SHLDQ - Sears Holdings Corp

[Luke 532]

sears green on such a red day

 

I'm thinking I'm going to switch my exposure to the options. The JAN 16 40s are at about $9.50. Sears will need to compound at 14% per annum for the next two years for these options to have value at expiration. If you'd rather use Eric's metrics, cost of leverage is 16.5% per annum.

 

At this point of accelerated liquidations, it should be very clear by 2016 if value is be unlocked faster than it's being destroyed (I'm sure people have been saying that for years now, but we're just recently seeing store closures on a large scale). I'm willing to "pay" this 14% to lower my risk in the event of being wrong while leveraging my upside.

 

Anyone want to tell me why I'm stupid for doing this?

 

It's not stupid at all.  I bought those very same options (2016 40's a week or two ago).  The primary reason I'm keeping my core common shares is I want to receive the spin-off shares.  I also want to own the exact same thing Lampert owns (common shares)... not for any particular reason but I just like owning exactly what he owns.

[ValueBuff]

sears green on such a red day

 

I'm thinking I'm going to switch my exposure to the options. The JAN 16 40s are at about $9.50. Sears will need to compound at 14% per annum for the next two years for these options to have value at expiration. If you'd rather use Eric's metrics, cost of leverage is 16.5% per annum.

 

At this point of accelerated liquidations, it should be very clear by 2016 if value is be unlocked faster than it's being destroyed (I'm sure people have been saying that for years now, but we're just recently seeing store closures on a large scale). I'm willing to "pay" this 14% to lower my risk in the event of being wrong while leveraging my upside.

 

Anyone want to tell me why I'm stupid for doing this?

 

The only benefit to the shares would be collecting the spin off companies

[Mephistopheles]

sears green on such a red day

 

I'm thinking I'm going to switch my exposure to the options. The JAN 16 40s are at about $9.50. Sears will need to compound at 14% per annum for the next two years for these options to have value at expiration. If you'd rather use Eric's metrics, cost of leverage is 16.5% per annum.

 

At this point of accelerated liquidations, it should be very clear by 2016 if value is be unlocked faster than it's being destroyed (I'm sure people have been saying that for years now, but we're just recently seeing store closures on a large scale). I'm willing to "pay" this 14% to lower my risk in the event of being wrong while leveraging my upside.

 

Anyone want to tell me why I'm stupid for doing this?

 

Hey Zach, I was thinking about buying those exact options. Where are you getting the 16.5% cost of leverage? Based on my calculations it comes out to 18.5%. I just did [$40/($38.15-$9.52)]^(1/1.975)-1. The 1.975 is the years till expiration.

[LC]

sears green on such a red day

 

I'm thinking I'm going to switch my exposure to the options. The JAN 16 40s are at about $9.50. Sears will need to compound at 14% per annum for the next two years for these options to have value at expiration. If you'd rather use Eric's metrics, cost of leverage is 16.5% per annum.

 

At this point of accelerated liquidations, it should be very clear by 2016 if value is be unlocked faster than it's being destroyed (I'm sure people have been saying that for years now, but we're just recently seeing store closures on a large scale). I'm willing to "pay" this 14% to lower my risk in the event of being wrong while leveraging my upside.

 

Anyone want to tell me why I'm stupid for doing this?

 

In two years, will the RE have lost that much value?

[texual]

Is ESL buying shares? Doesn't look like it. We would have seen a disclosure by now. I didn't buy stock this time around. Kind of glad I didn't because I would rather wait until he writes a letter in Feb. Don't think I will attend this years meeting, its largely been an overrated experience when I used to go. He doesn't say anything meaningful.

 

His blog posts also turned me off. They are very PR-heavy. What happened to the guy who used to recommend books and talk about his personal philosophy? That stuff actually made him seem a bit more of a person. The last few years of letters were lackluster, sounded very much 'safe' and he wasn't willing to say anything at the meetings.

 

Overall I think he is actually going to make a move that decides whether he stays invested in SHLD or slowly goes away. Hes already made a killing on this from his original Kmart bonds. Nothing in his history suggests he will walk away but I don't know if hes actually as committed to Sears as we think. He lives in Florida, hes basically turned his hedge fund into liquid cash except for Sears. Although this changed with the 7 million shares given to partners.

 

Can he actually go the way of WEB and start investing in stocks and companies? The market is already up so much. Can he find bargains like WEB was able to, during those early days?

 

What is he going to buy stock of? BAC? AIG? Is that sensible while the main retail is still getting creamed?

