SHLDQ - Sears Holdings Corp

[peridotcapital]

"Prior to Pharmaca, Mr. Panzer held the position of senior executive vice president and chief marketing officer with Rite Aid Corporation from 2005 to 2008. He was named to the role after serving as the senior executive vice president of store operations from 2001 to 2005 with responsibility for both pharmacy and front-end operating results."

 

Rite Aid... yet another example of a company with billions in sales and no profits... he'll fit right in at Kmart!

 

I checked Rite Aid's historical financials to see how well they did while he was running operations and marketing. RAD's operating margin in 2001 was 0.3%. By 2008 it came in at 0.2%. Yikes.

 

To be fair though, I'm not sure anyone could do any better getting operational talent into this company right now.

[Luke 532]

To be fair though, I'm not sure anyone could do any better getting operational talent into this company right now.

 

You don't find David Lukes, Robert Schriesheim and Sean Farney to be talented?

[peridotcapital]

To be fair though, I'm not sure anyone could do any better getting operational talent into this company right now.

 

You don't find David Lukes, Robert Schriesheim and Sean Farney to be talented?

 

Well, I can't comment on particular people without looking at their track records. What I do know is that Sears/Kmart has been an operational disaster for years, so speaking generally, I do not think SHLD has been able to lure strong executives relative to their competitors. I don't think saying that management at this company has been awful is unfair by any means.

[Luke 532]

To be fair though, I'm not sure anyone could do any better getting operational talent into this company right now.

 

You don't find David Lukes, Robert Schriesheim and Sean Farney to be talented?

 

Well, I can't comment on particular people without looking at their track records. What I do know is that Sears/Kmart has been an operational disaster for years, so speaking generally, I do not think SHLD has been able to lure strong executives relative to their competitors. I don't think saying that management at this company has been awful is unfair by any means.

 

Fair enough.  Just thought you might know about the impressive resumes of those 3 guys since you've blogged on SHLD a few times.

[heth247]

Two hires in past two days - perhaps we're getting more of an idea in which business units Lampert sees value.

 

Does it also mean two left? Neither of the press release mentioned about it.

 

One thing I don't like is that the turnover of the senior management at Sears is a bit too frequent over the past few years. Seems Eddie cannot get people to work with him.

[ourkid8]

Luke,  what is the percentage of your portfolio in SHLD and your average purchase price?

 

Tks,

S

[Luke 532]

Luke,  what is the percentage of your portfolio in SHLD and your average purchase price?

 

Tks,

S

 

Was 30% of the value of the portfolio back when the stock was much higher.  I've added calls and a small amount of common in the past 4 weeks... so it's less than 30% of the current portfolio value as of right now, but may very well rise above 30% once SHLD is back in the 55-65 range (that depends on how my other investments perform in the interim, of course).  Avg price on common is $48.xx (down from $49.xx before my small buys in the past week or two).

[ourkid8]

How long have you held this investment for?  I am trying to uderstand what kind of anchor this must have been on your returns in your portfolio as this stock has been a horrible long term investment so far.  I know you are a bull  and strongly believe this will rise back in the $55-60 range but have you considered the fact this could potentially continue to anchor your returns lower?  Are you hedging your downside risk?

 

Tks,

S

 

Luke,  what is the percentage of your portfolio in SHLD and your average purchase price?

 

Tks,

S

 

Was 30% of the value of the portfolio back when the stock was much higher.  I've added calls and a small amount of common in the past 4 weeks... so it's less than 30% of the current portfolio value as of right now, but may very well rise above 30% once SHLD is back in the 55-65 range (that depends on how my other investments perform in the interim, of course).  Avg price on common is $48.xx (down from $49.xx before my small buys in the past week or two).

[Luke 532]

How long have you held this investment for?  I am trying to uderstand what kind of anchor this must have been on your returns in your portfolio as this stock has been a horrible long term investment so far.  I know you are a bull  and strongly believe this will rise back in the $55-60 range but have you considered the fact this could potentially continue to anchor your returns lower?  Are you hedging your downside risk?

