SHLDQ - Sears Holdings Corp

[bmichaud]

My sneaking suspicion is that Circuit City did not have A-quality mall sites lying around its balance sheet.

[enoch01]

The WSJ article on Circuit city is interesting.

http://blogs.wsj.com/bankruptcy/2012/10/25/lessons-from-the-death-of-circuit-city/

 

Choice quotes:

 

He believes Circuit City’s decision makers weren’t scared enough by the shifting pressures in the industry nor nimble enough to quickly change course.

 

I actually think Lampert is "scared" of such shifting pressures, which explains his unwillingness to continue with the same type of CapEx.

 

Wurtzel believes that once management finally came up with a plan, it failed to execute it, deterred by pressure from Wall Street. The investments that would have moved Circuit City’s business forward also would have threatened its stock price, he said.

 

Lampert certainly does not suffer from feeling this kind of pressure.

 

Plus, did Circuit City have the kind of balance sheet Sears does?

[Luke 532]

 

Wurtzel believes that once management finally came up with a plan, it failed to execute it, deterred by pressure from Wall Street. The investments that would have moved Circuit City’s business forward also would have threatened its stock price, he said.

 

Lampert certainly does not suffer from feeling this kind of pressure.

 

Plus, did Circuit City have the kind of balance sheet Sears does?

 

When I propose one popular speculation -- that if improved operations don't get the stock moving soon, he will begin selling off more real estate and maybe even Sears house brands like Craftsman -- he laughs, simply saying, "No."

http://money.cnn.com/2006/02/03/news/companies/investorsguide_lampert/index.htm

 

[Luke 532]

Sears Canada announces more layoffs...

 

http://www.intelligencer.ca/2014/01/15/layoffs-at-sears

[alertmeipp]

i recall cc had sales comission, inventory and liquidity issues

[peridotcapital]

For those that don't think Sears is spending a fortune on Shop Your Way points, please see the attached image.  I wonder how much Sprint is paying them for this.  My sense is that Sprint is shouldering part of the burden, but Sears is also likely shouldering part of the burden to get members more engaged.

 

Well Sears provided us info on how much they are spending

 

We believe that we are making progress in this transformation, as we are seeing continued increases in our SYW member engagement metrics with 69% of our sales in the nine-week period ended January 4, 2014 derived from members as compared to 58% last year. We are intentionally transitioning business models in a thoughtful manner and are making the investments which we believe will demonstrate the value of SYW to our members. Throughout this transition, we have continued with traditional promotional programs and marketing expenditures while investing in our member-centric model, which has impacted our margin and expenses. For the nine-week period ended January 4, 2014 we spent $69 million more on SYW points expense compared to the same period last year.

 

So $69 million more for increase in sales to SYW from 58% to 69%. That would mean approx $400 Million for those 9 weeks. Since those 9 weeks are the most promotional with tons of free points imagine they are half the cost of points for the year. That would still mean approximately $800 Million is SYW points expenses for the year. A fortune sounds about right.

 

That's a good way to estimate it. $800 million is lot. It comes down to roughly $7.50/share.

 

Let's assume that the IV of a liquidation/spinoff scenario is $80/share, which is conservative based on many of the estimates that are out there. So if we assume that $7.50 is money we will never see again, that value goes down to $72.50 in the first year, $65 in the second year, and $57.50 in the third year.

 

By year 3 I would expect either a) SWY starts adding, rather than destroying value, or the more likely b) Lampert stops burning $800 million a year. So if it is worth $57.50 in 3 years, at the current price of $37 that is a 16% return annualized.

 

I think there is a lot of MOS built into this. It assumes $800 million/year wasted for 3 years. It assumes liquidation value to not increase in 3 years from a pretty conservative $80. And it doesn't account for any positive developments such as: a real estate sale to a REIT, a REIT spinoff, better than expected leasing/subleasing.

 

It's important to remember that the SWY spending can be pulled, and that won't effect the value of the brands or the real estate. It's not like it's a necessary form of maintenance capex. And the pension should be paid off in some time, and after that, if SWY is killed then the company should be cash flow positive.

 

My $.02, but I think SHLD is a good buy at this price.

