SHLDQ - Sears Holdings Corp

[20ppy]

I'm beginning to think that you are right about the possibility that maybe he has conquered the hedge fund world and proven over a couple decades that he is a great stock picker, and now his second act is to try and be remembered as an even better businessman. We'll never know, of course.

 

Yes, nobody will be able to read into Eddie's mind. But here is what I think -

 

What does building another Berkshire buy for Eddie, just so that he can be remembered as "the second Buffett"? Why spend the rest of your life to prove to the world that you are somebody else?

 

What does turning around Sears buy for Eddie? He will then have done the "mission impossible", or even the better, the "Buffett-said impossible", and will be remembered as the only guy did it.

 

What would you have done, if you are as smart and rich-already as him, and that if Sears' asset base is big enough to provide plenty of time and mistakes for you to try?

 

You are not describing the businessman that Eddie is.

 

[20ppy]

Some of the things Eddie has been doing is also echoed in the retail industry. I know Walmart opened some smaller stores in Factoria Mall of Bellevue Washington, and another location.

 

http://www.cnbc.com/id/101380735

 

 

[krazeenyc]

From Lands End Filing 1/31/2014.

 

Description of Material Indebtedness

From and after the spin-off, each of Lands’ End and Sears Holdings will generally, pursuant to a separation and distribution agreement and other agreements we will enter into with Sears Holdings, be responsible for the debts, liabilities and obligations related to the businesses it owns and operates following completion of the spin-off. See “Certain Relationships and Related Person Transactions—Our Relationship with Sears Holdings Following the Spin-Off.”

 

In connection with the spin-off, we are pursuing an ABL Facility which would provide for maximum borrowings of approximately $200 million with a letter of credit sub-limit and a senior secured term loan facility (the “Term Loan Facility”) of approximately $500 million. We expect that the proceeds of the Term Loan Facility will be used to pay a dividend to Sears Holdings immediately prior to the consummation of the spin-off. The ABL Facility would be available following the spin-off for working capital and other general corporate purposes. The terms of any such financing transactions would be described in an amendment to this information statement.

[spin]

Full HY KKR as expected:

 

"a Term Loan Facility of approximately $500 million. We expect that the proceeds of the Term Loan Facility will be used to pay a dividend to Sears Holdings immediately "

 

 

Any views on a scenario where Eddie loads a HY debt structure (say 4-5x EBITDA, 3-4x Interest coverage) on the LE spin and dividends 400-500MM back to SHLD?

 

Offsets 4-5 years of EBITDA lost from LE spin and then used to solve the last sulg of 2014 pension funding.

 

Aggressive use of CF to then pay-down LE debt.  Assumes EBITDA has troughed.

 

"In connection with the spin-off, we may incur material indebtedness. Any such indebtedness would be described in an amendment to this information statement."

 

[Spekulatius]

Full HY KKR as expected:

 

"a Term Loan Facility of approximately $500 million. We expect that the proceeds of the Term Loan Facility will be used to pay a dividend to Sears Holdings immediately "

 

 

The high debt load makes the Lands' End spinoff unappealing, imo. Too bad, because i was looking to buy into this spinoff at the right price. Lands' End is a business with it's own distinctive brand and can easily be separated from Sears, unlike SHOS , which is still intwined with the sinking retail mothership.

[bmichaud]

Earlier in the thread I used J Crew as a comp for Lands' End. While not directly comparable, it's a decent guideline.

 

1. In 2010 J Crew was purchased for 8X EBITDA

 

http://www.bloomberg.com/news/2010-11-23/j-crew-agrees-to-be-bought-by-tpg-leonard-green.html

 

2. In 2012 J Crew had ND/EBITDA of around 7X with interest coverage in the 2X range

 

http://www.reuters.com/article/2012/06/11/idUSWNB181720120611

 

3. In 2012, J Crew generated EBITDA margins of ~16%

 

http://online.wsj.com/article/PR-CO-20130320-913500.html

 

 

For comparison, LE had a ~6% EBITDA margin in 2012. Getting back to its 2010 EBITDA margin of 12% gets you to EBITDA of $192 on sales of $1.6B. PF debt of $500MM is 2.6X this EBITDA figure.

 

Yes it is concerning if Lampert was truly shopping LE to PE before now and a firm such as Leonard Green was not interested. But given the lack of an independent bricks and mortar footprint, I don't see how Leonard Green would not be interested in LE at a reasonable price. The growth potential has got to be attractive to a firm like that. But who knows.

