SHLDQ - Sears Holdings Corp

[vinod1]

Old article but has a data point on SYW redemption rate. 20% redemption rate is pretty low as it indicates that about 14% (70% of sales on SYW) of shoppers are really taking advantage of points.

 

http://www.businessweek.com/articles/2013-07-11/at-sears-eddie-lamperts-warring-divisions-model-adds-to-the-troubles#p6

 

"Although it’s unclear whether the program is effective—two former Sears executives say the rate at which Shop Your Way members redeem their points for purchases is less than 20 percent, far lower than most loyalty programs—Lampert maintains that Shop Your Way is the future of Sears."

 

Vinod

[T-bone1]

Does anyone keep a running tally of store closures?  It looks like a bunch more were announced today . . .

 

Maybe we could keep a clean thread for this without conversation on it? 

 

(or I could quit being lazy and do the work myself)

[Luke 532]

Does anyone keep a running tally of store closures?  It looks like a bunch more were announced today . . .

 

Maybe we could keep a clean thread for this without conversation on it? 

 

(or I could quit being lazy and do the work myself)

 

Done: http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/shld-store-closures/msg153272/#new

[Luke 532]

It looks like a bunch more were announced today . . .

 

A bunch more today?  I only see the Aiken, South Carolina closure (Chicago and Iowa were yesterday, is that what you mean?).

 

EDIT: nevermind, I see them on the "Store Closures" thread.  Thanks... 20 so far in 2014.  Keep it up, Eddie, keep it up.  This quote from Sanjeev keeps ringing in my ear...

It's possible to close enough underperforming stores and get it to break-even or a very modest profit.

[value-is-what-you-get]

Does anyone have a resonable guess or explanation as to why Sears pre-announced there earnings?  Was it an attempt to break up what will be a horrific quarter (retail loss-wise) into smaller bits?  Transparency to avoid shareholder class-actions? 

 

This has been knawing at me and I can't see the advantage in doing this.

[krazeenyc]

Does anyone have a resonable guess or explanation as to why Sears pre-announced there earnings?  Was it an attempt to break up what will be a horrific quarter (retail loss-wise) into smaller bits?  Transparency to avoid shareholder class-actions? 

 

This has been knawing at me and I can't see the advantage in doing this.

 

It's what they've done in the past. See late Dec. 2011.

 

 

http://searsholdings.mediaroom.com/index.php?s=16310&item=98114

[heth247]

Does anyone have a resonable guess or explanation as to why Sears pre-announced there earnings?  Was it an attempt to break up what will be a horrific quarter (retail loss-wise) into smaller bits?  Transparency to avoid shareholder class-actions? 

 

This has been knawing at me and I can't see the advantage in doing this.

 

Many companies do that, why guessing their motives every time?

 

The more important question is if/when we will see a insider buy by Eddie once he is out of the black-out period.  He liked the stock when it was $40 in 2012. Two years later, SYW should have made more progress and gives him more confidence if he really believe it works. If he does not buy more here, then all his blog posts are just BS.

[constructive]

Does anyone have a resonable guess or explanation as to why Sears pre-announced there earnings?  Was it an attempt to break up what will be a horrific quarter (retail loss-wise) into smaller bits?  Transparency to avoid shareholder class-actions? 

 

This has been knawing at me and I can't see the advantage in doing this.

 

Yeah, I think lawyers generally push management to preannounce bad earnings because it helps avoid the nuisance lawsuits brought by ambulance chasers.

[fareastwarriors]

http://www.bloomberg.com/news/2014-01-22/better-isn-t-happening-at-sears.html

 

Better Isn't Happening at Sears

[value-is-what-you-get]

Just read an article describing how Air Canada received a winfall against their pension liabilities due to interest rates on long bonds increasing.  A few basis points makes quite a difference.  Like 1.7 billion in a year difference against a 3+ billion liability.  Might SHLD reap similar benefit?  Are assumptions based on long bond rates adjusted annually, quarterly??

[value-is-what-you-get]

http://www.bloomberg.com/news/2014-01-22/better-isn-t-happening-at-sears.html

 

Better Isn't Happening at Sears

 

I don t agree with the author who states that their real estate footprint is an anchor around their necks.  It s the life jacket - he has it exactly wrong.

[Luke 532]

Just read an article describing how Air Canada received a winfall against their pension liabilities due to interest rates on long bonds increasing.  A few basis points makes quite a difference.  Like 1.7 billion in a year difference against a 3+ billion liability.  Might SHLD reap similar benefit?  Are assumptions based on long bond rates adjusted annually, quarterly??