 

1) Does anyone think that $800M is a bit high? Let's assume $36B in sales (total for 2013) and 65% (weighted average for 2013) of those come from SYW members. That equates to ~3.5% "cash back" on every single SYW purchase. For those who use this program, is 3.5% about right as an average reward? Furthermore, it also assumes that 100% of the points awarded are used (none of them expire).

 

2) Don't you think if Eddie pulls SYW after 3 years that sales declines would accelerate? I can't believe they wouldn't... it would mean the point system is not impacting their shopping habits (or are we assuming this would be the case if he pulled the plug?). So while you may stop losing the $7.50/share, you might still be losing $3 or $5 or something.

[Mephistopheles]

 

2) Don't you think if Eddie pulls SYW after 3 years that sales declines would accelerate? I can't believe they wouldn't... it would mean the point system is not impacting their shopping habits (or are we assuming this would be the case if he pulled the plug?). So while you may stop losing the $7.50/share, you might still be losing $3 or $5 or something.

 

Well he seems to believe that SYW is the only chance of SHLD returning as a retailer. If that fails, then it's likely he will really accelerate store closings and head towards a major liquidation. He's already accelerated over the last couple of years. This year so far they have already announced 14 store closings (based on the store closing thread). They have stated repeatedly that they intend on closing unprofitable stores. So I'm assuming that within 3 years the store count will have come down significantly. Besides, based on current numbers, they would be cash flow positive if it weren't for SYW and pension. If they accelerate store closings, then the cash should continue coming in.

[alertmeipp]

For those that don't think Sears is spending a fortune on Shop Your Way points, please see the attached image.  I wonder how much Sprint is paying them for this.  My sense is that Sprint is shouldering part of the burden, but Sears is also likely shouldering part of the burden to get members more engaged.

 

Well Sears provided us info on how much they are spending

 

We believe that we are making progress in this transformation, as we are seeing continued increases in our SYW member engagement metrics with 69% of our sales in the nine-week period ended January 4, 2014 derived from members as compared to 58% last year. We are intentionally transitioning business models in a thoughtful manner and are making the investments which we believe will demonstrate the value of SYW to our members. Throughout this transition, we have continued with traditional promotional programs and marketing expenditures while investing in our member-centric model, which has impacted our margin and expenses. For the nine-week period ended January 4, 2014 we spent $69 million more on SYW points expense compared to the same period last year.

 

So $69 million more for increase in sales to SYW from 58% to 69%. That would mean approx $400 Million for those 9 weeks. Since those 9 weeks are the most promotional with tons of free points imagine they are half the cost of points for the year. That would still mean approximately $800 Million is SYW points expenses for the year. A fortune sounds about right.

 

That's a good way to estimate it. $800 million is lot. It comes down to roughly $7.50/share.

 

Let's assume that the IV of a liquidation/spinoff scenario is $80/share, which is conservative based on many of the estimates that are out there. So if we assume that $7.50 is money we will never see again, that value goes down to $72.50 in the first year, $65 in the second year, and $57.50 in the third year.

 

By year 3 I would expect either a) SWY starts adding, rather than destroying value, or the more likely b) Lampert stops burning $800 million a year. So if it is worth $57.50 in 3 years, at the current price of $37 that is a 16% return annualized.

 

I think there is a lot of MOS built into this. It assumes $800 million/year wasted for 3 years. It assumes liquidation value to not increase in 3 years from a pretty conservative $80. And it doesn't account for any positive developments such as: a real estate sale to a REIT, a REIT spinoff, better than expected leasing/subleasing.

 

It's important to remember that the SWY spending can be pulled, and that won't effect the value of the brands or the real estate. It's not like it's a necessary form of maintenance capex. And the pension should be paid off in some time, and after that, if SWY is killed then the company should be cash flow positive.

 

My $.02, but I think SHLD is a good buy at this price.

 

1) Does anyone think that $800M is a bit high? Let's assume $36B in sales (total for 2013) and 65% (weighted average for 2013) of those come from SYW members. That equates to ~3.5% "cash back" on every single SYW purchase. For those who use this program, is 3.5% about right as an average reward? Furthermore, it also assumes that 100% of the points awarded are used (none of them expire).

 

2) Don't you think if Eddie pulls SYW after 3 years that sales declines would accelerate? I can't believe they wouldn't... it would mean the point system is not impacting their shopping habits (or are we assuming this would be the case if he pulled the plug?). So while you may stop losing the $7.50/share, you might still be losing $3 or $5 or something.

