SHLDQ - Sears Holdings Corp

[constructive]

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?

 

Patience is only a positive trait if the asset is increasing in value at a reasonable rate. Otherwise patience is negative.

 

Lampert is cash constrained. He would like to do buybacks, spinoffs, maintenance capex, growth capex and keep all the stores open. But he can't afford all that, so his priority has been growth capex and spinoffs, paid for by closing stores.

[gg]

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

 

Has anyone on here modeled/mapped out SHLD's capital structure and be willing to share? I'm reading about the different debt instruments but would love a head start if anyone has something worthwhile or an analyst report that does a good job of it--preferable in excel. I've read about SHLD passively for the past 9 years, but only got really interested this past two weeks due to fall in the stock price coupled with the rampant store closures (which is the catalyst I've been waiting for since Lampert's involvement). I'd

[muscleman]

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

 

Has anyone on here modeled/mapped out SHLD's capital structure and be willing to share? I'm reading about the different debt instruments but would love a head start if anyone has something worthwhile or an analyst report that does a good job of it--preferable in excel. I've read about SHLD passively for the past 9 years, but only got really interested this past two weeks due to fall in the stock price coupled with the rampant store closures (which is the catalyst I've been waiting for since Lampert's involvement). I'd

 

http://seekingalpha.com/article/1900481-sears-holdings-valuation-part-two-credit-flows-for-subsidiaries-inside-a-permanently-embedded-capital-structure

 

There is one article here. Unfortunately it has been set as seeking alpha pro now.

Basically, if you look through the SEC filings containing "guarantor" key word, you will find the corporate structures of those subs. I think it is filed sometime in 2012.

 

[constructive]

After spin off, the guarantors will become non-guarantors

 

What do you mean? Spinning off the guarantors seems very unrealistic.

[heth247]

After spin off, the guarantors will become non-guarantors

 

What do you mean? Spinning off the guarantors seems very unrealistic.

 

Land's END is a guarantor.

[Luke 532]

I haven't posted on short interest in awhile, but it's creeping up there again:

http://www.nasdaq.com/symbol/shld/short-interest

 

15.1M, highest since September 13, 2013

 

[muscleman]

After spin off, the guarantors will become non-guarantors

 

What do you mean? Spinning off the guarantors seems very unrealistic.

 

I think the debt covenant says after spin off, the guarantor becomes non-guarantor.

[bmichaud]

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

 

Value - do you not agree with Kraven that guarantor v. non-guar is a non-issue in a BK scenario? i.e. everyone is a guarantor in cpt. 11...

 

Or do you see it as relevant for spin-offs of non-guarantors outside of bk?

[adesigar]

After spin off, the guarantors will become non-guarantors

 

What do you mean? Spinning off the guarantors seems very unrealistic.

 

I think the debt covenant says after spin off, the guarantor becomes non-guarantor.

 

Im sorry if I don't quite get it but wouldn't it be the other way around. Id expect that if you spin off the guarantor subsidiaries the non-guarantor would become guarantor?

[adesigar]

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

 

Value - do you not agree with Kraven that guarantor v. non-guar is a non-issue in a BK scenario? i.e. everyone is a guarantor in cpt. 11...

 

Or do you see it as relevant for spin-offs of non-guarantors outside of bk?

 

Wouldn't everyone be a guarantor only if the debt is issued at the holdings company level. 

If I remember correctly Berkshire's Clayton, BNI, MidAmerican issue debt for their own business  needs and these are independently rated compared to BRK. If one of them went BK (never going to happen) it wouldn't affect BRK.

[Mephistopheles]

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

 

Value - do you not agree with Kraven that guarantor v. non-guar is a non-issue in a BK scenario? i.e. everyone is a guarantor in cpt. 11...

 

Or do you see it as relevant for spin-offs of non-guarantors outside of bk?

 

Wouldn't everyone be a guarantor only if the debt is issued at the holdings company level. 

If I remember correctly Berkshire's Clayton, BNI, MidAmerican issue debt for their own business  needs and these are independently rated compared to BRK. If one of them went BK (never going to happen) it wouldn't affect BRK.

 

I'm not a lawyer, but I agree with this. I suspect that the only reason they structured a few of the subs as bankruptcy remote is perhaps to make it easier for spinoff scenarios? Either way, I feel like bankruptcy is not a likely scenario. But maybe a lawyer can chime in, would a spinoff be easier for non-guarantors vs. guarantors?

