SHLDQ - Sears Holdings Corp

[merkhet]

Ah, I see. Thanks. I'm blaming it on being early in the morning. :)

[ERICOPOLY]

 

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

 

 

Do you have data that proves nobody does?

 

 

Some retailers are charging customers up to $25 to try on items in a bid to combat 'showrooming'.

 

The phenomenon, which sees shoppers research items in-store and buy them cheaper online, is said to be having a toxic effect on brick-and-mortar businesses and leading them to come up with new sales strategies.

 

Indeed, on WeddingWire, a bride-to-be called Jen reveals how she was recently charged $25 at one unnamed New York boutique as she tried on bridal gowns.

 

http://www.dailymail.co.uk/femail/article-2339125/The-stores-charging-shoppers-25-TRY-ON-clothes-backlash-time-wasting-trend-showrooming.html#ixzz2qHwPsUz4

 

[MrB]

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.

 

Bmichaud, I apologise for wasting your time by not expressing myself well. I meant those as rhetorical questions. Making the point that those are the three questions an investor needs to answer. I also should have added that your point on "optionality" is critical, but "under discussed". I've lucked into having a front row seat to some interesting work outs/turnarounds and what I've come to realise is that the smart operators focus on creating and maintaining options more than they go for a make it or break it strategy. However, when investors look from the outside in, they tend to argue the latter on don't realise the operator is positioning for the former.

Anyway, apologies again for wasting your time, but thank you for the answers anyway. Broadly speaking I intended it as a compliment for pointing out the optionality.

 

I think I should go to bed earlier and Merkhet should sleep in  ;-)

[ERICOPOLY]

valueInv,

 

This will teach you how it's done:

 

http://www.ehow.com/video_4405070_trying-jeans-before-buying-online.html

 

 

(I'm not posting this to be snarky, but rather to show that they even have an EHow article on this -- it's not something I'm imagining, it's a trend and a lot of people do it.  The cost of returns won't show up in Amazon's numbers until all the brick and mortar "showrooms" go bust)

 

The point being, Amazon is convenient if you don't have to go through the hassle&cost of returning all the items that don't fit you.  I wouldn't use Amazon for that kind of shopping if I had to keep boxing things back up and returning.  At that point, it becomes more convenient to just go down to the "Brand X" showroom/store at the mall -- so I see it making sense if the brands pay for the showroom space, that way they don't care if you buy it right there on the spot in the show room, or if Amazon fulfills the order online.

[enoch01]

Making the point that those are the three questions an investor needs to answer. I also should have added that your point on "optionality" is critical, but "under discussed". I've lucked into having a front row seat to some interesting work outs/turnarounds and what I've come to realise is that the smart operators focus on creating and maintaining options more than they go for a make it or break it strategy. However, when investors look from the outside in, they tend to argue the latter on don't realise the operator is positioning for the former.

 

+1

[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.

 

Bmichaud, I apologise for wasting your time by not expressing myself well. I meant those as rhetorical questions. Making the point that those are the three questions an investor needs to answer. I also should have added that your point on "optionality" is critical, but "under discussed". I've lucked into having a front row seat to some interesting work outs/turnarounds and what I've come to realise is that the smart operators focus on creating and maintaining options more than they go for a make it or break it strategy. However, when investors look from the outside in, they tend to argue the latter on don't realise the operator is positioning for the former.

Anyway, apologies again for wasting your time, but thank you for the answers anyway. Broadly speaking I intended it as a compliment for pointing out the optionality.

 

I think I should go to bed earlier and Merkhet should sleep in  ;-)

 

Mr. B,

 

Not a waste of time at all - I thought you may have been speaking rhetorically, but in case you were not I didn't want to be rude  :)

 

Obviously I'm biased, but I LOVE the thought you just posted. It just defies logic that Lampert would burn the furniture. He can't be that dumb.

[ERICOPOLY]

I bought a few hundred calls this morning when stock was around $36.80 and the stock took off really fast into the $37.20 range.

 

Fairly easy to move the price up despite the avalanche of bad press.