 

3.5% seems high but my read is they are trying to make ppl buy @45% off rather than %50off using SYW. So that still net 1.5% for example.

[krazeenyc]

For those that don't think Sears is spending a fortune on Shop Your Way points, please see the attached image.  I wonder how much Sprint is paying them for this.  My sense is that Sprint is shouldering part of the burden, but Sears is also likely shouldering part of the burden to get members more engaged.

 

Well Sears provided us info on how much they are spending

 

We believe that we are making progress in this transformation, as we are seeing continued increases in our SYW member engagement metrics with 69% of our sales in the nine-week period ended January 4, 2014 derived from members as compared to 58% last year. We are intentionally transitioning business models in a thoughtful manner and are making the investments which we believe will demonstrate the value of SYW to our members. Throughout this transition, we have continued with traditional promotional programs and marketing expenditures while investing in our member-centric model, which has impacted our margin and expenses. For the nine-week period ended January 4, 2014 we spent $69 million more on SYW points expense compared to the same period last year.

 

So $69 million more for increase in sales to SYW from 58% to 69%. That would mean approx $400 Million for those 9 weeks. Since those 9 weeks are the most promotional with tons of free points imagine they are half the cost of points for the year. That would still mean approximately $800 Million is SYW points expenses for the year. A fortune sounds about right.

 

That's a good way to estimate it. $800 million is lot. It comes down to roughly $7.50/share.

 

Let's assume that the IV of a liquidation/spinoff scenario is $80/share, which is conservative based on many of the estimates that are out there. So if we assume that $7.50 is money we will never see again, that value goes down to $72.50 in the first year, $65 in the second year, and $57.50 in the third year.

 

By year 3 I would expect either a) SWY starts adding, rather than destroying value, or the more likely b) Lampert stops burning $800 million a year. So if it is worth $57.50 in 3 years, at the current price of $37 that is a 16% return annualized.

 

I think there is a lot of MOS built into this. It assumes $800 million/year wasted for 3 years. It assumes liquidation value to not increase in 3 years from a pretty conservative $80. And it doesn't account for any positive developments such as: a real estate sale to a REIT, a REIT spinoff, better than expected leasing/subleasing.

 

It's important to remember that the SWY spending can be pulled, and that won't effect the value of the brands or the real estate. It's not like it's a necessary form of maintenance capex. And the pension should be paid off in some time, and after that, if SWY is killed then the company should be cash flow positive.

 

My $.02, but I think SHLD is a good buy at this price.

 

1) Does anyone think that $800M is a bit high? Let's assume $36B in sales (total for 2013) and 65% (weighted average for 2013) of those come from SYW members. That equates to ~3.5% "cash back" on every single SYW purchase. For those who use this program, is 3.5% about right as an average reward? Furthermore, it also assumes that 100% of the points awarded are used (none of them expire).

 

2) Don't you think if Eddie pulls SYW after 3 years that sales declines would accelerate? I can't believe they wouldn't... it would mean the point system is not impacting their shopping habits (or are we assuming this would be the case if he pulled the plug?). So while you may stop losing the $7.50/share, you might still be losing $3 or $5 or something.

 

Eddie has made it clear that currently they're essentially spending 2x on marketing. Once on traditional marketing and again on SYW points. I think once they feel that enough of their customers are using SYW, they will cut traditional marketing almost entirely (like Costco).  Will it work... who knows.

 

I don't have a good estimate on exactly what is being spent on SYW.

[Mephistopheles]

Eddie has made it clear that currently they're essentially spending 2x on marketing. Once on traditional marketing and again on SYW points. I think once they feel that enough of their customers are using SYW, they will cut traditional marketing almost entirely (like Costco).  Will it work... who knows.

 

I don't have a good estimate on exactly what is being spent on SYW.

 

Advertising expense, as listed under SG&A, was $1.6 billion in 2012. If they are truly spending 2x on marketing, then SYW points are costing the company $1.6 billion, not $800 million. In a way that's good because it'll be more of a benefit if the plug is pulled, but that also means they are burning $15/share every year.

[krazeenyc]

Eddie has made it clear that currently they're essentially spending 2x on marketing. Once on traditional marketing and again on SYW points. I think once they feel that enough of their customers are using SYW, they will cut traditional marketing almost entirely (like Costco).  Will it work... who knows.