 

Bottom line, I don't think the LE spin is as unattractive as it appears. Were SHLD sucking $800 to $1,000 out of it, then that would be entirely unsustainable from the start. At less than 3X normalized EBITDA, the debt isn't horrendous.

 

Even at $100 EBITDA, interest coverage is 3.33X at a 6% interest rate.

[muscleman]

Earlier in the thread I used J Crew as a comp for Lands' End. While not directly comparable, it's a decent guideline.

 

1. In 2010 J Crew was purchased for 8X EBITDA

 

http://www.bloomberg.com/news/2010-11-23/j-crew-agrees-to-be-bought-by-tpg-leonard-green.html

 

2. In 2012 J Crew had ND/EBITDA of around 7X with interest coverage in the 2X range

 

http://www.reuters.com/article/2012/06/11/idUSWNB181720120611

 

3. In 2012, J Crew generated EBITDA margins of ~16%

 

http://online.wsj.com/article/PR-CO-20130320-913500.html

 

 

For comparison, LE had a ~6% EBITDA margin in 2012. Getting back to its 2010 EBITDA margin of 12% gets you to EBITDA of $192 on sales of $1.6B. PF debt of $500MM is 2.6X this EBITDA figure.

 

Yes it is concerning if Lampert was truly shopping LE to PE before now and a firm such as Leonard Green was not interested. But given the lack of an independent bricks and mortar footprint, I don't see how Leonard Green would not be interested in LE at a reasonable price. The growth potential has got to be attractive to a firm like that. But who knows.

 

Bottom line, I don't think the LE spin is as unattractive as it appears. Were SHLD sucking $800 to $1,000 out of it, then that would be entirely unsustainable from the start. At less than 3X normalized EBITDA, the debt isn't horrendous.

 

Even at $100 EBITDA, interest coverage is 3.33X at a 6% interest rate.

 

"In connection with the spin-off, we are pursuing an ABL Facility which would provide for maximum borrowings of approximately $200 million with a letter of credit sub-limit and a senior secured term loan facility (the “Term Loan Facility”) of approximately $500 million."

 

From the languages here, it sounds like LE's debt will be 700 instead of 500, which is pretty close to your 800 entirely unsustainable level.

 

LE does look like a solid brand with growth potential. The only reason that ESL is doing this is probably because he is in desperate need of cash?

[Guest wellmont]

I don't see them borrowing from ABL facility until needed. it's a credit line. I think their net debt will be around $500m. this is not a good business. lands end is a stale brand. the spin off imo is being done to shoot some cash onto the shld balance sheet. notice what he did with orchard supply. he stripped some cash out of it, and spun it off. it went bk. not predicting bk for le. it's just a low return business. but eddie wants the cash for the mother ship. this deal is like OSH and not shos.

[muscleman]

I don't see them borrowing from ABL facility until needed. it's a credit line. I think their net debt will be around $500m. this is not a good business. lands end is a stale brand. the spin off imo is being done to shoot some cash onto the shld balance sheet. notice what he did with orchard supply. he stripped some cash out of it, and spun it off. it went bk. not predicting bk for le. it's just a low return business. but eddie wants the cash for the mother ship. this deal is like OSH and not shos.

 

Yes. This deal definitely reminds me of OSH.

Why do you think LE won't need the ABL? They will need it for operating business needs, especially during peak holiday times.

[Guest wellmont]

they may have some operating cash at spin off. they've probably been allocated some operating cash within shld that they will take with them. I believe they will access the ABL as needed, as you say during peak selling seasons.

[Luke 532]

Quick short interest dynamics update for those interested.  Anything >50% catches my attention and I start to look at trades (not investments) based on the possibility of a squeeze.  Apologies to those that think this is nonsense, but the nonsense discussed in Q3/Q4 of 2013 proved to be very profitable for some.

 

Short (as of 1/15/2014): 15.1M

Lampert/Berkowitz/Tisch: 76M

Outstanding: 106M

Float: 30M

Horizon/Chou/OldWest/BakerSt/Force = ~3.9M

 

Short interest as % of float: 50.3% (assuming zero shares are long-term oriented of those held by Horizon Kinetics, Baker Street, Old West, Chou, and Force Capital)

Short interest as % of float: 52.4% (assuming 30% of shares...)