 

Not going to lie, a few years ago I believed he would have avoided all this mess and just called it a day, back in 2010-2011 when it clearly wasn't working. After the SYW stuff began happening I thought he would fold it up, it was never going to make him compete with Amazon. I still believe it will never be a consumer destination. Prove me wrong. ESL is not got any tricks up his sleeve, its all just slowly managing this down to a baseline where it isn't dying off. That could take five years, ten? Maybe for all eternity SHLD just drifts down and hes slashing it to meet that decline?

 

What the hell am I invested in here? Wish I could get out but I am pretty underwater and prefer to see it through. My timeline (along with Berkowitz') is apparently WAY off...

[texual]

Biggest moral of the story that i can share with you guys is...

 

don't fall in love with a stock!

 

There was very little in 2009/2010 that I wasn't already invested in... so what the hell, this guy sounds like hes doing something DIFFERENT! Loved the story. Loved Fairholme's interest. I bought shares in Sears and accumulated. I made a lot of money soon after on that. I thought the guy's letters were spot on. Lots of truth, lots of great advice and thinking.

 

Today I regret owning this stock because I would have been better off just putting the money in another stock, ANY stock. Hell I turned down some railroad stocks thinking this would be better. I'm really bitter about it because those stock were ones Buffett loved, he took BNSF and I made some money on that, but I should have just gotten some of the other rail's instead of Sears. My thinking was that ESL was better than Buffett or that his conglomerate was a heck of a lot more valuable with him at the helm.

 

I wonder how Berkowitz really feels about this stock, he owned it way longer than me. And hes investing other people's money. There is another adage about history: it repeats itself. I thought after reading about WEB and the textile mills that people this smart would get the hell out of retail. Nope.

 

Best of luck to all of us longs. I am a long only because the outcome here really doesn't make a difference. I either break even, or make some money and sell. Unless the story materially changes, I won't be interested unless its a short term pop that I can recoup some of the investment. Its DOA until ESL says were going to make some money now.

[Luke 532]

 

Nothing in his history suggests he will walk away but I don't know if hes actually as committed to Sears as we think. He lives in Florida, hes basically turned his hedge fund into liquid cash except for Sears. Although this changed with the 7 million shares given to partners.

 

Not committed to Sears?  Seriously?  He's likely the most committed person to any stock in the market today.  He has huge skin in the game, he's minimizing responsibilities outside of SHLD (by selling off other stocks thus he has less companies to follow/study financials/etc.), became CEO a year ago, etc.  Has he given even 1 single indication that he's not committed?

 

Biggest moral of the story that i can share with you guys is...

 

don't fall in love with a stock!

 

Personally, I certainly love the risk/reward more here at $38 than I did in the $50's and $60's.  I just don't think the fundamental story has changed enough to not be "in love" with the company/stock.  With long-term investing there is an element of "loving" the underlying business... otherwise why would one ever buy a company other than for short-term catalysts (which is hardly a value investing approach).

 

Today I regret owning this stock because I would have been better off just putting the money in another stock, ANY stock.

 

Yes, of course.  But should what has happened in the past impact current decision making?  Rear-view mirror vs. windshield.  With that said, we should obviously weigh the pros/cons of past events and how it impacts the value of a security today.

 

I wonder how Berkowitz really feels about this stock, he owned it way longer than me. And hes investing other people's money.

 

Voting with his mouth: As of January 2013, Berkowitz says this is all reminiscent of early Berkshire Hathaway if we play back the tape.

 

Voting with his wallet: He added 365,000 shares in Q3... and has added consistently for years.  His Q4 buys (if any) will likely be released mid-February.

 

Your previous comment...

Side note - Berkowitz seems to have no ideas better than SHLD at the moment. He added to that position and it is his solid #3 investment. Kudos for Mr Fairholme holding onto this sucker since 2005... it would be the only stock he has consistently owned in his portfolio today that he owned for the past 8 years... tells you something. No other stock on there has such a distinction.

 

So I'd think it's pretty safe to say that Berkowitz likes SHLD a whole lot.

 

There is another adage about history: it repeats itself. I thought after reading about WEB and the textile mills that people this smart would get the hell out of retail. Nope.

 

How long did Buffett let the textile mill operate as compared to Lampert and retail?  And it's a bit premature to call Lampert's transformation efforts a failure. 

