SHLDQ - Sears Holdings Corp

[krazeenyc]

when you're liquidating a store. Sales comp will go down drastically for that store. Sears likely knows they will be closing a store months before it's officially announced. Let's say they know they are closing a store by Jan 2013 (if not earlier) but the store closing is not going to happen until 1/2014.  They're not going to load it up with inventory.  Even though they're going to purge their inventory, it's going to be on a low total inventory. Sales are way down b/c items that would sell for maybe $100 will now be sold for $70.  SSS on nearly all the closing stores (especially the ones that did OK last year) will be down drastically. Look at the following pictures of a store that's closing soon - what exactly is there to sell.

In a regular store, something sell out, they restock and sell more of it. Even if there is extra inventory at the end of the quarter there is no loss -- but there are definitely way more sales in a non closing/liquidating store.

 

http://media.kentucky.com/smedia/2014/01/10/13/17/1bE5dS.AuSt.79.jpeg

http://media.kentucky.com/smedia/2014/01/10/21/47/1mMhU.AuSt.79.jpeg

http://media.kentucky.com/smedia/2014/01/10/13/17/v9fL5.AuSt.79.jpeg

 

I am not trying to say this is the reason for the SSS decline the main reason for SSS decline is Sears retail is bad.

 

Don't compare the cash/debt/pension with last quarter, compare it with where it was after Q4 last year. Compare it after Q4 2 years ago. Also take into account how much money SHLD brought in on real estate transactions, SCC dividends and the SHOS spinoff as well as how much actual cash they put into their pension/post retirement ($980 million between 2012 and 2014 and $1.37 billion between 2011-2013 -- no wonder Eddie hates the Fed).

[Lance]

Does anyone have an opinion on SHLD's bonds?

 

Thanks

Lance

[valueyoda]

The CDS spreads are really blowing out, so on a near term basis the bonds look appealing. However, longer term, it is way more rewarding to be a shareholder than to be a bondholder.

[Guest valueInv]

This idea that brick and mortar malls will go away is complete BS -- or at least I am biased enough from love of the physical world.  Maybe I'm just to old to get it.

 

Everything will be available from Amazon only?  Where do you go to look at furniture, sit on it, feel the texture?  Where do you try on the Hugo Boss shirt to see if it fits your shoulders?  You can just buy everything from Amazon and if it doesn't fit then return it free of charge.  That would kill Amazon in shipping charges.  Currently Amazon sells you the Hugo Boss shirt that you tried on in Nordstrom and you know it already fits you.  That only works for Amazon so long as the mall retail stores survive in their present form.  They are starving their showrooms to death.

 

Amazon's model effectively depends to some degree on dying retail models to continue to struggle and not die.

 

Let's say every single retail store was gone.  You'd really be buying things sight-unseen from Amazon and not be returning a lot of the stuff?  I don't believe it -- I think return charges would come back to bite them.  There has to be showrooms.

 

Well, retailers are trying to change the problem of clothing. I can't find a link off the top of my head, but there are services here in NYC that will take a 3-D image of your body shape and have clothing fitted to you. So for a one time appointment you get fitted clothes at a reasonable price.

 

I agree though, the physical world of retail won't die. People like to go and shop. We've been doing it since the early days of civilization. What else, are we all just going to sit home all day? Work from home, shop from home, watch movies at home, watch sports at home, interact with your friends at home, etc. etc.? At some point, human nature wants to go out and be social. And no, by social I don't mean facebook and twitter! :D

 

That helps dramatically to quickly sort which brands/size will fit you -- less time in the dressing room.  However I still think you want to try them on to see how the fabric feels.  It is soft?  Scratchy?  Does it stretch?  I don't know, the tactile thing. 

 

Well anyhow, aside from the 3d modeling thing look at it like this... if I'm wrong then people don't currently go to the malls to demo products and then buy them online.  Online is here today, yet people still go to the "showroom" at the mall.  It is unproven that Amazon can survive without a showroom -- for some products at least.  Or perhaps it is unproven that some brands can maintain an edge without a showroom.

 

The showroom reduces the number of online orders that get returned.  That's one of it's advantages to today's Amazon model.  Costs aside, it's also a hassle for the customer to return things that don't fit or work as expected.  So some of the convenience of Amazon goes away if you can't try on or demo the product at a physical store before ordering it from Amazon.

 

Take a look at Zappos.

[Guest valueInv]

I think Lands' End is sort of like the example.  Post spinoff, they will rent space from SHLD.  So they are renting showroom space.  Therefore, it doesn't matter if people try things on and order online.  Sears just cares if the rent is paid.  The brand only cares that they sold a product under their label.

 

The success will happen if Lands' End isn't the only one doing that.  Will others come?

 

It might be the ultimate destiny, but we aren't there yet.  If brands can still find space on JC Penney stores today, then why rent showroom space from Sears?  I guess there is some sort of lag time before the freeloading brands are forced to either rent space in malls (from Sears perhaps) or cease to have any showrooms at all.

 

Curious...what if Amazon does this. Just "rent" space on Amazon to vendors. Amazon is essentially real estate + fulfillment. Split the company into 2. Charge rent to stay on Amazon's website real estate, pay more "rent" + a fee to have your product stored in Amazon's warehouse & fulfilled by Amazon. No inventory problems on Amazon's side, as those product are still generating 'rent'.

 

They already do this.

[LC]

I think Lands' End is sort of like the example.  Post spinoff, they will rent space from SHLD.  So they are renting showroom space.  Therefore, it doesn't matter if people try things on and order online.  Sears just cares if the rent is paid.  The brand only cares that they sold a product under their label.

 

The success will happen if Lands' End isn't the only one doing that.  Will others come?

 

It might be the ultimate destiny, but we aren't there yet.  If brands can still find space on JC Penney stores today, then why rent showroom space from Sears?  I guess there is some sort of lag time before the freeloading brands are forced to either rent space in malls (from Sears perhaps) or cease to have any showrooms at all.

