichaud]

But is he going to risk BK for the sake of "innovation"? I don't believe it. Perhaps he believes he can create an "integrated retailer", but simultaneously there is no reason why he cannot separate the real estate from the SWY madness in order to create separate value. He cannot possibly be dumb enough to believe chapter 11 is a viable option.

 

 

He and Berkowitz are down in Florida together. I don't think it is unreasonable speculation that they have something cooking behind the scenes for the real estate. Who knows - maybe even Pershing Square, Vornado and Blackrock get involved.

 

The retail side is a complete and utter side show, and there are far too many smart people involved or could be involved for the retail side to just incinerate real estate value.

 

This is not unlike Clearwire where it was losing money hand over fist but had a highly valuable asset that could be exploited in the hands of a stronger player.

[stahleyp]

Eric, good point there.

 

bmi, I'd be cautious as to knowing whether or not he'll risk it. When a person's pride is on the line, they'll do some crazy things.

[ERICOPOLY]

You also don't start posting articles on your blog about this kind of thing when you are "finally liquidating the real estate".

 

So the theories that he is accelerating and finally getting out of retail seem incorrect.

 

I got out of MBI when the settlement looked like it would never happen -- it was because mules' piss kept coming out of Jay Brown's mouth.  It wasn't until he was silenced that I thought a settlement was possible (actually, somebody else pointed out his silence and the relevance of it).

 

To use that as a model, Lampert is still fighting the good fight, looking at his SYW metrics which he seems to view as successful despite the horrific losses. 

 

I am trying to stretch a metaphor out to Robert McNamara who was brought in from Ford.  He tried to fight the Vietnam War with numbers and it didn't work out because he underestimated the ability of the North to keep sending replacements into the field.  Well, I can't quite get the analogy to work but I think that Lampert is somehow making a similar mistake with his metrics, because the results are aweful.  Somehow he is underestimating the human emotions that one feels when walking into a Sears store.  McNamara underestimated the effect carpet bombing would have on enemy resolve.

[bmichaud]

Except in this case Eddie "McNamara" Lampert has a real estate nuclear bomb in his back pocket in case the numbers don't work.

[vinod1]

My main concern is what it would take for Lambert to realize that SYW is not working and shut it down.

 

Vinod

 

 

Look at his wordpress blog.  He posted links to two articles about leadership stuff. 

 

The "Do vs Can't Do Cultures" article really struck me.  He even highlighted a paragraph out of that with the line "truly innovative ideas often look like bad ideas at the time".

 

This is Eddie getting defensive to outside criticism.  Being defensive is when you shut down to critics.  Not a sign that he is moving in the right direction.

 

In his mind he is truly innovative and the critics are just the people who say it is a bad idea at the time.  So he is dismissing criticism this way, digging in.

 

Quoting an article on great leadership to defend what he is doing... doesn't look good.

 

I did not notice that post. Good point. What attracted my attention is his most recent post:

 

"We see signs that it is working. We’ve had consistent annual digital growth and significantly-increased engagement from Shop Your Way members. We continue to leverage our strengths as the distinction between physical and online retailing blurs. The fact that these results are obscured by our overall performance doesn’t make them any less real or any less central to the needed transformation of our company."

 

It is scary that he thinks SYW is working. I have a nagging suspicion that SYW is his baby and it would be difficult for him to let go.

 

Vinod

[bmichaud]

Stan - agreed, but unlike Ron Johnson who had nothing but his pride to lose as he ran JCP into the ground, Lampert has literally billions at risk.

[warrior]

Eric ,Good observation. And I wonder what would make Lampert to realize or doubt  that perhaps, he is wrong…I do not see that “a one more bad quarter” is tipping point for him.

[ourkid8]

I have said it earlier as well.  Majority of board members think this is an asset play but in reality the one in charge and largest shareholder's master plan is to focus on integrated retailing.  IMO that is a huge mistake but what do I know.

 

Eric made me think about this earlier through one of his colorful examples.  O&G companies do not trade for what is under in ground but what can be extracted and turned into cash. If you use that same example with SHLD, it should not trade based on real estate as many on the board believe but based on how much is turned into cash.

 

The turn around is just not happening fast enough and we continue to burn through cash at an accelerated rate.  SYW is really pissing me off as this is a huge waste of cash.  We would have all wished EL to deploy the cash in public securities as he is able to compound at a high rate of return.

 

Thanks,

S

[stahleyp]

Vinrod,

 

I can agree with that. There's plenty of research shown that when we "own" something, we think it's more valuable than it actually is.

 

Personally, I'm hoping that Sears does work out.

[plato1976]

Now everyone here is worrying about a liquidation not fast enough ...

Basically Eddie will liquidate a few stores, get some cash, burn them, and then repeat this again and again

 

We probably under-estimated Eddie 's ego

 

I have said it earlier as well.  Majority of board members think this is an asset play but in reality the one in charge and largest shareholder's master plan is to focus on integrated retailing.  IMO that is a huge mistake but what do I know.

 

Eric made me think about this earlier through one of his colorful examples.  O&G companies do not trade for what is under in ground but what can be extracted and turned into cash. If you use that same example with SHLD, it should not trade based on real estate as many on the board believe but based on how much is turned into cash.

 

The turn around is just not happening fast enough and we continue to burn through cash at an accelerated rate.  SYW is really pissing me off as this is a huge waste of cash.  We would have all wished EL to deploy the cash in public securities as he is able to compound at a high rate of return.

 

Thanks,

S

[bmichaud]

Clearwire: losing hundreds of millions, sold for billions

 

Dish spectrum: $0 cash generation, worth north of $10B

 

Twitter: $32B market cap for something not in existence 10 years ago with barely a dime of profit.

 

SHLD: 68MM SF of some of the most valuable real estate in the world for under $7B (mkt cap + long term debt).

 

GGP trades for $260/SF and SHLD's high quality portfolio trades at ~$100/SF. This cannot be lost on market participants.

[DCG]

How can you say 'most valuable real estate in the world'? The majority of their real estate are large sections at the end of malls, which is not something in very high demand right now. Retailers are moving to smaller locations, not larger. People have been using the real estate argument for Sears for a decade, but until Lampert is able to prove he's actually able to turn a significant amount of that real estate into cash, you can't say that it's valuable.

 

And just because the markets are euphorically overvaluing other companies doesn't necessarily mean that Sears is undervalued. You can compare it to other similar box-store retailers, but even that's hard as SHLD is probably the most poorly run retailer in its category.

[thecynic]

Looking at the way ESL describes himself on the blog - "I am also the Chairman and CEO of Sears Holdings Corporation, a membership-focused, integrated retailer in the process of transforming from a traditional retail company", I think he has tied his personal identity to SYW. He will not listen to anyone until the "process of tranforming" has played out even if in the process sears is destroyed. He says he is "data driven" but consistent with an Ayn Rand zealot he is probably driven by his own "ideas which are superior to everyone elses that they just dont see".

 

Anyways, I speculate, we will shortly see some kind of activist action from Baker Street to drive sense into him (perhaps a letter?). Privately perhaps Fairholme is already engaging him. In addition, we will probably see a bounce because of the Land's end spinoff.