[krazeenyc]

I bought a few hundred calls this morning when stock was around $36.80 and the stock took off really fast into the $37.20 range.

 

Fairly easy to move the price up despite the avalanche of bad press.

 

I straight added some more shares around $36.10-$36.15. 

[value-is-what-you-get]

I bought a few hundred calls this morning when stock was around $36.80 and the stock took off really fast into the $37.20 range.

 

Fairly easy to move the price up despite the avalanche of bad press.

 

fairly easy while the short selling ban is in effect too.  Tomorrow may be different.

[merkhet]

I bought a few hundred calls this morning when stock was around $36.80 and the stock took off really fast into the $37.20 range.

 

Fairly easy to move the price up despite the avalanche of bad press.

 

Curious to know why you went the call route -- the cost of leverage seems quite high, no?

[ASTA]

well I was drinking again as I am shit scared but bought 7% more today lets see last time I was drunk buying this it went well for a while I hope I will not be the last person leaving the midnight ball. 17% position now.

[BTShine]

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.

 

Good points. 

 

Warby Parker, and others like Bonobos, etc., are opening brick and mortar stores after starting their business solely online.  It's not a world that is completely online.  Sometimes it's just easier to go into the store.

 

Bonobos sells at Nordstrom brick and mortar stores. 

 

Just as the catalog/mail order system didn't kill the mall.  The internet won't kill the mall (or the majority of malls) either. 

 

 

[Cardboard]

"The honest answer is we certainly had plans (for a turnaround) and forecasts for this year that it would have happened already, and we haven't delivered against that," Lampert said

 

This is what makes me the most worried. Is the guy delusional? What have they done to warrant a turnaround in 2013?

 

Customers are fleeing, he is investing nothing in the stores: capex, people, inventory. I understand the "showrooming" effect but, people still shop at Macy's, Dillard's and other stores. So it is a headwind but, likely not the biggest for them at the moment. However, what is clear in retail is that once a negative trend is in place, it just gets worse and worse. To get people back and sales, he will have to take them away from others and I see nothing to make that happen. How else can he have expected a turnaround at current store count or in 2013? Their internet sales may be going up but, nowhere near enough to offset the decline.

 

While I agree that the value of the real estate is there, the overall value is declining due to negative cash flow. My simple way to look at SHLD was to add a certain amount to property and equipment to account for the not-reflected value of real estate and then to look at the resulting book value to get a sense of IV vs the stock.

 

Now, I know that people will jump and mention that I forget the value of the brands, Lands End and all that but, I continue to believe that most of that will be swallowed by closing costs and on-going negative cash flows until it is over. Moreover, it is pretty typical in a liquidation to realize that assets are less than expected while liabilities stick and often get worse.

 

So maybe that the best outcome is for a SGP to take a run at SHLD and finally do what is necessary and to shutdown the operating business which Lampert has been unwilling to do and seems intent on continuing. Sometimes I wonder if Lampert is performing some act of philanthropy by keeping SHLD open and continuing to keep as many employees employed as possible during this difficult economic time.

 

By the way, is there any example in the last 100 years of a large retail chain shutting down before bankruptcy? Do they all wait before there is nothing left to salvage other than for repaying some creditors?

 

Cardboard

[gr33ngi4nt]

http://www.sec.gov/Archives/edgar/data/799288/000119312514008029/d632333dex991.htm

 

Updated LE filing - includes Q3 financials. EBITDA is 20% higher YTD (Nov end). Q3 Adjusted EBITDA increased 30% YoY on higher sales and lower SG&A.

[plato1976]

Eric,

 

You were not fully convinced with SHLD

So this is just a speculation ?

 

 

I bought a few hundred calls this morning when stock was around $36.80 and the stock took off really fast into the $37.20 range.

 

Fairly easy to move the price up despite the avalanche of bad press.

[alertmeipp]

too many males here, shopping in a mall is much more enjoyable for some.

[ERICOPOLY]

Eric,

 

You were not fully convinced with SHLD

So this is just a speculation ?

 

 

I bought a few hundred calls this morning when stock was around $36.80 and the stock took off really fast into the $37.20 range.