Short interest as % of float: 53.7% (assuming 50% of shares...)

Short interest as % of float: 57.9% (assuming 100% of shares...)

[krazeenyc]

I don't see them borrowing from ABL facility until needed. it's a credit line. I think their net debt will be around $500m. this is not a good business. lands end is a stale brand. the spin off imo is being done to shoot some cash onto the shld balance sheet. notice what he did with orchard supply. he stripped some cash out of it, and spun it off. it went bk. not predicting bk for le. it's just a low return business. but eddie wants the cash for the mother ship. this deal is like OSH and not shos.

 

Yes. This deal definitely reminds me of OSH.

Why do you think LE won't need the ABL? They will need it for operating business needs, especially during peak holiday times.

 

Completely disagree with this (but you really can't know one way or another until it gets out from under SHLD) IMO,  Lands End is a classic brand -- that  with a little investment and guidance should do great under someone like VF Corp or Sycamore. Obviously whether or not it makes sense to make an investment in them will depend on valuation.

 

Lands End at Sears just makes no sense at all. In fact, there is literally no good reason for Lands Ends shops to exist inside Sears. Lands End was  not run well at SHLD.

[peridotcapital]

Full HY KKR as expected:

 

"a Term Loan Facility of approximately $500 million. We expect that the proceeds of the Term Loan Facility will be used to pay a dividend to Sears Holdings immediately "

 

 

Any views on a scenario where Eddie loads a HY debt structure (say 4-5x EBITDA, 3-4x Interest coverage) on the LE spin and dividends 400-500MM back to SHLD?

 

Offsets 4-5 years of EBITDA lost from LE spin and then used to solve the last sulg of 2014 pension funding.

 

Aggressive use of CF to then pay-down LE debt.  Assumes EBITDA has troughed.

 

"In connection with the spin-off, we may incur material indebtedness. Any such indebtedness would be described in an amendment to this information statement."

 

 

Good call! I was modeling $200-300M but you nailed it. 4x leverage seems high to me, but not egregiously so. 

 

Of course, this means LE equity is likely going to trade at a market cap of ~$300M (I'm assuming an EV/EBITDA multiple of 6-7x), so only about $3 per SHLD share, as opposed to some on this thread who pegged it at $10-$12 and Baker Street as high as $15.

 

Depending on your views, you could say that keeping $500M within SHLD would be better for current SHLD shareholders than getting another $5/share of LE stock. On the other hand, it really depends on what Eddie does with this $500M. If it just funds the retail transformation than you might wish you had $8 of LE stock instead of $3.

[Luke 532]

Full HY KKR as expected:

 

"a Term Loan Facility of approximately $500 million. We expect that the proceeds of the Term Loan Facility will be used to pay a dividend to Sears Holdings immediately "

 

 

Any views on a scenario where Eddie loads a HY debt structure (say 4-5x EBITDA, 3-4x Interest coverage) on the LE spin and dividends 400-500MM back to SHLD?

 

Offsets 4-5 years of EBITDA lost from LE spin and then used to solve the last sulg of 2014 pension funding.

 

Aggressive use of CF to then pay-down LE debt.  Assumes EBITDA has troughed.

 

"In connection with the spin-off, we may incur material indebtedness. Any such indebtedness would be described in an amendment to this information statement."

 

 

Good call! I was modeling $200-300M but you nailed it. 4x leverage seems high to me, but not egregiously so. 

 

Of course, this means LE equity is likely going to trade at a market cap of ~$300M (I'm assuming an EV/EBITDA multiple of 6-7x), so only about $3 per SHLD share, as opposed to some on this thread who pegged it at $10-$12 and Baker Street as high as $15.

 

Depending on your views, you could say that keeping $500M within SHLD would be better for current SHLD shareholders than getting another $5/share of LE stock. On the other hand, it really depends on what Eddie does with this $500M. If it just funds the retail transformation than you might wish you had $8 of LE stock instead of $3.

 

$8/share is > 20% of today's market cap.  I prefer as much money in Lampert's hands as possible as he has access to critical data that the rest of the world doesn't, so I'm more than happy to see a $500M dividend from LE to SHLD so Lampert can invest it as he sees fit.

[gg]

Quick short interest dynamics update for those interested.  Anything >50% catches my attention and I start to look at trades (not investments) based on the possibility of a squeeze.  Apologies to those that think this is nonsense, but the nonsense discussed in Q3/Q4 of 2013 proved to be very profitable for some.