 

Curious...what if Amazon does this. Just "rent" space on Amazon to vendors. Amazon is essentially real estate + fulfillment. Split the company into 2. Charge rent to stay on Amazon's website real estate, pay more "rent" + a fee to have your product stored in Amazon's warehouse & fulfilled by Amazon. No inventory problems on Amazon's side, as those product are still generating 'rent'.

 

They already do this.

 

And that's why I don't run a global retail organization :)

[thepupil]

I love Buffett's quote in last year's annual letter regarding BRK's Berkadia segment:

 

Berkadia continues to do well. Our partners at Leucadia do most of the work in this venture, an arrangement that Charlie and I happily embrace.

 

I view Berkowitz's and Baker Street's work on Sears' real estate the same way. We should count ourselves lucky to have their analysis entirely free of charge. 

 

I found this interesting from BB's March 2009 OID interview on page 15

 

OID: So you think Sears can pay off their debt - or refinance it at reasonable terms?

BB: I think the answer to both questions is yes. And if Eddie Lampert has any difficulties, I think he should call Fairholme because we would be willing to help him at the right price.

 

 

Between Lampert's personal resources and Fairholme's resources, I really believe an extremely distressed scenario is off the table. Berkowitz said that in March 2009 in the middle of Great Depression 2.0. Now? Cap rates are low, A-quality mall demand is high, money is easy and the economy is improving. There is just sooooo much optionality here it's scary. Who knows what the stock does in the short term, as the market focuses on the dying retail operations....but longer term, the biggest risk at these levels appears to be NOT owning the stock.

 

 

Baker Report: http://www.bakerstreetcapital.com/BakerStreet_SHLD.pdf

 

March 2009 OID: http://www.grahamanddoddsville.net/wordpress/Files/Gurus/Bruce%20Berkowitz/OID%20-%20Bruce%20Berkowitz%20-%203-17-2009.pdf

 

I do feel like most investors buy into SHLD according to those super investor's reports. But the question is what do you perceive this investment on your own?

People have been asking ESL to start a faster liquidation process, and from the cash position update in Q4, it seems like he is doing that work.

But I still don't understand why the same store comp could drop 9%. If he is liquidating the inventories fast, he will report a higher loss, but I think at least the sales comp should go up instead of down.

So maybe he is not doing what you wanted him to do. As another member pointed out, the cash increase is just seasonal.

Anyway, I am very unhappy with my investment in this sucker, but fortunately I have only a 5% position, so I am not feeling as painful as Baker Street.

What I especially don't understand is the reconciliation between GAAP and adjusted earnings. I expected the 700 mn reduction in pension liability due to interest rate increase to shock the short sellers, but it wasn't anywhere listed in the latest Q4 update.

"We currently expect our reported net loss attributable to Holdings' shareholders for the quarter ending February 1, 2014 will be between $250 million and $360 million, or between $2.35 and $3.39 loss per diluted share. This includes $41 million of pension expense, $29 million for store closures and severance and $12 million from gains on sales of assets. Adjusted for these items, net loss is expected to be between $213 million and $316 million, or between $2.01 and $2.98 loss per diluted share."

 

 

Muscleman, the  favorable change in the pension's underfunding does not flow through to net income. It will be captured in other comprehensive income. Pensions affect net income through service cost (the cost of benefits given out in the period, not relevant to SHLD since the pension is frozen), and interest cost. The change in underfunded does not affect net income but does affect equity and book value. Check out page 57 of last year's 10-K for where the adjustment to comprehensive income is. 2011 has a 790MM negative adjustment.

 

A good company to see this dynamic at work is Lockheed Martin. Look at their net income compared to the change in equity. Even after accounting for dividends and share repurchases at negative book value, the change in equity is quite dramatic and very negative in the recent past because of falling rates.  LMT has negative equity, in part because of having one of the nation's largest underfunded pensions (i should note this doesn't matter for LMT because their cost plus contracts include the pension in them so the government is on the hook for 80+% of that)

 

[ERICOPOLY]

This idea that brick and mortar malls will go away is complete BS -- or at least I am biased enough from love of the physical world.  Maybe I'm just to old to get it.

 

Everything will be available from Amazon only?  Where do you go to look at furniture, sit on it, feel the texture?  Where do you try on the Hugo Boss shirt to see if it fits your shoulders?  You can just buy everything from Amazon and if it doesn't fit then return it free of charge.  That would kill Amazon in shipping charges.  Currently Amazon sells you the Hugo Boss shirt that you tried on in Nordstrom and you know it already fits you.  That only works for Amazon so long as the mall retail stores survive in their present form.  They are starving their showrooms to death.

 

Amazon's model effectively depends to some degree on dying retail models to continue to struggle and not die.

 

Let's say every single retail store was gone.  You'd really be buying things sight-unseen from Amazon and not be returning a lot of the stuff?  I don't believe it -- I think return charges would come back to bite them.  There has to be showrooms.

 

Well, retailers are trying to change the problem of clothing. I can't find a link off the top of my head, but there are services here in NYC that will take a 3-D image of your body shape and have clothing fitted to you. So for a one time appointment you get fitted clothes at a reasonable price.

 

I agree though, the physical world of retail won't die. People like to go and shop. We've been doing it since the early days of civilization. What else, are we all just going to sit home all day? Work from home, shop from home, watch movies at home, watch sports at home, interact with your friends at home, etc. etc.? At some point, human nature wants to go out and be social. And no, by social I don't mean facebook and twitter! :D

 

That helps dramatically to quickly sort which brands/size will fit you -- less time in the dressing room.  However I still think you want to try them on to see how the fabric feels.  It is soft?  Scratchy?  Does it stretch?  I don't know, the tactile thing. 