 

But I feel where you're coming from texual.  It has been painful watching SHLD at $65 just 2 months ago and at $38 today.  I have most likely felt the pain more than most as I have a huge percentage of my net worth in SHLD.  But pain is expected in value investing.  I personally have chosen to use this huge drop constructively as I don't think the thesis of why I have invested has changed at all.  I added a good chunk of those $40-strike 2016 calls I mentioned previously at $8.45.

Just FYI for those looking at options, the $40-strike 2016 (24 months) calls are going for $8.45.

 

Texual, I think you had some great points in the following post... don't forget your own words of wisdom!

 

The impatient ones gave up years ago. Soon there will be really nobody left which is great if you want to accumulate control which is part of ESL and BB's strategy no matter how it may seem ethically - its in his and Fairholme's interest that Sears remain a heavily shorted, unloved stock so they buy more and more. The way I see it, they'll wind up selling half the stores over the next 10 years anyways. I wish it happened much faster but thats just not in the cards.

 

They are the smartest mutual fund manager, and smartest hedge fund managers I know of, and invested in the same company with reasonable conviction. Skin in the game is why they have no choice. Read it again, NO CHOICE but to turn it into a winning combination. I can only think of one other situation where this kind of 'stupidity' ensued for years and two hedge funds owned a lot of stock of a company and tried to accumulate more shares and power. And the operations faltered and went to crud. They even spent a lot of cash repurchasing shares and buying upgraded equipment and saw the thing go further down. They kept buying it and people were baffled. They got together and set out to earn 24 billion in 2012... and said it was a dud year.

 

I've certainly heard of big hedge funds going after single investments or getting blown up. But not this way, not the way its been playing out.

 

Basically my opinion boils down to this: you get either a company that stays afloat because of a tepid return to profits and a better economy OR you get a investment vehicle for two smart guys - or kind of both? I see all three as a winning outcome.

[20ppy]

My two cents:

 

It's not unintelligent to think that without the retail business transformation, Eddie could make the stores cash flow positive, just like other struggling retailers would be able to do, agreed?

 

So, I think Eddie is shooting for the ultimate. Thru these past few years of “experiments” or “throwing the darts”, Eddie is getting to be clear now as to what to do. He is not dumb, he sees cash flow positive activities and integrated retail long term profitability. Him being clear in the future directions is very important, because then, will he really tackle some cash flow problems, evidenced by what’s happening now, he is going to make it cash flow positive by closing stores and shrinking store sizes and more. All the while, if he can buy some more shares at a lower price, all the better.

 

The ultimate is to make the stores long term viable, not only profitable for the present time. Once the transformation is "complete", i.e. members begin to understand and like what Sears does, profits will grow at every turn of the new world and the value of the retail chain will be worth more than the RE values which are worth a lot even today. It will become the missing part of Amazon perhaps? Why not?

 

Suppose for a moment that he isn’t doing the integrated retail thing, Sears would still face the daunting task of closures and worse, accelerated forced closures in time. He has to liquidate almost the whole portfolio, and at the same time, he needs to find better investment, which to him may not be too bad, but still, is there anything good at all long term?

 

I believe he also loves these RE properties and in time, what can be worth more? Will he get the cake and eat it too? I certainly think so.

[Luke 532]

The material change today is that he spent money on SYW. How he is arriving at this conclusion is the kind of stuff I wish he would tell us. He won't say because I just decided that not even he knows.

 

He has told us already...

http://articles.chicagotribune.com/2013-11-24/business/ct-biz-1124-phil-lampert--20131124_1_sears-and-kmart-stores-edward-lampert

"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. "The Shop Your Way membership metrics that we measure, and there are many of them, almost uniformly they've been going in the right direction. Many have exceeded what our expectations were at the beginning of the year. So we see these behaviors that are foundational to the transformation and foundational to restoring profitability. But we haven't been able to connect those behaviors to the actual results."

 

Here is how I look at 2013. If you want to make comparisons to BRK, with the textiles - WEB folded.

 

I might be wrong but with Lampert selling boatloads of stock (companies other than SHLD) and also meeting redemptions, that indicates to me that ESL is being wound down.

[Spekulatius]

Here is how I look at 2013. If you want to make comparisons to BRK, with the textiles - WEB folded.

 

ESL in 2013 makes Sears appear like the textile mills (retail) competing against china (amazon) at any cost.

 

BRK had a cash cow insurance business, as well as net cash to do equity investments. The Berkshire mills were and anchor that was slowing down BRK, but had by no means the capacity to sink them.