 

I don't have a good estimate on exactly what is being spent on SYW.

 

Advertising expense, as listed under SG&A, was $1.6 billion in 2012. If they are truly spending 2x on marketing, then SYW points are costing the company $1.6 billion, not $800 million. In a way that's good because it'll be more of a benefit if the plug is pulled, but that also means they are burning $15/share every year.

 

You misunderstood me. I'm saying that right now they are spending money on SYW and additionally they are spending money on standard ads. They plan to eventually cut the standard ads out completely and use only SYW.

[alertmeipp]

Eddie has made it clear that currently they're essentially spending 2x on marketing. Once on traditional marketing and again on SYW points. I think once they feel that enough of their customers are using SYW, they will cut traditional marketing almost entirely (like Costco).  Will it work... who knows.

 

I don't have a good estimate on exactly what is being spent on SYW.

 

Advertising expense, as listed under SG&A, was $1.6 billion in 2012. If they are truly spending 2x on marketing, then SYW points are costing the company $1.6 billion, not $800 million. In a way that's good because it'll be more of a benefit if the plug is pulled, but that also means they are burning $15/share every year.

 

You misunderstood me. I'm saying that right now they are spending money on SYW and additionally they are spending money on standard ads. They plan to eventually cut the standard ads out completely and use only SYW.

 

My bet is they will never cut the standard ad out completely, there customer base won't allow that.

[adesigar]

1) Does anyone think that $800M is a bit high? Let's assume $36B in sales (total for 2013) and 65% (weighted average for 2013) of those come from SYW members. That equates to ~3.5% "cash back" on every single SYW purchase. For those who use this program, is 3.5% about right as an average reward? Furthermore, it also assumes that 100% of the points awarded are used (none of them expire).

 

2) Don't you think if Eddie pulls SYW after 3 years that sales declines would accelerate? I can't believe they wouldn't... it would mean the point system is not impacting their shopping habits (or are we assuming this would be the case if he pulled the plug?). So while you may stop losing the $7.50/share, you might still be losing $3 or $5 or something.

 

I did a bit of quick research to see what points are awarded for

 

Shop your way points are not just awarded for purchases at Sears

1. They are awarded for offers from SYW Partners. The partners probably compensate SHLD for this

2. Bonus points if a card is linked

3. Special limited time SYW points that don't last the full year

4. Targeted deals with bonus points

5. Surprise points giveaway

etc

 

http://www.searsholdings.com/pubrel/pressOne.jsp?id=s16310_item137220

http://slickdeals.net/f/6367174-ch3apsk8-s-down-dirty-faq-for-shop-your-way-rewards

 

[adesigar]

Eddie has made it clear that currently they're essentially spending 2x on marketing. Once on traditional marketing and again on SYW points. I think once they feel that enough of their customers are using SYW, they will cut traditional marketing almost entirely (like Costco).  Will it work... who knows.

 

I don't have a good estimate on exactly what is being spent on SYW.

 

Advertising expense, as listed under SG&A, was $1.6 billion in 2012. If they are truly spending 2x on marketing, then SYW points are costing the company $1.6 billion, not $800 million. In a way that's good because it'll be more of a benefit if the plug is pulled, but that also means they are burning $15/share every year.

 

You misunderstood me. I'm saying that right now they are spending money on SYW and additionally they are spending money on standard ads. They plan to eventually cut the standard ads out completely and use only SYW.

 

My bet is they will never cut the standard ad out completely, there customer base won't allow that.

 

They may not cut it out completely but they can definitely drastically reduce the spend from 1.5+ Billion since 70% of sales are to members who get customized offers on the site or phone.

 

From the 2010 Chairmans letter

The Shop Your Way Rewards program transitions Sears Holdings from serving customers to building relationships with members.  Sears helped establish first the mail-order catalog and later the newspaper circular as foundational platforms for communicating with customers.  These platforms were very effective, but suffer today from long lead times to execute and a lack of personalization.  Each customer receives the same weekly ad delivered through their local newspaper.  In the past, it was not until a customer arrived at one of our stores that we could begin a true relationship with them, and even then it was predominantly transactional.