 

Well anyhow, aside from the 3d modeling thing look at it like this... if I'm wrong then people don't currently go to the malls to demo products and then buy them online.  Online is here today, yet people still go to the "showroom" at the mall.  It is unproven that Amazon can survive without a showroom -- for some products at least.  Or perhaps it is unproven that some brands can maintain an edge without a showroom.

 

The showroom reduces the number of online orders that get returned.  That's one of it's advantages to today's Amazon model.  Costs aside, it's also a hassle for the customer to return things that don't fit or work as expected.  So some of the convenience of Amazon goes away if you can't try on or demo the product at a physical store before ordering it from Amazon.

 

Take a look at Zappos.

 

Why?

[alertmeipp]

This idea that brick and mortar malls will go away is complete BS -- or at least I am biased enough from love of the physical world.  Maybe I'm just to old to get it.

 

Everything will be available from Amazon only?  Where do you go to look at furniture, sit on it, feel the texture?  Where do you try on the Hugo Boss shirt to see if it fits your shoulders?  You can just buy everything from Amazon and if it doesn't fit then return it free of charge.  That would kill Amazon in shipping charges.  Currently Amazon sells you the Hugo Boss shirt that you tried on in Nordstrom and you know it already fits you.  That only works for Amazon so long as the mall retail stores survive in their present form.  They are starving their showrooms to death.

 

Amazon's model effectively depends to some degree on dying retail models to continue to struggle and not die.

 

Let's say every single retail store was gone.  You'd really be buying things sight-unseen from Amazon and not be returning a lot of the stuff?  I don't believe it -- I think return charges would come back to bite them.  There has to be showrooms.

 

Well, retailers are trying to change the problem of clothing. I can't find a link off the top of my head, but there are services here in NYC that will take a 3-D image of your body shape and have clothing fitted to you. So for a one time appointment you get fitted clothes at a reasonable price.

 

I agree though, the physical world of retail won't die. People like to go and shop. We've been doing it since the early days of civilization. What else, are we all just going to sit home all day? Work from home, shop from home, watch movies at home, watch sports at home, interact with your friends at home, etc. etc.? At some point, human nature wants to go out and be social. And no, by social I don't mean facebook and twitter! :D

 

That helps dramatically to quickly sort which brands/size will fit you -- less time in the dressing room.  However I still think you want to try them on to see how the fabric feels.  It is soft?  Scratchy?  Does it stretch?  I don't know, the tactile thing. 

 

Well anyhow, aside from the 3d modeling thing look at it like this... if I'm wrong then people don't currently go to the malls to demo products and then buy them online.  Online is here today, yet people still go to the "showroom" at the mall.  It is unproven that Amazon can survive without a showroom -- for some products at least.  Or perhaps it is unproven that some brands can maintain an edge without a showroom.

 

The showroom reduces the number of online orders that get returned.  That's one of it's advantages to today's Amazon model.  Costs aside, it's also a hassle for the customer to return things that don't fit or work as expected.  So some of the convenience of Amazon goes away if you can't try on or demo the product at a physical store before ordering it from Amazon.

 

Take a look at Zappos.

 

Why?

 

I think he is saying Zappos is selling shoes without physical stores.

[LC]

shoes are much easier to size than a shirt or suit jacket, however.

 

in fact, most people don't know if they would need narrow or wide shoes because they don't look much different. compare that to a shirt with the neck an inch too big, or a jacket with the sleeves an inch too long, and you immediately feel out of place.

[alertmeipp]

maybe Amazon can just take out Sears. They can then take a run on HD, BBY and even Costco in one shot.

[ERICOPOLY]

This idea that brick and mortar malls will go away is complete BS -- or at least I am biased enough from love of the physical world.  Maybe I'm just to old to get it.

 

Everything will be available from Amazon only?  Where do you go to look at furniture, sit on it, feel the texture?  Where do you try on the Hugo Boss shirt to see if it fits your shoulders?  You can just buy everything from Amazon and if it doesn't fit then return it free of charge.  That would kill Amazon in shipping charges.  Currently Amazon sells you the Hugo Boss shirt that you tried on in Nordstrom and you know it already fits you.  That only works for Amazon so long as the mall retail stores survive in their present form.  They are starving their showrooms to death.

 

Amazon's model effectively depends to some degree on dying retail models to continue to struggle and not die.

 

Let's say every single retail store was gone.  You'd really be buying things sight-unseen from Amazon and not be returning a lot of the stuff?  I don't believe it -- I think return charges would come back to bite them.  There has to be showrooms.

 

Well, retailers are trying to change the problem of clothing. I can't find a link off the top of my head, but there are services here in NYC that will take a 3-D image of your body shape and have clothing fitted to you. So for a one time appointment you get fitted clothes at a reasonable price.

 

I agree though, the physical world of retail won't die. People like to go and shop. We've been doing it since the early days of civilization. What else, are we all just going to sit home all day? Work from home, shop from home, watch movies at home, watch sports at home, interact with your friends at home, etc. etc.? At some point, human nature wants to go out and be social. And no, by social I don't mean facebook and twitter! :D

 

That helps dramatically to quickly sort which brands/size will fit you -- less time in the dressing room.  However I still think you want to try them on to see how the fabric feels.  It is soft?  Scratchy?  Does it stretch?  I don't know, the tactile thing. 

 

Well anyhow, aside from the 3d modeling thing look at it like this... if I'm wrong then people don't currently go to the malls to demo products and then buy them online.  Online is here today, yet people still go to the "showroom" at the mall.  It is unproven that Amazon can survive without a showroom -- for some products at least.  Or perhaps it is unproven that some brands can maintain an edge without a showroom.

 

The showroom reduces the number of online orders that get returned.  That's one of it's advantages to today's Amazon model.  Costs aside, it's also a hassle for the customer to return things that don't fit or work as expected.  So some of the convenience of Amazon goes away if you can't try on or demo the product at a physical store before ordering it from Amazon.