 

If so, then we can invert. The non-guarantors would still be liable in Bk given that the guarantors and holding company owns the equity. So why even structure subs like that? I'm just speculating, but if it makes spinoff easier, then I wouldn't be surprised if KCD or the REMIC get spun off. In which case the total value of just those two would be well over half of the market cap.

 

But again I know nothing about the legal aspect, so it'll be great if we can get some other opinions.

[Mephistopheles]

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.

 

Thanks for your reply. You're right that the retail side may never be cash flow positive in operations, especially if they continue to spend all this money on SYW. But if liquidation continues at a fair pace, I am looking to reap benefits from liquidation cash flow. And I like that they can switch off SYW rewards points whenever they want, without causing harm to the liquidation scenario, in which case the business as a whole would be cash flow positive, not counting the pension and assuming fast paced liquidation.

 

IMO the only wild card is SYW (stating the obvious). If and when they decide to stop wasting money on that, the stock should shoot up.

 

I have a position, but it's not a big position because I hate the SYW incinerator. But at the same time, on an asset basis it's very cheap.

[peridotcapital]

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.

 

Thanks for your reply. You're right that the retail side may never be cash flow positive in operations, especially if they continue to spend all this money on SYW. But if liquidation continues at a fair pace, I am looking to reap benefits from liquidation cash flow. And I like that they can switch off SYW rewards points whenever they want, without causing harm to the liquidation scenario, in which case the business as a whole would be cash flow positive, not counting the pension and assuming fast paced liquidation.

 

IMO the only wild card is SYW (stating the obvious). If and when they decide to stop wasting money on that, the stock should shoot up.

 

I have a position, but it's not a big position because I hate the SYW incinerator. But at the same time, on an asset basis it's very cheap.

 

I'm skeptical that the store closings are going to net enough cash flow that would make them material to equity holders, even if we get 100+ closings this year. It looks like, on average, they'll only net about $1 million cash per store (inventory less payables and severance). Even $100M a year is a drop in the bucket for SHLD in its present structure, largely because of the SYW expenses you reference that he insists on.

 

Maybe there is another $25-$50M (per 100 closures) of annual cash burn saved by shutting down money-losing locations, but I don't believe that retail margins company-wide will improve much even with more closures because I don't think many of the 1,900+ stores make money (it would be different if 80% made money and he was closing the 20% that didn't). In fact, we have seen margins get worse on the retail side, even as Eddie has closed a few hundred stores in the last few years. That tells me there is not a huge gap between the profitability of the "bad" stores and the "less bad" stores.

 

As a result, the pace at which he can actually really monetize the real estate seems most important (I don't consider a store closure that nets $1 million a material "monetization" even though by definition it is). On that front, things are moving pretty slowly unfortunately.

[T-bone1]

If you look at the results, I think the cash burn must be a lot higher than that per store - even if you assume that 80% lose and equal amount and 20% are positive or breakeven.

 

JCP said closing their worst stores would mitigate $2 million per store in losses (announced this month)

[Luke 532]

I'm skeptical that the store closings are going to net enough cash flow that would make them material to equity holders, even if we get 100+ closings this year. It looks like, on average, they'll only net about $1 million cash per store (inventory less payables and severance). Even $100M a year is a drop in the bucket for SHLD in its present structure, largely because of the SYW expenses you reference that he insists on.

 

Maybe there is another $25-$50M (per 100 closures) of annual cash burn saved by shutting down money-losing locations, but I don't believe that retail margins company-wide will improve much even with more closures because I don't think many of the 1,900+ stores make money (it would be different if 80% made money and he was closing the 20% that didn't). In fact, we have seen margins get worse on the retail side, even as Eddie has closed a few hundred stores in the last few years. That tells me there is not a huge gap between the profitability of the "bad" stores and the "less bad" stores.

 

As a result, the pace at which he can actually really monetize the real estate seems most important (I don't consider a store closure that nets $1 million a material "monetization" even though by definition it is). On that front, things are moving pretty slowly unfortunately.

 

No truth to the following quote?

http://seekingalpha.com/article/1509142-sears-holdings-valuation-between-berkshire-hathaway-and-bankruptcy?source=email_rt_article_title

The $1 billion net proceeds from 300 closed stores since 2006 - most of which occurred in 2012 - implies around $3.3 million net gain for each closed store.

[Kraven]

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

 

Value - do you not agree with Kraven that guarantor v. non-guar is a non-issue in a BK scenario? i.e. everyone is a guarantor in cpt. 11...

 

Or do you see it as relevant for spin-offs of non-guarantors outside of bk?