 

Yeah, I think SHLD gets about $500-$600M in pension relief for every 1% rise in rates.

[Mephistopheles]

Bump. Anyone?

 

 

I am looking through the guarantor/non-guarantor structure, and trying to estimate what KCD earns.

 

According to exhibit 21 from the 10-k (http://www.sec.gov/Archives/edgar/data/1310067/000131006713000013/shldex21201210k.htm), the non-guarantor subsidiaries are:

 

Sears Holdings Global Sourcing

Sears Reinsurance

Sears Canada

Sears Financial Holding Corporation

Sears Brands LLC - KCD IP

SRC Depositor Corporation

SRC O.P. Corporation - SRC Facilities Statutory Trust No. 2003-A - SRC Real Estate Holdings (TX), SRC Real Estate (TX) (REMIC related subsidiaries)

 

According to the last 10-K, the non-guarantor subsidiaries had $8 billion in sales and $446 million in net income.

 

As we know, the REMIC subsidiaries earn lease income from 125 stores, and KCD IP earns royalty income on KCD products. And we also know that Sears Re owns MBS and ABS on these income streams.

 

Sears Re owns $1.25 billion in securities issued by the REMIC from which they get paid through the lease income. So if the 125 stores are valued at $1.25 billion, then at a cap rate of say 8%, the lease income is $100 million. Is this a good way to approach it?

 

Sears Canada earned C$101 million in 2012 (CAD and USD were about the same last year when these figures were released).

 

So if we subtract $100 million in leases and $100 million in SCC net income from $446, we get $246 million in income from the other non-guarantors, including KCD, and the insurance operations of Sears Re. Does anyone know what the other non-guarantors may earn, or is it safe to say that a good chunk of that $246 million belongs to KCD? If we assume $200 million in income for KCD, then at a 10x multiple that is 1/2 of the current market cap, or $2 billion. This is fairly close to the ABS value of $1.8 billion.

 

I also noticed that operating cash flow for the non-guarantors was $1 billion in 2012. If we take out $100 or even $200 million for lease income, that is still a lot of cash being produced by the non-guarantors, which I believe don't include any of the real estate besides those 125 stores (and SCC stores). If the bulk of the value of the non-guarantors include only 125 domestic stores, SCC stores, SCC, and KCD, then it makes SHLD a screaming buy.

 

Thoughts?

 

[Luke 532]

Annual Meeting announced... May 6th

http://searsholdings.mediaroom.com/index.php?s=16310&item=137265

[peridotcapital]

Bump. Anyone?

 

 

I am looking through the guarantor/non-guarantor structure, and trying to estimate what KCD earns.

 

According to exhibit 21 from the 10-k (http://www.sec.gov/Archives/edgar/data/1310067/000131006713000013/shldex21201210k.htm), the non-guarantor subsidiaries are:

 

Sears Holdings Global Sourcing

Sears Reinsurance

Sears Canada

Sears Financial Holding Corporation

Sears Brands LLC - KCD IP

SRC Depositor Corporation

SRC O.P. Corporation - SRC Facilities Statutory Trust No. 2003-A - SRC Real Estate Holdings (TX), SRC Real Estate (TX) (REMIC related subsidiaries)

 

According to the last 10-K, the non-guarantor subsidiaries had $8 billion in sales and $446 million in net income.

 

As we know, the REMIC subsidiaries earn lease income from 125 stores, and KCD IP earns royalty income on KCD products. And we also know that Sears Re owns MBS and ABS on these income streams.

 

Sears Re owns $1.25 billion in securities issued by the REMIC from which they get paid through the lease income. So if the 125 stores are valued at $1.25 billion, then at a cap rate of say 8%, the lease income is $100 million. Is this a good way to approach it?

 

Sears Canada earned C$101 million in 2012 (CAD and USD were about the same last year when these figures were released).

 

So if we subtract $100 million in leases and $100 million in SCC net income from $446, we get $246 million in income from the other non-guarantors, including KCD, and the insurance operations of Sears Re. Does anyone know what the other non-guarantors may earn, or is it safe to say that a good chunk of that $246 million belongs to KCD? If we assume $200 million in income for KCD, then at a 10x multiple that is 1/2 of the current market cap, or $2 billion. This is fairly close to the ABS value of $1.8 billion.