 

Take a look at Zappos.

 

Why?

 

I think he is saying Zappos is selling shoes without physical stores.

 

Sure they are.  I try on the shoes at the mall, I like them, then I whip out my phone and buy them for less from Zappos.

 

Zappos gets the sale.  I don't return the shoes to Zappos because I tried them on first at the mall.

 

But then the mall goes bust.

 

Next time, I have nowhere to try shoes on first.

 

So I order them from Zappos -- whoops, those ones were too narrow.  So I return them AT THEIR COST.  Then I order another shoe -- oops, don't like those ones.  So I return them to Zappos AT THEIR COST.

 

Uh ohh... this is now getting expensive for Zappos.  Profits aren't as good as they were before.

[adesigar]

Sure they are.  I try on the shoes at the mall, I like them, then I whip out my phone and buy them for less from Zappos.

 

Zappos gets the sale.  I don't return the shoes to Zappos because I tried them on first at the mall.

 

But then the mall goes bust.

 

Next time, I have nowhere to try shoes on first.

 

So I order them from Zappos -- whoops, those ones were too narrow.  So I return them AT THEIR COST.  Then I order another shoe -- oops, don't like those ones.  So I return them to Zappos AT THEIR COST.

 

Uh ohh... this is now getting expensive for Zappos.  Profits aren't as good as they were before.

 

Amazon has had this problem already. If you order an item from Amazon and don't like it or don't want it. They charge return Shipping. The cost to return an item can be almost as high as the item itself. Companies like Sears, Walmart, Target etc who have a physical location have an advantage on Amazon in this regard. The closest thing amazon has to physical locations is the Amazon Locker.

 

http://www.amazon.com/gp/help/customer/display.html?nodeId=200572810

[BTShine]

Sure they are.  I try on the shoes at the mall, I like them, then I whip out my phone and buy them for less from Zappos.

 

Zappos gets the sale.  I don't return the shoes to Zappos because I tried them on first at the mall.

 

But then the mall goes bust.

 

Next time, I have nowhere to try shoes on first.

 

So I order them from Zappos -- whoops, those ones were too narrow.  So I return them AT THEIR COST.  Then I order another shoe -- oops, don't like those ones.  So I return them to Zappos AT THEIR COST.

 

Uh ohh... this is now getting expensive for Zappos.  Profits aren't as good as they were before.

 

Amazon has had this problem already. If you order an item from Amazon and don't like it or don't want it. They charge return Shipping. The cost to return an item can be almost as high as the item itself. Companies like Sears, Walmart, Target etc who have a physical location have an advantage on Amazon in this regard. The closest thing amazon has to physical locations is the Amazon Locker.

 

http://www.amazon.com/gp/help/customer/display.html?nodeId=200572810

 

Yep.  Zappos, from my experience, doesn't sell at the low price.  They sell at full price and recoup the free shipping costs by selling at full price. 

[muscleman]

I love Buffett's quote in last year's annual letter regarding BRK's Berkadia segment:

 

Berkadia continues to do well. Our partners at Leucadia do most of the work in this venture, an arrangement that Charlie and I happily embrace.

 

I view Berkowitz's and Baker Street's work on Sears' real estate the same way. We should count ourselves lucky to have their analysis entirely free of charge. 

 

I found this interesting from BB's March 2009 OID interview on page 15

 

OID: So you think Sears can pay off their debt - or refinance it at reasonable terms?

BB: I think the answer to both questions is yes. And if Eddie Lampert has any difficulties, I think he should call Fairholme because we would be willing to help him at the right price.

 

 

Between Lampert's personal resources and Fairholme's resources, I really believe an extremely distressed scenario is off the table. Berkowitz said that in March 2009 in the middle of Great Depression 2.0. Now? Cap rates are low, A-quality mall demand is high, money is easy and the economy is improving. There is just sooooo much optionality here it's scary. Who knows what the stock does in the short term, as the market focuses on the dying retail operations....but longer term, the biggest risk at these levels appears to be NOT owning the stock.

 

 

Baker Report: http://www.bakerstreetcapital.com/BakerStreet_SHLD.pdf

 

March 2009 OID: http://www.grahamanddoddsville.net/wordpress/Files/Gurus/Bruce%20Berkowitz/OID%20-%20Bruce%20Berkowitz%20-%203-17-2009.pdf

 

I do feel like most investors buy into SHLD according to those super investor's reports. But the question is what do you perceive this investment on your own?

People have been asking ESL to start a faster liquidation process, and from the cash position update in Q4, it seems like he is doing that work.

But I still don't understand why the same store comp could drop 9%. If he is liquidating the inventories fast, he will report a higher loss, but I think at least the sales comp should go up instead of down.

So maybe he is not doing what you wanted him to do. As another member pointed out, the cash increase is just seasonal.

Anyway, I am very unhappy with my investment in this sucker, but fortunately I have only a 5% position, so I am not feeling as painful as Baker Street.

What I especially don't understand is the reconciliation between GAAP and adjusted earnings. I expected the 700 mn reduction in pension liability due to interest rate increase to shock the short sellers, but it wasn't anywhere listed in the latest Q4 update.

"We currently expect our reported net loss attributable to Holdings' shareholders for the quarter ending February 1, 2014 will be between $250 million and $360 million, or between $2.35 and $3.39 loss per diluted share. This includes $41 million of pension expense, $29 million for store closures and severance and $12 million from gains on sales of assets. Adjusted for these items, net loss is expected to be between $213 million and $316 million, or between $2.01 and $2.98 loss per diluted share."