 

Just to clarify, it isn't that everyone is a guarantor in a Holdings bk, but that the assets of Holdings would be available to satisfy its creditors and that includes its equity interests in its guarantor and non-guarantor subs. In terms of guarantor vs non guarantor the difference is that the guarantor subs are also on the hook for that specific debt they've guaranteed. It's 2 different concepts.

[peridotcapital]

If you look at the results, I think the cash burn must be a lot higher than that per store - even if you assume that 80% lose and equal amount and 20% are positive or breakeven.

 

JCP said closing their worst stores would mitigate $2 million per store in losses (announced this month)

 

It might be more, but I doubt it's near $2M each. It's hard to imagine but JCP burned 50% more cash than SHLD for the first 9 months of 2013, despite having ~ half the store count. But maybe it's closer to $1M/store for SHLD...

[heth247]

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. 

 

Thanks for the link. I found this article interesting. Here is the quote:

 

Shin and Sudhir find that a company’s decision to reward its own customers makes sense only in industries where two conditions apply.

 

First, the industry must be one in which the greatest percentage of profits comes from a small group of customers. Shin and Sudhir call this customer heterogeneity.

 

The second condition is that the industry must be one in which customers can easily switch their business to competing firms.

 

I think the problem of us to have an opinion about SYW is that, most (if not all) of members on this board are not the type of customer Eddie is targeting with it.  And it probably also explains why Eddie's strategy is to target a small customer base and profit from them. 

 

Sears/Kmart still does 35b sales, even you net out KCD/Auto/LE/Home Service, you still have a customer base that buy 22b of other stuffs. Who are they and what are they buying?

[peridotcapital]

I'm skeptical that the store closings are going to net enough cash flow that would make them material to equity holders, even if we get 100+ closings this year. It looks like, on average, they'll only net about $1 million cash per store (inventory less payables and severance). Even $100M a year is a drop in the bucket for SHLD in its present structure, largely because of the SYW expenses you reference that he insists on.

 

Maybe there is another $25-$50M (per 100 closures) of annual cash burn saved by shutting down money-losing locations, but I don't believe that retail margins company-wide will improve much even with more closures because I don't think many of the 1,900+ stores make money (it would be different if 80% made money and he was closing the 20% that didn't). In fact, we have seen margins get worse on the retail side, even as Eddie has closed a few hundred stores in the last few years. That tells me there is not a huge gap between the profitability of the "bad" stores and the "less bad" stores.

 

As a result, the pace at which he can actually really monetize the real estate seems most important (I don't consider a store closure that nets $1 million a material "monetization" even though by definition it is). On that front, things are moving pretty slowly unfortunately.

 

No truth to the following quote?

http://seekingalpha.com/article/1509142-sears-holdings-valuation-between-berkshire-hathaway-and-bankruptcy?source=email_rt_article_title

The $1 billion net proceeds from 300 closed stores since 2006 - most of which occurred in 2012 - implies around $3.3 million net gain for each closed store.

 

When I say $1M per closed store I mean cases where they let the lease expire and liquidate the inventory (like in the 30 closures announced YTD). If they sell a hugely valuable lease they will likely get much more than that (a la Sears Canada). As for the $1 billion/300 store figure, that includes the deal to sell the Honolulu store for more than $200M. That was a unique case (the most productive mall in the U.S. on a sales/sf basis) and one that it not likely to be repeated very often.

[Kraven]

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

 

Value - do you not agree with Kraven that guarantor v. non-guar is a non-issue in a BK scenario? i.e. everyone is a guarantor in cpt. 11...

 

Or do you see it as relevant for spin-offs of non-guarantors outside of bk?

 

Wouldn't everyone be a guarantor only if the debt is issued at the holdings company level. 

If I remember correctly Berkshire's Clayton, BNI, MidAmerican issue debt for their own business  needs and these are independently rated compared to BRK. If one of them went BK (never going to happen) it wouldn't affect BRK.

 

I'm not a lawyer, but I agree with this. I suspect that the only reason they structured a few of the subs as bankruptcy remote is perhaps to make it easier for spinoff scenarios? Either way, I feel like bankruptcy is not a likely scenario. But maybe a lawyer can chime in, would a spinoff be easier for non-guarantors vs. guarantors?

 

If so, then we can invert. The non-guarantors would still be liable in Bk given that the guarantors and holding company owns the equity. So why even structure subs like that? I'm just speculating, but if it makes spinoff easier, then I wouldn't be surprised if KCD or the REMIC get spun off. In which case the total value of just those two would be well over half of the market cap.