 

I also noticed that operating cash flow for the non-guarantors was $1 billion in 2012. If we take out $100 or even $200 million for lease income, that is still a lot of cash being produced by the non-guarantors, which I believe don't include any of the real estate besides those 125 stores (and SCC stores). If the bulk of the value of the non-guarantors include only 125 domestic stores, SCC stores, SCC, and KCD, then it makes SHLD a screaming buy.

 

Thoughts?

 

I don't think $200M for KCD income is too far off. A 10 multiple would be the high end of the range for me, given that KCD products are losing market share and should continue to do so. I think the assertion that other retailers are eager to stock Craftsman and Kenmore is also overstated given how few deals have surfaced over the last few years. And we know Eddie is willing to diversify suppliers since they have deals with Costco and Ace so you know he's not the one saying no.

 

So a $2B value for KCD in my view is at the high end of a range I am willing to use. As for whether it makes SHLD a "screaming buy," I'm not so sure... it really depends how quickly you think Eddie can stem the retail losses IMHO. In fact, after the news that Sears can't even run a store in downtown Chicago at breakeven, I'm not so sure he'll ever be able to get the retail side to cash flow positive.

[bmichaud]

Perhaps he can blog his way to cash flow positive :)

[20ppy]

Perhaps he can blog his way to cash flow positive :)

 

Blogs or not, we can care less, but being cash flow positive is THE billion dollar question and it seems a matter of when!!

[merkhet]

I'm likely biased at this point, so I'm throwing this out there.

 

I'm re-reading parts of Andy Grove's "Only the Paranoid Survive," and I'm getting the sense that ESL is taking a page from the Intel playbook when they decided to start focusing on microprocessors.

 

Not a fully formed thought yet, but I thought I'd get some feedback on that idea.

[JAllen]

I'm likely biased at this point, so I'm throwing this out there.

 

I'm re-reading parts of Andy Grove's "Only the Paranoid Survive," and I'm getting the sense that ESL is taking a page from the Intel playbook when they decided to start focusing on microprocessors.

 

Not a fully formed thought yet, but I thought I'd get some feedback on that idea.

 

 

Merkhet: Haven't read they book.  Care to expand on that point?

[merkhet]

So I'll combine Andy Grove with Dick Foster's book on Creative Destruction.

 

Basically, companies believe that the world is continuous when in fact it is discontinuous.  It's akin to a punctuated equilibrium theory of firms.  There are what Andy Grove calls "strategic inflection points" that create both immense and yet barely perceptible changes that redefine industries.  Companies that are not aware of this change and do not adapt to this change are inevitably wiped out.

 

For Intel, there is a great story where Andy Grove and another executive were faced with whether to continue making the DRAM chips that were Intel's bread and butter (but were getting crushed on margins because of Japanese entrants) or move to making microprocessors.  At the time, it was not clear that Intel would have any real competitive advantage or facility in making microprocessors.  Andy & the other executive basically looked at each other and said, if we were fired and someone else walked through that door right now -- what would that person do?  And they both agreed that the new guy would focus on microprocessors.  So Andy says, well why don't we go out and grab a cigarette, walk back through those doors and do it ourselves?

 

In this particular case, I think Sears might be very similar to Intel in that there are changes occurring in the retail landscape that require an immense amount of adaptation in order to survive.  I suspect that ESL could run Sears mildly profitably if he were to just do what everyone else is doing -- basically stick with the game plan.  However, he has the resources (real estate) and control (which Ackman lacked at JCP) to suffer for a while during the transformation process.

 

None of this indicates that they will succeed, however -- it merely means that I personally think he's doing the right thing.  Additionally, if they do succeed, I would pose the following question in terms of competitive advantage -- can you see any other big box retailer or anchor retailer being able to take the type of pain that ESL seems to be willing to endure?  I think no -- Johnson's tenure lasted 14 months, and the guy was a genius.  (A bit rash and rushed in his plan, but I still think a genius nonetheless.)

 

Just some food for thought.

[enoch01]

In this particular case, I think Sears might be very similar to Intel in that there are changes occurring in the retail landscape that require an immense amount of adaptation in order to survive.  I suspect that ESL could run Sears mildly profitably if he were to just do what everyone else is doing -- basically stick with the game plan.  However, he has the resources (real estate) and control (which Ackman lacked at JCP) to suffer for a while during the transformation process.

 

I think this describes the situation very, very well.