 

 

Muscleman, the  favorable change in the pension's underfunding does not flow through to net income. It will be captured in other comprehensive income. Pensions affect net income through service cost (the cost of benefits given out in the period, not relevant to SHLD since the pension is frozen), and interest cost. The change in underfunded does not affect net income but does affect equity and book value. Check out page 57 of last year's 10-K for where the adjustment to comprehensive income is. 2011 has a 790MM negative adjustment.

 

A good company to see this dynamic at work is Lockheed Martin. Look at their net income compared to the change in equity. Even after accounting for dividends and share repurchases at negative book value, the change in equity is quite dramatic and very negative in the recent past because of falling rates.  LMT has negative equity, in part because of having one of the nation's largest underfunded pensions (i should note this doesn't matter for LMT because their cost plus contracts include the pension in them so the government is on the hook for 80+% of that)

 

Maybe my accounting 101 is not good, but my understanding is that if your book value is $10, and you report a $1 net income, your book value becomes $11. You cannot have the book value changing without the net income changing.

But you are saying the book value will change, but the net income will not. That is confusing to me.

[Guest valueInv]

This idea that brick and mortar malls will go away is complete BS -- or at least I am biased enough from love of the physical world.  Maybe I'm just to old to get it.

 

Everything will be available from Amazon only?  Where do you go to look at furniture, sit on it, feel the texture?  Where do you try on the Hugo Boss shirt to see if it fits your shoulders?  You can just buy everything from Amazon and if it doesn't fit then return it free of charge.  That would kill Amazon in shipping charges.  Currently Amazon sells you the Hugo Boss shirt that you tried on in Nordstrom and you know it already fits you.  That only works for Amazon so long as the mall retail stores survive in their present form.  They are starving their showrooms to death.

 

Amazon's model effectively depends to some degree on dying retail models to continue to struggle and not die.

 

Let's say every single retail store was gone.  You'd really be buying things sight-unseen from Amazon and not be returning a lot of the stuff?  I don't believe it -- I think return charges would come back to bite them.  There has to be showrooms.

 

Well, retailers are trying to change the problem of clothing. I can't find a link off the top of my head, but there are services here in NYC that will take a 3-D image of your body shape and have clothing fitted to you. So for a one time appointment you get fitted clothes at a reasonable price.

 

I agree though, the physical world of retail won't die. People like to go and shop. We've been doing it since the early days of civilization. What else, are we all just going to sit home all day? Work from home, shop from home, watch movies at home, watch sports at home, interact with your friends at home, etc. etc.? At some point, human nature wants to go out and be social. And no, by social I don't mean facebook and twitter! :D

 

That helps dramatically to quickly sort which brands/size will fit you -- less time in the dressing room.  However I still think you want to try them on to see how the fabric feels.  It is soft?  Scratchy?  Does it stretch?  I don't know, the tactile thing. 

 

Well anyhow, aside from the 3d modeling thing look at it like this... if I'm wrong then people don't currently go to the malls to demo products and then buy them online.  Online is here today, yet people still go to the "showroom" at the mall.  It is unproven that Amazon can survive without a showroom -- for some products at least.  Or perhaps it is unproven that some brands can maintain an edge without a showroom.

 

The showroom reduces the number of online orders that get returned.  That's one of it's advantages to today's Amazon model.  Costs aside, it's also a hassle for the customer to return things that don't fit or work as expected.  So some of the convenience of Amazon goes away if you can't try on or demo the product at a physical store before ordering it from Amazon.

 

Take a look at Zappos.

 

Why?

 

I think he is saying Zappos is selling shoes without physical stores.

 

Sure they are.  I try on the shoes at the mall, I like them, then I whip out my phone and buy them for less from Zappos.

 

Zappos gets the sale.  I don't return the shoes to Zappos because I tried them on first at the mall.

 

But then the mall goes bust.

 

Next time, I have nowhere to try shoes on first.

 

So I order them from Zappos -- whoops, those ones were too narrow.  So I return them AT THEIR COST.  Then I order another shoe -- oops, don't like those ones.  So I return them to Zappos AT THEIR COST.

 

Uh ohh... this is now getting expensive for Zappos.  Profits aren't as good as they were before.

 

Zappos has the return costs built into its business model. That's why they cover the cost of mailing the shoe back to them. The idea is - people order multiple pairs of shoes , try them on and keep the ones they like. They built this model because people wouldn't buy them online because they didn't know ephod it would fit, look on them,etc.

 

Another company that does this is Warby Parker. There are probably others too. No malls involved.

 

Where did you get the info that people try on clothes in stores and then buy them online?

 

Lands End has been selling clothes through catalogs way before the Internet, without people trying them on.

[Mephistopheles]

I love Buffett's quote in last year's annual letter regarding BRK's Berkadia segment:

 

Berkadia continues to do well. Our partners at Leucadia do most of the work in this venture, an arrangement that Charlie and I happily embrace.

 

I view Berkowitz's and Baker Street's work on Sears' real estate the same way. We should count ourselves lucky to have their analysis entirely free of charge. 

 

I found this interesting from BB's March 2009 OID interview on page 15

 

OID: So you think Sears can pay off their debt - or refinance it at reasonable terms?

BB: I think the answer to both questions is yes. And if Eddie Lampert has any difficulties, I think he should call Fairholme because we would be willing to help him at the right price.

 

 

Between Lampert's personal resources and Fairholme's resources, I really believe an extremely distressed scenario is off the table. Berkowitz said that in March 2009 in the middle of Great Depression 2.0. Now? Cap rates are low, A-quality mall demand is high, money is easy and the economy is improving. There is just sooooo much optionality here it's scary. Who knows what the stock does in the short term, as the market focuses on the dying retail operations....but longer term, the biggest risk at these levels appears to be NOT owning the stock.

 

 

Baker Report: http://www.bakerstreetcapital.com/BakerStreet_SHLD.pdf

 

March 2009 OID: http://www.grahamanddoddsville.net/wordpress/Files/Gurus/Bruce%20Berkowitz/OID%20-%20Bruce%20Berkowitz%20-%203-17-2009.pdf

 

I do feel like most investors buy into SHLD according to those super investor's reports. But the question is what do you perceive this investment on your own?