 

But again I know nothing about the legal aspect, so it'll be great if we can get some other opinions.

 

I am not sure I would agree with the assertion that none of those BRK subs can go bankrupt, but that's neither here nor there. But yes, if one of them did it could affect BRK. Depends on how reliant they are on funds dividended up from that sub. Sub goes bankrupt, no more funds and that could have some effect. I'm not saying it would or wouldn't, but it could.

 

In terms of being bankruptcy remote I would say that has nothing to do with whether they are going to be spun off or not. It has to do primarily with the ability to issue obligations in ways where the credit and rating of the obligation is tied to the assets backing the obligation as opposed to the credit of the issuing entity. That is its typically a way for an issuer to get a higher rating on its obligations than it could get if it issued the obligations directly. There are a number of others reasons for doing it as well, this is just one.  By being bankruptcy remote it limits the concern that a bankruptcy of the SPE will draw the assets backing the obligations into the bk estate.

[TwoCitiesCapital]

I'm skeptical that the store closings are going to net enough cash flow that would make them material to equity holders, even if we get 100+ closings this year. It looks like, on average, they'll only net about $1 million cash per store (inventory less payables and severance). Even $100M a year is a drop in the bucket for SHLD in its present structure, largely because of the SYW expenses you reference that he insists on.

 

Maybe there is another $25-$50M (per 100 closures) of annual cash burn saved by shutting down money-losing locations, but I don't believe that retail margins company-wide will improve much even with more closures because I don't think many of the 1,900+ stores make money (it would be different if 80% made money and he was closing the 20% that didn't). In fact, we have seen margins get worse on the retail side, even as Eddie has closed a few hundred stores in the last few years. That tells me there is not a huge gap between the profitability of the "bad" stores and the "less bad" stores.

 

As a result, the pace at which he can actually really monetize the real estate seems most important (I don't consider a store closure that nets $1 million a material "monetization" even though by definition it is). On that front, things are moving pretty slowly unfortunately.

 

No truth to the following quote?

http://seekingalpha.com/article/1509142-sears-holdings-valuation-between-berkshire-hathaway-and-bankruptcy?source=email_rt_article_title

The $1 billion net proceeds from 300 closed stores since 2006 - most of which occurred in 2012 - implies around $3.3 million net gain for each closed store.

 

When I say $1M per closed store I mean cases where they let the lease expire and liquidate the inventory (like in the 30 closures announced YTD). If they sell a hugely valuable lease they will likely get much more than that (a la Sears Canada). As for the $1 billion/300 store figure, that includes the deal to sell the Honolulu store for more than $200M. That was a unique case (the most productive mall in the U.S. on a sales/sf basis) and one that it not likely to be repeated very often.

 

I have a hard time disagreeing with you, but at the same time, I have hard time believing that ESL and Berkowitz would be totally blinded and miss this. I can't personally argue with you about this because your argument seems reasonable, but two of the best investors I know of are still very, very much behind this and see a bright future.

 

Sears is only 3% of my portfolio because I believe that the real estate does have value and that the accelerated liquidations are a good thing. The only reason I'm even comfortable with it at 3% is because I have a lot of respect for Berkowitz and feel that if I can generally understand a liquidation scenario. I won't make it any larger than this until I have better thesis developed or a more immediately identifiable catalyst. I just think at this price with as much cash as ESL has produced, there is  a large amount of optionality and it's backed by two of the best investors there are. I have a hard time arguing arguing optionality backed by incredibly savvy business people.

[Aberhound]

It is interesting that it took 7M increase in shorts to drop the price from Mid May to late august from high $50s to just under $40 then only a 1.3M increase in shorts from Dec 31 to Jan 15 to drop the price from high $40s to about $36. The latter attack was stopped by the suspension of short trading.

 

http://www.nasdaq.com/symbol/shld/short-interest

 

Does this mean that the bull side funds are unsure? What has changed in the past 6 months? Traditional retail has been in steady decline for years. Store closings have increased like everyone say they want. The company is trying to sell and redevelop properties. If the bull thesis is believed by the hedge funds wouldn't they increase their purchasing when the stock price is lower? Someone referred in this thread to the Australian short guru who explained that it is too difficult and ill-considered to close stores rapidly. Yet there are bullish indicators. Look at the 2015 calls. One hundred and three thousand $60 calls. I wonder how the market maker covers that level of volume as I don't see the matching puts. Is ESL permitted to sell Sears common and buy calls to meet redemptions? ESL probably can't or won't hedge their major holding by shorting. Lampert faces difficult fiduciary responsibilities doing the best for both Sears and the ESL investors. He should resign one or the other if the decisions start to get more difficult because of the conflict. A hedge fund manager should be free to sell or to hedge if necessary to protect investors.