 

SHLD is foremost a retail business and it's loosing money hand over fist. There is no cash cow business outside that would allow a food capital allocator (which Eddie certainly is) to do much. SHLD certainly has valuable assets, but lacks the cash generation (and in fact consumes cash) to finance a transformation.

[krazeenyc]

Here is how I look at 2013. If you want to make comparisons to BRK, with the textiles - WEB folded.

 

ESL in 2013 makes Sears appear like the textile mills (retail) competing against china (amazon) at any cost.

 

If you ran Sears Holdings and your goal was to separate the real estate from the retail operations what would you do? I know people here have said that Eddie Lampert is trying to "compete" against Amazon -- I don't think he looks at it that way. Of course, the fact is every retailer is competing against Amazon.  ESL is simply trying to COPY some things that has helped Amazon succeed as an online only asset light company (which Sears retail aspires to be).  In the last article I posted, everyone seemed to care only that an upstart hedgefund was interested in buying SHLD. I thought the most fascinating thing was that SHLD was opening a 10,000 sq ft Sears location. The fact is I think it's worth spending money to try save the retail - there is HUGE additional upside if he can get the retail operations to be even moderately profitable.

 

[abitofvalue]

Interesting study re: rewarding your customers - http://som.yale.edu/resolving-customer-management-dilemma

 

Authors seem to think there may be value in rewarding your customers in retail.  Thought it was interesting when thinking about SYW and whether it even makes sense. 

 

Re: the WEB analogies -  Warren didn't waste good money reinvesting and trying to compete with imports.  Warren bought other businesses that generated cash he could continue investing while treating the textile business with benign neglect. ESL doesn't have the luxury of any other businesses throwing off cash. A situation he brought on himself - he used cash flows from retail to buy back shares not to buy other businesses when things were good.

[Luke 532]

SHLD certainly has valuable assets, but lacks the cash generation (and in fact consumes cash) to finance a transformation.

 

$1B cash on hand, $300M coming from Sears Canada, $1.8B on their domestic facility.

 

Closures help, too.  Cut out the money draining operating costs and reduces inventory... a notable cash flow help given the lead time of purchasing inventory to actually selling it.

 

Seems to me that he has more time to get this done than the market gives him credit for.

[Luke 532]

In the last article I posted, everyone seemed to care only that an upstart hedgefund was interested in buying SHLD. I thought the most fascinating thing was that SHLD was opening a 10,000 sq ft Sears location. The fact is I think it's worth spending money to try save the retail - there is HUGE additional upside if he can get the retail operations to be even moderately profitable.

 

I agree the 10,000 sq ft location was the most important part of the article.  I only included the Stone House quote because you had already adequately mentioned the very interesting deal on the 10,000 sq ft location.

 

If the retail thing works out I'll be doing backflips.  I'm only in SHLD for the real estate portfolio and my belief that Lampert can make a killing monetizing SHLD's assets.

[JSArbitrage]

I believe he also loves these RE properties and in time, what can be worth more? Will he get the cake and eat it too? I certainly think so.

 

Eddie is already toast.  There is no cake for him from here on out.  Remember, he has been in this stock for almost 10 years now.  Even if the stock is a double from here, his IRR is in the single digits.  If it takes him 5 more years, he'll basically be returning what a 20 year treasury would have (plus or minus.)

[TwoCitiesCapital]

sears green on such a red day

 

I'm thinking I'm going to switch my exposure to the options. The JAN 16 40s are at about $9.50. Sears will need to compound at 14% per annum for the next two years for these options to have value at expiration. If you'd rather use Eric's metrics, cost of leverage is 16.5% per annum.

 

At this point of accelerated liquidations, it should be very clear by 2016 if value is be unlocked faster than it's being destroyed (I'm sure people have been saying that for years now, but we're just recently seeing store closures on a large scale). I'm willing to "pay" this 14% to lower my risk in the event of being wrong while leveraging my upside.

 

Anyone want to tell me why I'm stupid for doing this?

 

In two years, will the RE have lost that much value?

 

The concern isn't that the real estate will have lost value. The concern is as he creates hundreds of millions of dollars in cash from sales and closures that he'll burn just as much reinvesting in the money losing retail operation. This is very much a real estate valuation based thesis, but if the realized profits plug the whole of realized losses in the retail operations then it doesn't do me any good.

[wisdom]

JS Arb do you know Lamperts cost to buy into SHLD?

 

I would check how he bought into it and you might arrive at a different conclusion.

[krazeenyc]

JS Arb do you know Lamperts cost to buy into SHLD?

 

I would check how he bought into it and you might arrive at a different conclusion.