 

Short (as of 1/15/2014): 15.1M

Lampert/Berkowitz/Tisch: 76M

Outstanding: 106M

Float: 30M

Horizon/Chou/OldWest/BakerSt/Force = ~3.9M

 

Short interest as % of float: 50.3% (assuming zero shares are long-term oriented of those held by Horizon Kinetics, Baker Street, Old West, Chou, and Force Capital)

Short interest as % of float: 52.4% (assuming 30% of shares...)

Short interest as % of float: 53.7% (assuming 50% of shares...)

Short interest as % of float: 57.9% (assuming 100% of shares...)

 

There's no way I know of to prove that a causal relationship exists between the large short interest, followed by rise in the stock price as a result. I think it's worth tracking this information but I don't agree with you that it's directly useful for calling future short squeezes and being able to forecast the stock price over the next few months. There is certainly a favorable supply/demand dynamic for longs, and you can see this by the high cost that shorts need to pay their brokers to be short the stock. But if that rate gets much higher, why wouldn't Fairholme/Lampert lend out their shares and capture this additional revenue stream on their shares?

 

Longer term, this would smooth out the supply/demand and take the borrow costs back down. But to the extent that SHLD is not reliant on capital markets for their short and medium term needs, Lampert has no reason to care about the stock price in the interim, and should be happy to lend out his shares if he'd be getting paid well to do it...

[Luke 532]

I think it's worth tracking this information but I don't agree with you that it's directly useful for calling future short squeezes and being able to forecast the stock price over the next few months.

 

I'm not predicting a short squeeze or any particular price over the next few months.  I don't do that.  I price, I don't predict (to steal a line from Berkowitz).  But I will say that there are times when short interest dynamics give a favorable risk/reward on trades that take leveraged advantage of large stock price moves.  TSLA, VW, FFH, OSTK (SHLD few months ago), etc. 

 

I should add that in no way do I think short interest plays a part in the long-term thesis of a value investment.  I think I've been clear on that point in the past.  At times I have both an investment and a trade (very different from one another) on the same underlying business.  This is one of those times.

[bmichaud]

A $300MM market cap + $500 divy to SHLD is $7.50 per share. That's not bad for immediate value.

 

If you think LE is ultimately worth 8x $200 core ebitda, them the net equity value is $15 per share in the next couple of years. Of course LE isn't going to trade for intrinsic value right off the bat - it's a brand that's been underinvested in for a decade....it's a miracle it still does $1.6B in sales...

[krazeenyc]

Full HY KKR as expected:

 

"a Term Loan Facility of approximately $500 million. We expect that the proceeds of the Term Loan Facility will be used to pay a dividend to Sears Holdings immediately "

 

 

Any views on a scenario where Eddie loads a HY debt structure (say 4-5x EBITDA, 3-4x Interest coverage) on the LE spin and dividends 400-500MM back to SHLD?

 

Offsets 4-5 years of EBITDA lost from LE spin and then used to solve the last sulg of 2014 pension funding.

 

Aggressive use of CF to then pay-down LE debt.  Assumes EBITDA has troughed.

 

"In connection with the spin-off, we may incur material indebtedness. Any such indebtedness would be described in an amendment to this information statement."

 

 

Good call! I was modeling $200-300M but you nailed it. 4x leverage seems high to me, but not egregiously so. 

 

Of course, this means LE equity is likely going to trade at a market cap of ~$300M (I'm assuming an EV/EBITDA multiple of 6-7x), so only about $3 per SHLD share, as opposed to some on this thread who pegged it at $10-$12 and Baker Street as high as $15.

 

Depending on your views, you could say that keeping $500M within SHLD would be better for current SHLD shareholders than getting another $5/share of LE stock. On the other hand, it really depends on what Eddie does with this $500M. If it just funds the retail transformation than you might wish you had $8 of LE stock instead of $3.

 

I personally agreed with you that it would initially trade at about $800M (EV), but that it would be acquired for about 1 - 1.2B -- in fairly short order. Land's End has been neglected and I think it's still a classic brand that will be turned around. Look at the Land's End shops for example they generate negative ebitda for Land's End.  They exist to benefit SHLD only. VF Corp or Sycamore will buy out Land's End (you heard it here first lol).  As an overall transaction for SHLD it's interesting + $500 MIllion up front, and currently negative $70 million in Ebitda (-100 LE ebitda + 30 from rent)

 

I look at separating LE from SHLD the same way as when Coach was ripped out of Sara Lee.