People have been asking ESL to start a faster liquidation process, and from the cash position update in Q4, it seems like he is doing that work.

But I still don't understand why the same store comp could drop 9%. If he is liquidating the inventories fast, he will report a higher loss, but I think at least the sales comp should go up instead of down.

So maybe he is not doing what you wanted him to do. As another member pointed out, the cash increase is just seasonal.

Anyway, I am very unhappy with my investment in this sucker, but fortunately I have only a 5% position, so I am not feeling as painful as Baker Street.

What I especially don't understand is the reconciliation between GAAP and adjusted earnings. I expected the 700 mn reduction in pension liability due to interest rate increase to shock the short sellers, but it wasn't anywhere listed in the latest Q4 update.

"We currently expect our reported net loss attributable to Holdings' shareholders for the quarter ending February 1, 2014 will be between $250 million and $360 million, or between $2.35 and $3.39 loss per diluted share. This includes $41 million of pension expense, $29 million for store closures and severance and $12 million from gains on sales of assets. Adjusted for these items, net loss is expected to be between $213 million and $316 million, or between $2.01 and $2.98 loss per diluted share."

 

 

Muscleman, the  favorable change in the pension's underfunding does not flow through to net income. It will be captured in other comprehensive income. Pensions affect net income through service cost (the cost of benefits given out in the period, not relevant to SHLD since the pension is frozen), and interest cost. The change in underfunded does not affect net income but does affect equity and book value. Check out page 57 of last year's 10-K for where the adjustment to comprehensive income is. 2011 has a 790MM negative adjustment.

 

A good company to see this dynamic at work is Lockheed Martin. Look at their net income compared to the change in equity. Even after accounting for dividends and share repurchases at negative book value, the change in equity is quite dramatic and very negative in the recent past because of falling rates.  LMT has negative equity, in part because of having one of the nation's largest underfunded pensions (i should note this doesn't matter for LMT because their cost plus contracts include the pension in them so the government is on the hook for 80+% of that)

 

Maybe my accounting 101 is not good, but my understanding is that if your book value is $10, and you report a $1 net income, your book value becomes $11. You cannot have the book value changing without the net income changing.

But you are saying the book value will change, but the net income will not. That is confusing to me.

 

Net income (after dividends) effects retained earnings, but that's only one part of book value. Changes in value of assets and liabilities that are not necessarily earnings related also have an impact on book value (obviously). Take Berkshire for example, where the stock portfolio is marked to market quarterly, and so impacts book value, but doesn't flow through to earnings. Changes in the derivatives book, however, do flow through to earnings.

[bmichaud]

I love Buffett's quote in last year's annual letter regarding BRK's Berkadia segment:

 

Berkadia continues to do well. Our partners at Leucadia do most of the work in this venture, an arrangement that Charlie and I happily embrace.

 

I view Berkowitz's and Baker Street's work on Sears' real estate the same way. We should count ourselves lucky to have their analysis entirely free of charge. 

 

I found this interesting from BB's March 2009 OID interview on page 15

 

OID: So you think Sears can pay off their debt - or refinance it at reasonable terms?

BB: I think the answer to both questions is yes. And if Eddie Lampert has any difficulties, I think he should call Fairholme because we would be willing to help him at the right price.

 

 

Between Lampert's personal resources and Fairholme's resources, I really believe an extremely distressed scenario is off the table. Berkowitz said that in March 2009 in the middle of Great Depression 2.0. Now? Cap rates are low, A-quality mall demand is high, money is easy and the economy is improving. There is just sooooo much optionality here it's scary. Who knows what the stock does in the short term, as the market focuses on the dying retail operations....but longer term, the biggest risk at these levels appears to be NOT owning the stock.

 

 

Baker Report: http://www.bakerstreetcapital.com/BakerStreet_SHLD.pdf

 

March 2009 OID: http://www.grahamanddoddsville.net/wordpress/Files/Gurus/Bruce%20Berkowitz/OID%20-%20Bruce%20Berkowitz%20-%203-17-2009.pdf

 

You said it bmichaud. "optionality" is the key word. Quite possibly more important than certainty, especially in a situation like this.

 

So three questions really,

a) Does the current valuation provide a sufficient margin of safety?

b) Is Eddie on your side?, and

c) does he have sufficient options?

 

Mr. B,

 

a) A-quality mall space currently trades between $200 and $300 per square foot in the open market, as represented by General Growth and Simon Property. SHLD has ~68MM SF of this GGP/SPG-type real estate. SHLD has total debt of $4.6B, or ~$68/SF (excluding pension, as in a normal rate environment, it's largely nil). If you value the 68MM at $150/SF and back out the $68 of debt, the quality RE is worth a free-and-clear $52 per share. Sears Canada, Lands End, Kenmore, Craftsman, Diehard and net liquidation value, if any, of the remaining stores and RE all come free. Now there is big leverage in the $52 number - valued at $200, it rises to $84.

 

Where the embedded SHLD REIT becomes interesting is if it is spun off to shareholders versus sold or borrowed against. Triple-net lease REITs generate AFFO of about $8/SF on an annual basis. At an 80% payout ratio, the SHLD REIT would have dividend capacity of ~$4 per share.

 

Lastly, with the virtually inevitable backing of Fairholme and Lampert, it seems very difficult to die in this situation.

 

b) Though I believe misguided (even adjusting for hindsight bias), ESL's buyback program pre-financial crisis solidified his long-term focus and alignment with fellow shareholders. He was not cashing out his stake alongside the buyback program, nor was he paying out fat dividends for immediate gratification - he saw the long-term value of SHLD and wanted to reward long-term owners of the business.