[Luke 532]

In this particular case, I think Sears might be very similar to Intel in that there are changes occurring in the retail landscape that require an immense amount of adaptation in order to survive.  I suspect that ESL could run Sears mildly profitably if he were to just do what everyone else is doing -- basically stick with the game plan.  However, he has the resources (real estate) and control (which Ackman lacked at JCP) to suffer for a while during the transformation process.

 

I think this describes the situation very, very well.

 

+1

[plato1976]

I am fine if the plan is to have a tough transformation

 

But the retailer experience SHLD is providing is just terrible (both online and offline)

I am not sure how you can create a successful retailer with unhappy customers

 

The similarity with intel may stop at they both need a transformation.

 

So I'll combine Andy Grove with Dick Foster's book on Creative Destruction.

 

Basically, companies believe that the world is continuous when in fact it is discontinuous.  It's akin to a punctuated equilibrium theory of firms.  There are what Andy Grove calls "strategic inflection points" that create both immense and yet barely perceptible changes that redefine industries.  Companies that are not aware of this change and do not adapt to this change are inevitably wiped out.

 

For Intel, there is a great story where Andy Grove and another executive were faced with whether to continue making the DRAM chips that were Intel's bread and butter (but were getting crushed on margins because of Japanese entrants) or move to making microprocessors.  At the time, it was not clear that Intel would have any real competitive advantage or facility in making microprocessors.  Andy & the other executive basically looked at each other and said, if we were fired and someone else walked through that door right now -- what would that person do?  And they both agreed that the new guy would focus on microprocessors.  So Andy says, well why don't we go out and grab a cigarette, walk back through those doors and do it ourselves?

 

In this particular case, I think Sears might be very similar to Intel in that there are changes occurring in the retail landscape that require an immense amount of adaptation in order to survive.  I suspect that ESL could run Sears mildly profitably if he were to just do what everyone else is doing -- basically stick with the game plan.  However, he has the resources (real estate) and control (which Ackman lacked at JCP) to suffer for a while during the transformation process.

 

None of this indicates that they will succeed, however -- it merely means that I personally think he's doing the right thing.  Additionally, if they do succeed, I would pose the following question in terms of competitive advantage -- can you see any other big box retailer or anchor retailer being able to take the type of pain that ESL seems to be willing to endure?  I think no -- Johnson's tenure lasted 14 months, and the guy was a genius.  (A bit rash and rushed in his plan, but I still think a genius nonetheless.)

 

Just some food for thought.

[merkhet]

I think the issue is that our mental models of what a retailer should provide are somewhat ossified by history and prior experience.  It's not altogether clear to me how retailers should best serve customers in the age of Amazon.

[Luke 532]

I think the issue is that our mental models of what a retailer should provide are somewhat ossified by history and prior experience.  It's not altogether clear to me how retailers should best serve customers in the age of Amazon.

 

I think Ericopoly's thoughts on this topic could be what the future of retail looks like...

Somebody pointed out that SYW is scalable to any brands/retailers that want to join the network. 

Somebody pointed out that the other stores in the mall may want to leverage the Sears platform for online fulfillment, in-store returns

The big box anchor stores might be a good size to serve as online fulfillment, return at mall centers

So the Sears department store at the mall might get nuked, but SHLD might retain the asset and use it as "fullment center as a service"

 

I've been wondering what the REIT executive is doing sitting on the SHLD board of directors.  Maybe he is there to help with the "Mall Strikes Back" strategy.  It serves his company's interests to strengthen the rents at malls, which is what would happen if brands/retailers located in malls could have this big online fulfillment center that processes free in-store returns.  There is a benefit to getting the customer to return the item to the store -- not just return charges, but a chance for a salesperson to engage the customer and sell them more stuff.

 

You could imagine a store like "The Gap" perhaps moving some of it's inventory into a fulfillment warehouse that is now the Sears department store.  Suppose somebody then orders a pair of Jeans online from the Gap -- it get shipped out of the nearest "former-Sears" location.  But what if they want to pick it up in the store for a lower price to save on shipping -- oh, how convenient... a runner can walk 3 minutes to go deliver it to the Gap storefront.  So the customer drives to the mall and goes to the Gap showroom/storefront to pick it up.  While there, they make other spontaneous purchases at the Gap and other mall stores.

 

Perhaps by keeping less inventory in the stores themselves, the mall retailers can have more expansive showrooms (smaller stockrooms as it gets outsourced to the prior Sears department store mall anchor).

 

The mall retailers may find this useful and great, and might not.  I'm just brainstorming, trying on different ideas to see what sticks.