[Luke 532]

Last I remember 70% of SHLD purchases were SYW members.  I wonder if the entirety of SHLD has increased to 75% or if just LE is at that level.  The closer we get to every purchase being from a SYW member the faster Lampert can monetize.

 

"Currently, approximately 75% of all retail purchases at Lands’ End Shops at Sears are made by Shop Your Way members."

http://www.sec.gov/Archives/edgar/data/799288/000119312514030430/d632333dex991.htm

[JAllen]

A $300MM market cap + $500 divy to SHLD is $7.50 per share. That's not bad for immediate value.

 

If you think LE is ultimately worth 8x $200 core ebitda, them the net equity value is $15 per share in the next couple of years. Of course LE isn't going to trade for intrinsic value right off the bat - it's a brand that's been underinvested in for a decade....it's a miracle it still does $1.6B in sales...

 

 

Bmichaud: Where do you get your core ebitda estimate from?

[bmichaud]

2010 ebitda margin was 12%. 2012 was 6%. There was good discussion back when the spin was announced about how SYW expense is being allocated to LE, which is driving down margins. 2010 is probably a decent proxy for what "core" lands end can earn, IMO.

[Luke 532]

Anybody know of a particular reason/strategy Lampert is having the $500M dividend from LE to SHLD being paid immediately prior to the consummation of the spin-off, as opposed to after? It's most likely an immaterial detail but I was just curious if anybody had insight on a possible reason.

 

Page 48: In connection with the spin-off, we are pursuing an ABL Facility which would provide for maximum borrowings of approximately $200 million with a letter of credit sub-limit and a senior secured term loan facility (the “Term Loan Facility”) of approximately $500 million. We expect that the proceeds of the Term Loan Facility will be used to pay a dividend to Sears Holdings immediately prior to the consummation of the spin-off.

http://www.sec.gov/Archives/edgar/data/799288/000119312514030430/d632333dex991.htm

[muscleman]

Anybody know of a particular reason/strategy Lampert is having the $500M dividend from LE to SHLD being paid immediately prior to the consummation of the spin-off, as opposed to after? It's most likely an immaterial detail but I was just curious if anybody had insight on a possible reason.

 

Page 48: In connection with the spin-off, we are pursuing an ABL Facility which would provide for maximum borrowings of approximately $200 million with a letter of credit sub-limit and a senior secured term loan facility (the “Term Loan Facility”) of approximately $500 million. We expect that the proceeds of the Term Loan Facility will be used to pay a dividend to Sears Holdings immediately prior to the consummation of the spin-off.

http://www.sec.gov/Archives/edgar/data/799288/000119312514030430/d632333dex991.htm

 

Maybe he wants the money sooner than later. He has been monetizing assets a lot recently. 500M from Sears Canada and 500M from LE. He has been calling for another 500M from the assurance business too.

The end game is quickly approaching, and it is still unclear to me what he will do with these cash. If he had raised cash earlier in 2010 or 2011, he would have made a killing using the cash to buy other stocks, but I haven't seen him using the cash to invest in anything else except SYW.

If he starts to use the cash to invest in other stocks, I would be very interested in increasing my position

[Guest wellmont]

what does he do with the cash? it's simply replacing the cash his business incinerates. go back and track all the financial engineering he is doing. He was forced into this strategy because he needed to raise cash. His bond ratings were marked down. His credit line was in jeopardy. He had to raise cash to keep the doors open. And the stock price confirms this. In fact the value destruction of his core business has far exceeded the cash he has raised from asset sales and financial engineering. Just look at a long term chart of the stock and cross reference it against his financial engineering. So I don't worry about "what is he going to do with the cash"? that question has an obvious answer.

[Luke 532]

Maybe he wants the money sooner than later.

 

I should have been more clear in my original post.  "Immediately prior" might be a day or two, instead of after... so we're talking potentially 2 or 3 day difference (negligible).

 

I guess the better way to ask is "from a legal, tax, or strategic perspective what is the advantage of getting the dividend from LE prior to the spin-off is completed as opposed to after it is completed (other than getting the $ a few days earlier)?"

 

Lampert is an attention-to-detail freak and I'm just curious if there's a reason for the timing of the dividend when compared to the completion of the spin-off.