 

ESL has exposure to ~$2B of SHLD common and its various spin-offs - though others disagree, I personally think he has a decent chunk of change to lose here.

 

c) Between highly valuable real estate, cov-lite debt, profitable individual subsidiaries and Fairholme backing, it appears he has significant optionality.

[merkhet]

bmichaud, check your math -- I think your number is low on the 68 million SF.

 

Also, let's not forget that they own 90 million square feet and lease 150 square feet at what seems to be a ceiling of $5.50 per square foot on average.  The delta between $5.50 and market value is probably also worth something.

[bmichaud]

I love Buffett's quote in last year's annual letter regarding BRK's Berkadia segment:

 

Berkadia continues to do well. Our partners at Leucadia do most of the work in this venture, an arrangement that Charlie and I happily embrace.

 

I view Berkowitz's and Baker Street's work on Sears' real estate the same way. We should count ourselves lucky to have their analysis entirely free of charge. 

 

I found this interesting from BB's March 2009 OID interview on page 15

 

OID: So you think Sears can pay off their debt - or refinance it at reasonable terms?

BB: I think the answer to both questions is yes. And if Eddie Lampert has any difficulties, I think he should call Fairholme because we would be willing to help him at the right price.

 

 

Between Lampert's personal resources and Fairholme's resources, I really believe an extremely distressed scenario is off the table. Berkowitz said that in March 2009 in the middle of Great Depression 2.0. Now? Cap rates are low, A-quality mall demand is high, money is easy and the economy is improving. There is just sooooo much optionality here it's scary. Who knows what the stock does in the short term, as the market focuses on the dying retail operations....but longer term, the biggest risk at these levels appears to be NOT owning the stock.

 

 

Baker Report: http://www.bakerstreetcapital.com/BakerStreet_SHLD.pdf

 

March 2009 OID: http://www.grahamanddoddsville.net/wordpress/Files/Gurus/Bruce%20Berkowitz/OID%20-%20Bruce%20Berkowitz%20-%203-17-2009.pdf

 

I do feel like most investors buy into SHLD according to those super investor's reports. But the question is what do you perceive this investment on your own?

People have been asking ESL to start a faster liquidation process, and from the cash position update in Q4, it seems like he is doing that work.

But I still don't understand why the same store comp could drop 9%. If he is liquidating the inventories fast, he will report a higher loss, but I think at least the sales comp should go up instead of down.

So maybe he is not doing what you wanted him to do. As another member pointed out, the cash increase is just seasonal.

Anyway, I am very unhappy with my investment in this sucker, but fortunately I have only a 5% position, so I am not feeling as painful as Baker Street.

What I especially don't understand is the reconciliation between GAAP and adjusted earnings. I expected the 700 mn reduction in pension liability due to interest rate increase to shock the short sellers, but it wasn't anywhere listed in the latest Q4 update.

"We currently expect our reported net loss attributable to Holdings' shareholders for the quarter ending February 1, 2014 will be between $250 million and $360 million, or between $2.35 and $3.39 loss per diluted share. This includes $41 million of pension expense, $29 million for store closures and severance and $12 million from gains on sales of assets. Adjusted for these items, net loss is expected to be between $213 million and $316 million, or between $2.01 and $2.98 loss per diluted share."

 

muscleman,

 

BB/Baker Street's real estate analysis can be verified by where commercial real estate currently trades in the market. All I am saying is that it saves us a tremendous amount of time and resources. It's folly to invest just b/c someone else is in a name - yes I'm picking two of his worst investments, but what if one (cough...Whitney Tilson) had followed Ackman into HLF and JCP? You still have to make your own judgement of the situation and do your own analysis. For example, Baker Street thinks the SHLD online business is worth $1B and assumes it only costs $900MM to wind down unfeasible stores in the worst case scenario - I don't agree with either of those assumptions. But on the other hand, I think the upside for a Seritage REIT is higher than what Baker assumes. Soooo many moving parts here that it's very difficult to just say, "Oh these big investors are in it, so I'm going to follow". I have tried to understand Netflix for years now and simply cannot - so Uncle Carl takes a big stake, and I have zero interest b/c I cannot figure it out myself.

[bmichaud]

bmichaud, check your math -- I think your number is low on the 68 million SF.

 

Also, let's not forget that they own 90 million square feet and lease 150 square feet at what seems to be a ceiling of $5.50 per square foot on average.  The delta between $5.50 and market value is probably also worth something.

 

The 68MM is the total SF of the top 350 owned and top 50 leased, per Baker Street.

[compoundinglife]

I love Buffett's quote in last year's annual letter regarding BRK's Berkadia segment:

 

Berkadia continues to do well. Our partners at Leucadia do most of the work in this venture, an arrangement that Charlie and I happily embrace.

 

I view Berkowitz's and Baker Street's work on Sears' real estate the same way. We should count ourselves lucky to have their analysis entirely free of charge. 

 

I found this interesting from BB's March 2009 OID interview on page 15

 

OID: So you think Sears can pay off their debt - or refinance it at reasonable terms?

BB: I think the answer to both questions is yes. And if Eddie Lampert has any difficulties, I think he should call Fairholme because we would be willing to help him at the right price.

 

 

Between Lampert's personal resources and Fairholme's resources, I really believe an extremely distressed scenario is off the table. Berkowitz said that in March 2009 in the middle of Great Depression 2.0. Now? Cap rates are low, A-quality mall demand is high, money is easy and the economy is improving. There is just sooooo much optionality here it's scary. Who knows what the stock does in the short term, as the market focuses on the dying retail operations....but longer term, the biggest risk at these levels appears to be NOT owning the stock.