 

Fairly easy to move the price up despite the avalanche of bad press.

 

 

Yes, it is a speculation.

[alertmeipp]

as if shld is not speculative enough? ;D

[BTShine]

too many males here, shopping in a mall is much more enjoyable for some.

 

Agreed!!! 

 

Men will do anything not to step foot in the mall.

 

Women will find an excuse just to step foot in the mall!

[ERICOPOLY]

By the way, is there any example in the last 100 years of a large retail chain shutting down before bankruptcy? Do they all wait before there is nothing left to salvage other than for repaying some creditors?

 

Cardboard

 

Executives would rather keep on getting paid their handsome salaries perhaps, rather than shut down for the benefit of others (shareholders).  Plus, it feels bad to fire all those people -- so if you still get paid to keep it running, then why be the unpopular guy who fires everyone including himself?

[ERICOPOLY]

I bought a few hundred calls this morning when stock was around $36.80 and the stock took off really fast into the $37.20 range.

 

Fairly easy to move the price up despite the avalanche of bad press.

 

Curious to know why you went the call route -- the cost of leverage seems quite high, no?

 

I don't really think it's high.

 

Is $700,000 expensive for a studio apartment in Manhattan?  You can get one for much less in Texas.

 

You have to look at the volatility of the stock, and consider which strikes you are talking about. 

[peridotcapital]

If you click from Sears and 1 partner it shows the partner that is selling it. (the Sears site sux compared to amazon).  But both sears.com and Sears marketplace are both growing rapidly.

 

Sears retail is horrible -- I KNOW. But I want to post more on SHLD -- especially since I can pretty much debunk the myth that Sears Retail is so bad that the retail ops is burning all the cash/real estate -- IT IS NOT. But I suggest everyone look at Sears 2 years ago vs Sears now -- CASH/DEBT/PENSION vs PROPERTY/LEASES SOLD.  Realize that the SCC ownership is only 50% they recieved 300M USD from SCC in the last 2 years from SCC dividends. Consider Sears spent $1 billion in cash on the pension/postretirement benefits -- and the liablity went from $3 billion to about $1.4 billion. Look at how much CASH was burned, how much Debt was added, how much the pension was reduced, and how much SHLD took in from 1 offs (SHLD real estate transactions/SHOS and SCC dividends). Obviously the return on assets is HORRIBLE -- but the actual cash burn from retail ops is $0 or less depending on how you look at it.

 

What they're really doing is burning inventory -- liquidating in slow motion all the excess stores.

They are bridging the gap from a retailer with a lot of real estate  to real estate company with a retailer attached.

 

How do SHLD's book value and total assets compare from 2 years ago vs today. From that perspective, do you still think they have essentially treaded water from a financial condition perspective over the last 24 months?

[Cardboard]

"Executives would rather keep on getting paid their handsome salaries perhaps, rather than shut down for the benefit of others (shareholders).  Plus, it feels bad to fire all those people -- so if you still get paid to keep it running, then why be the unpopular guy who fires everyone including himself?"

 

Exactly! Executives.

 

Lampert is not an executive. Despite not suffering from this he is still not shutting it down. Is the political pressure too great? Is it just ego to see a grand plan make it through?

 

If we take one smaller case to make it simpler for him: Kmart. Is there any reason why there is any Kmart store operating today? Is that business generating any free cash flow? Would it not have been better to shut this down 2 or 3 years ago and to realize the value from the real estate?

 

Cardboard

[ERICOPOLY]

I bought a few hundred calls this morning when stock was around $36.80 and the stock took off really fast into the $37.20 range.

 

Fairly easy to move the price up despite the avalanche of bad press.

 

fairly easy while the short selling ban is in effect too.  Tomorrow may be different.

 

10 million shares traded on Friday.  Already 2 million today.

 

The stock is holding up well because there isn't much selling pressure?

[ERICOPOLY]

 

Lampert is not an executive.

 

 

Did he step down from CEO role?  Maybe your point is that he is not traditionally an executive, but he is in that role today and he is not keeping the job for the salary.