 

The sub, non-sub discussion is interesting. It looks like Lampert is keeping his options open. As Lands End and the like are handed out to shareholders the bondholders will get increasingly nervous. When bond prices drop further Lampert likely will want to sell non-guarantor assets to buy debt. Non-guarantor means a sale can take place without permission. We should start studying the debt structure. The bonds + calls might offer a better risk/reward in the short window between panic and the sale of a non-guarantor sub. I suspect Sears Canada trades at a discount due to Lampert's control so a management buy-out is possible.

 

I have no position.

[ZenaidaMacroura]

It is interesting that it took 7M increase in shorts to drop the price from Mid May to late august from high $50s to just under $40 then only a 1.3M increase in shorts from Dec 31 to Jan 15 to drop the price from high $40s to about $36. The latter attack was stopped by the suspension of short trading.

 

http://www.nasdaq.com/symbol/shld/short-interest

 

Does this mean that the bull side funds are unsure? What has changed in the past 6 months? Traditional retail has been in steady decline for years. Store closings have increased like everyone say they want. The company is trying to sell and redevelop properties. If the bull thesis is believed by the hedge funds wouldn't they increase their purchasing when the stock price is lower? Someone referred in this thread to the Australian short guru who explained that it is too difficult and ill-considered to close stores rapidly. Yet there are bullish indicators. Look at the 2015 calls. One hundred and three thousand $60 calls. I wonder how the market maker covers that level of volume as I don't see the matching puts. Is ESL permitted to sell Sears common and buy calls to meet redemptions? ESL probably can't or won't hedge their major holding by shorting. Lampert faces difficult fiduciary responsibilities doing the best for both Sears and the ESL investors. He should resign one or the other if the decisions start to get more difficult because of the conflict. A hedge fund manager should be free to sell or to hedge if necessary to protect investors.

 

The sub, non-sub discussion is interesting. It looks like Lampert is keeping his options open. As Lands End and the like are handed out to shareholders the bondholders will get increasingly nervous. When bond prices drop further Lampert likely will want to sell non-guarantor assets to buy debt. Non-guarantor means a sale can take place without permission. We should start studying the debt structure. The bonds + calls might offer a better risk/reward in the short window between panic and the sale of a non-guarantor sub. I suspect Sears Canada trades at a discount due to Lampert's control so a management buy-out is possible.

 

I have no position.

 

It could just be that its not as attractive a short at $40?  Think of the inverse, one might be an enthusiastic buyer at $36 but not at $50.

[T-bone1]

If you look at the results, I think the cash burn must be a lot higher than that per store - even if you assume that 80% lose and equal amount and 20% are positive or breakeven.

 

JCP said closing their worst stores would mitigate $2 million per store in losses (announced this month)

 

It might be more, but I doubt it's near $2M each. It's hard to imagine but JCP burned 50% more cash than SHLD for the first 9 months of 2013, despite having ~ half the store count. But maybe it's closer to $1M/store for SHLD...

 

JCP had a lot more CAPEX which increased the cash burn, but I believe the $2 million per store in operating losses is accurate.

 

Sears domestic will lose ~$350 million this year across ~2,500 stores (less if you take out auto centers).  If you back our the earnings of the real estate trust (rented out to sears domestic), brands, land's end, etc, you are probably looking at $1.35 billion in operating losses for the domestic stores, or roughly -$500k per location.  Some locations definitely make money and there is definitely a cohort of the "worst stores".  I would bet that the worst 200 locations are losing $2 million each and probably more than that.

[Luke 532]

 

JCP had a lot more CAPEX which increased the cash burn, but I believe the $2 million per store in operating losses is accurate.

 

Sears domestic will lose ~$350 million this year across ~2,500 stores (less if you take out auto centers).  If you back our the earnings of the real estate trust (rented out to sears domestic), brands, land's end, etc, you are probably looking at $1.35 billion in operating losses for the domestic stores, or roughly -$500k per location.  Some locations definitely make money and there is definitely a cohort of the "worst stores".  I would bet that the worst 200 locations are losing $2 million each and probably more than that.

 

There's a lot of guess work that goes into analyzing SHLD, obviously.  One thing is for sure: Lampert knows how much each store is making/losing, probably down to the penny.  Once again it boils down to a company with a ton of assets and trusting that Lampert will make the best decisions for long-term shareholders.