 

 

Baker Report: http://www.bakerstreetcapital.com/BakerStreet_SHLD.pdf

 

March 2009 OID: http://www.grahamanddoddsville.net/wordpress/Files/Gurus/Bruce%20Berkowitz/OID%20-%20Bruce%20Berkowitz%20-%203-17-2009.pdf

 

I do feel like most investors buy into SHLD according to those super investor's reports. But the question is what do you perceive this investment on your own?

People have been asking ESL to start a faster liquidation process, and from the cash position update in Q4, it seems like he is doing that work.

But I still don't understand why the same store comp could drop 9%. If he is liquidating the inventories fast, he will report a higher loss, but I think at least the sales comp should go up instead of down.

So maybe he is not doing what you wanted him to do. As another member pointed out, the cash increase is just seasonal.

Anyway, I am very unhappy with my investment in this sucker, but fortunately I have only a 5% position, so I am not feeling as painful as Baker Street.

What I especially don't understand is the reconciliation between GAAP and adjusted earnings. I expected the 700 mn reduction in pension liability due to interest rate increase to shock the short sellers, but it wasn't anywhere listed in the latest Q4 update.

"We currently expect our reported net loss attributable to Holdings' shareholders for the quarter ending February 1, 2014 will be between $250 million and $360 million, or between $2.35 and $3.39 loss per diluted share. This includes $41 million of pension expense, $29 million for store closures and severance and $12 million from gains on sales of assets. Adjusted for these items, net loss is expected to be between $213 million and $316 million, or between $2.01 and $2.98 loss per diluted share."

 

When you say you are unhappy with your investment is this sucker is because the facts have changed or because the price went down? What is different today vs when you first bought? Is it just because there was no update on the pension liability?

[merkhet]

bmichaud, check your math -- I think your number is low on the 68 million SF.

 

Also, let's not forget that they own 90 million square feet and lease 150 square feet at what seems to be a ceiling of $5.50 per square foot on average.  The delta between $5.50 and market value is probably also worth something.

 

The 68MM is the total SF of the top 350 owned and top 50 leased, per Baker Street.

 

No, I mean that if you use $150 per square foot and back out $68 per square foot of debt, you get $82 and not $52.

[phil_Buffett]

I love Buffett's quote in last year's annual letter regarding BRK's Berkadia segment:

 

Berkadia continues to do well. Our partners at Leucadia do most of the work in this venture, an arrangement that Charlie and I happily embrace.

 

I view Berkowitz's and Baker Street's work on Sears' real estate the same way. We should count ourselves lucky to have their analysis entirely free of charge. 

 

I found this interesting from BB's March 2009 OID interview on page 15

 

OID: So you think Sears can pay off their debt - or refinance it at reasonable terms?

BB: I think the answer to both questions is yes. And if Eddie Lampert has any difficulties, I think he should call Fairholme because we would be willing to help him at the right price.

 

 

Between Lampert's personal resources and Fairholme's resources, I really believe an extremely distressed scenario is off the table. Berkowitz said that in March 2009 in the middle of Great Depression 2.0. Now? Cap rates are low, A-quality mall demand is high, money is easy and the economy is improving. There is just sooooo much optionality here it's scary. Who knows what the stock does in the short term, as the market focuses on the dying retail operations....but longer term, the biggest risk at these levels appears to be NOT owning the stock.

 

 

Baker Report: http://www.bakerstreetcapital.com/BakerStreet_SHLD.pdf

 

March 2009 OID: http://www.grahamanddoddsville.net/wordpress/Files/Gurus/Bruce%20Berkowitz/OID%20-%20Bruce%20Berkowitz%20-%203-17-2009.pdf

 

I do feel like most investors buy into SHLD according to those super investor's reports. But the question is what do you perceive this investment on your own?

People have been asking ESL to start a faster liquidation process, and from the cash position update in Q4, it seems like he is doing that work.

But I still don't understand why the same store comp could drop 9%. If he is liquidating the inventories fast, he will report a higher loss, but I think at least the sales comp should go up instead of down.

So maybe he is not doing what you wanted him to do. As another member pointed out, the cash increase is just seasonal.

Anyway, I am very unhappy with my investment in this sucker, but fortunately I have only a 5% position, so I am not feeling as painful as Baker Street.

What I especially don't understand is the reconciliation between GAAP and adjusted earnings. I expected the 700 mn reduction in pension liability due to interest rate increase to shock the short sellers, but it wasn't anywhere listed in the latest Q4 update.

"We currently expect our reported net loss attributable to Holdings' shareholders for the quarter ending February 1, 2014 will be between $250 million and $360 million, or between $2.35 and $3.39 loss per diluted share. This includes $41 million of pension expense, $29 million for store closures and severance and $12 million from gains on sales of assets. Adjusted for these items, net loss is expected to be between $213 million and $316 million, or between $2.01 and $2.98 loss per diluted share."

 

When you say you are unhappy with your investment is this sucker is because the facts have changed or because the price went down? What is different today vs when you first bought? Is it just because there was no update on the pension liability?

 

i think a lot of People are unhappy with the stock Price. and with the strong volatility of the stock. iam also not happy when i bought this at 46$ and now it is 36$.  but i and Long term holders should be more Patient. now is so much negative noise in the media. they talk the stock down. and when the stock goes up again they talk it up again. it is not more than playing with the People.

 

how should bruce berkowitz feel with this Holding? he holds it now for years. he must be the unhappiest Person on earth!

 

but i think he is not. he knows what it is worth. and someday in the future we will arrive at the IV

[tombgrt]

bmichaud, check your math -- I think your number is low on the 68 million SF.

 

Also, let's not forget that they own 90 million square feet and lease 150 square feet at what seems to be a ceiling of $5.50 per square foot on average.  The delta between $5.50 and market value is probably also worth something.

 

The 68MM is the total SF of the top 350 owned and top 50 leased, per Baker Street.

 

No, I mean that if you use $150 per square foot and back out $68 per square foot of debt, you get $82 and not $52.

 

The $52 is per share, not per square foot.