[vinod1]

 

1) Does anyone think that $800M is a bit high? Let's assume $36B in sales (total for 2013) and 65% (weighted average for 2013) of those come from SYW members. That equates to ~3.5% "cash back" on every single SYW purchase. For those who use this program, is 3.5% about right as an average reward? Furthermore, it also assumes that 100% of the points awarded are used (none of them expire).

 

2) Don't you think if Eddie pulls SYW after 3 years that sales declines would accelerate? I can't believe they wouldn't... it would mean the point system is not impacting their shopping habits (or are we assuming this would be the case if he pulled the plug?). So while you may stop losing the $7.50/share, you might still be losing $3 or $5 or something.

 

I think $800M is a very high estimate.

 

Although Tesco Clubcard data is not disclosed, there are a few hints in the AR. In 2010 AR they mentioned that customers earned £550m when they had double points during that year. The double points were not offered for the whole year, but it represents about 1.4% of UK sales.

 

The standard SYW offer is for 1% and even if we assume that it would be double that amount due to promotions, with 70% of sales are using SYW and with 80% redemption we would get at most $392 million [ $35 B x 0.7 x 0.02 x 0.8 ]

 

Vinod

[adesigar]

I think $800M is a very high estimate.

 

Although Tesco Clubcard data is not disclosed, there are a few hints in the AR. In 2010 AR they mentioned that customers earned £550m when they had double points during that year. The double points were not offered for the whole year, but it represents about 1.4% of UK sales.

 

The standard SYW offer is for 1% and even if we assume that it would be double that amount due to promotions, with 70% of sales are using SYW and with 80% redemption we would get at most $392 million [ $35 B x 0.7 x 0.02 x 0.8 ]

 

Vinod

 

I believe Sears needs to expense SYW when points are awarded to customers and not if/when used.

[Mephistopheles]

Cutting of advertising makes a lot of sense. If they are spending a lot less than $800 million on SYW, then we should see some serious savings from cutting the ad/SYW budget. And the trend is already in place. In 2012 they spent 4.0% of sales on advertising, down from 4.6% in 2011.

[vinod1]

I think $800M is a very high estimate.

 

Although Tesco Clubcard data is not disclosed, there are a few hints in the AR. In 2010 AR they mentioned that customers earned £550m when they had double points during that year. The double points were not offered for the whole year, but it represents about 1.4% of UK sales.

 

The standard SYW offer is for 1% and even if we assume that it would be double that amount due to promotions, with 70% of sales are using SYW and with 80% redemption we would get at most $392 million [ $35 B x 0.7 x 0.02 x 0.8 ]

 

Vinod

 

I believe Sears needs to expense SYW when points are awarded to customers and not if/when used.

 

That is correct, but I think they use an estimate of the points that are likely to be redeemed when they expense it. Just like loan loss reserves or airline points. In other words they do not expense as if there is 100% redemption.

 

Vinod

[Luke 532]

King of Prussia Lease Agreement with Dick's:

http://searsholdings.mediaroom.com/index.php?s=16310&item=137262

 

Looks like this Seeking Alpha writer was on to something:

http://seekingalpha.com/article/1919971-a-visit-to-the-front-lines-of-the-sears-holdings-cold-war

[ourkid8]

Now that JPC is closing and selling 33 underperforming stores, wouldn't this be a negative impact to SHLD's RE prices?

 

Tks,

S

[alertmeipp]

Now that JPC is closing and selling 33 underperforming stores, wouldn't this be a negative impact to SHLD's RE prices?

 

Tks,

S

 

My take is +ve to its retail, and as to RE, we will need to see map out their locations to see, bad location worth next to nothing anyways.

[jeffmori7]

Now that JPC is closing and selling 33 underperforming stores, wouldn't this be a negative impact to SHLD's RE prices?

 

Tks,

S

 

My take is +ve to its retail, and as to RE, we will need to see map out their locations to see, bad location worth next to nothing anyways.

 

Sorry, but what is +ve?

[alertmeipp]

less competition (if they have nearby locations)?

[ourkid8]

Who is Sear's real competition? They are fighting at the lower end segment and that is Walmart and Target.  JC Penny is a bit higher end then Sears from what I saw when I was in the states.  Please correct me if I am wrong? 

 

Tks,

S

 

less competition (if they have nearby locations)?

[bmichaud]

http://www.cnbc.com/id/101341409

 

Honestly, I'm surprised SHLD's retail side didn't get hurt worse given how bad the retail environment has been.