 

+1. I was talking to another investor the other day.  We both remarked at what an astute investment the original Kmart Debt  was for ESL -- especially considering how poorly the retail operations have turned through the last decade.

[20ppy]

I believe he also loves these RE properties and in time, what can be worth more? Will he get the cake and eat it too? I certainly think so.

 

Eddie is already toast.  There is no cake for him from here on out.  Remember, he has been in this stock for almost 10 years now.  Even if the stock is a double from here, his IRR is in the single digits.  If it takes him 5 more years, he'll basically be returning what a 20 year treasury would have (plus or minus.)

To be fair, I am glad that Eddie managed to survive the great recession and the RE just turned within the last year or so, he couldn't have sold the properties and that would have been a mistake.

 

[20ppy]

He will fold all of the retail business or at least enough such that it is a tiny fraction of what it once was. SYW is going to fail. He will eventually stop pouring cash into it. Basically everything he has done the past 10 years will be totally useless compared to when he has billions of cash to spend. I just hope he doesn't keep going after retail.

 

My original investment was based on him arriving at that point many years earlier. If I were him I wouldn't have wasted the time on saving any of the Sears stores or Kmart businesses. They are destined to fail.

 

Whatever he is doing is beyond me, and I wish him well.

 

So assume the worst, that he is 100% wrong with Integrated Retail. The cure should be rather quick: pull the plug on SYW and be done with it. The millions already poured into Integrated Retail is probably for:

1. The cost of his dart throwing, but SYW can stay and be maintained, or sold. At least the appearance of SYW made the Sears RE values stable.

2. The fact that Eddie knows to avoid fast store closures as it will trigger landslide effects for Sears, employees, RE markets and Sears customers, it maybe riskier than the short term cash flow gains.

2. The fact that he bought more time waiting for the right time to sell stores gradually.

 

Could it be likely that the money poured into SYW is much less than the total RE gains for the last couple of years?

 

In an 2012 interview, when Consuelo Mack asked Bruce whether Eddie should dispose the RE properties quickly, Bruce said something like "RE has cycles and you can't push him to do that. There is a time to hold, sell or do nothing. He will figure out when to do what."

 

I think he has a real chance to succeed because the right framework is almost there. What's left is probably continue to close and shrink the stores and stipulate Costco-like policies for better member services. But if all fails, what he is doing now is probably necessary for the overall liquidation anyway. So his last dart is probably free.

 

 

[Luke 532]

 

Following ESL is suicide, unless you were smart and invested in AZO and AN during the years since the recession. SHLD was his worst investment and will likely never earn him the reputation he once had. Unless he turns into WEB pronto, and begins to make a killing on his investments within the company.

 

It cannot be a grand slam home run using the retail business as its basis. The integrated retail is destined to fail. There is zero evidence of customers liking it or wanting more

 

The PR that the company likes to dispel is either made up or inaccurate - they have not broken out the data on SYW that we need in order to evaluate the business properly.

 

Texual, this is a genuine question based on what I bolded above: why do you still own even 1 share if you believe investing with Eddie is suicide and that SHLD is lying to us?

[gg]

Texual - I agree with you as far is the time horizon goes (i.e. Lampert obviously has no short-term need for cash so his time horizon is likely longer than yours) but isn't that ultimately a positive for long term holders of the stock?

 

Second, do you not think that closing a store per day so far this year, and monetizing those real estate parcels, is exactly what you've been waiting for all this time?

[Luke 532]

Texual - I agree with you as far is the time horizon goes (i.e. Lampert obviously has no short-term need for cash so his time horizon is likely longer than yours) but isn't that ultimately a positive for long term holders of the stock?

 

Second, do you not think that closing a store per day so far this year, and monetizing those real estate parcels, is exactly what you've been waiting for all this time?

 

Couple that with the lowest share price we've seen in two years.  To me, it seems like a once-in-a-lifetime opportunity.

[valuecfa]

Surprisingly little discussion on the guarantor vs non guarantor pieces of the company out there

[muscleman]

Surprisingly little discussion on the guarantor vs non guarantor pieces of the company out there

 

I tried to bring that up but did not receive much discussion. It is pretty complex. After spin off, the guarantors will become non-guarantors, and right now a lot of the guarantors holds 100% equity interest in the non-guarantors.

 

There is also some debt covenant that restricts him from closing more than 300 or 500 stores per year.

 

I am glad that you are interested in SHLD, because that will likely bring us some new insight, just like your MBIA work. :D