 

Tks,

S

 

My first purchases were in 2013 when I thought Lampert was making some moves indicating he was ready to take the next step (becoming CEO, hiring Lukes/Schriesheim, etc.).  So it's safe to say I probably have a different perspective than many others when speaking of drag on my portfolio. 

 

I don't believe much in hedging when a stock price is so incredibly low (in my opinion), but if/when it gets back to the $60 range I'll likely hedge some unless the move is news-based and I think it would be the end of the volatility.

[dutchman]

kudos to those of you who take this volatility with equanimity.  As much as I try, I get really grumpy.

[ourkid8]

Based on your purchase price, you feel the stock is only 25% undervalued?  You took a 30% portfolio position based on a 25% upside? ($60 upside with a purchase price of $48.xx)

 

Tks,

S

[20ppy]

I have a tax related question :

 

In the event off LE spin off, are the LE shares we receive dividends? What are the tax implications ? Also, how are and if option prices going to be adjusted?

[Luke 532]

Based on your purchase price, you feel the stock is only 25% undervalued?  You took a 30% portfolio position based on a 25% upside? ($60 upside with a purchase price of $48.xx)

 

Tks,

S

 

No, I think the upside is many, many multiples of $60.  I was just saying that if I thought the stock moved up to that level just on volatility and not news-based that I'd be more inclined to hedge than I would be if material news caused the stock to be at those levels.  Other than trying to make a little money on short-term price fluctuations I just don't see much point hedging down here at today's levels.

 

My average purchase price at $48.xx is based on my belief that long-term there is minimal chance shareholders receive < $40/share in value.  In my mind, I have $8 of long-term risk (in addition to opportunity cost) in exchange for a business with unquantifiable upside (in a good way) in the hands of a master allocator.

[peridotcapital]

To be fair though, I'm not sure anyone could do any better getting operational talent into this company right now.

 

You don't find David Lukes, Robert Schriesheim and Sean Farney to be talented?

 

Well, I can't comment on particular people without looking at their track records. What I do know is that Sears/Kmart has been an operational disaster for years, so speaking generally, I do not think SHLD has been able to lure strong executives relative to their competitors. I don't think saying that management at this company has been awful is unfair by any means.

 

Fair enough.  Just thought you might know about the impressive resumes of those 3 guys since you've blogged on SHLD a few times.

 

To me, it's like football. Are the Jacksonville Jaguar players talented? Sure, if you compare them with 99% of the population. But when they go up against the Seahawks you won't be impressed and their results won't look anything like their resumes.

 

Is Eddie Lampert very smart? Of course, but does he stand a chance up going against Terry Lundgren at Macy's, or any other retail CEO with decades of industry experience? I think we've seen the answer. I don't think Eddie's revolving door of senior managers has been full of idiots, but that doesn't mean they can/will get the job done at SHLD. 

 

Sean Farney might have built a beautiful data center for Microsoft in Chicago, but does that mean he'll be able to build Ubiquity into a formidable data center competitor? As we've seen with Sears, it's not just who you are, it's what you have to work with and what your competitors are doing that will also impact your success.

 

I'm not short, so I'm rooting for them! And I'm hoping to be impressed by Eddie in early May... the stock in the low 30's is not something to ignore... even for skeptics like me.

[Luke 532]

To me, it's like football. Are the Jacksonville Jaguar players talented? Sure, if you compare them with 99% of the population. But when they go up against the Seahawks you won't be impressed and their results won't look anything like their resumes.

 

Is Eddie Lampert very smart? Of course, but does he stand a chance up going against Terry Lundgren at Macy's, or any other retail CEO with decades of industry experience? I think we've seen the answer. I don't think Eddie's revolving door of senior managers has been full of idiots, but that doesn't mean they can/will get the job done at SHLD. 

 

Sean Farney might have built a beautiful data center for Microsoft in Chicago, but does that mean he'll be able to build Ubiquity into a formidable data center competitor? As we've seen with Sears, it's not just who you are, it's what you have to work with and what your competitors are doing that will also impact your success.

 

I'm not short, so I'm rooting for them! And I'm hoping to be impressed by Eddie in early May... the stock in the low 30's is not something to ignore... even for skeptics like me.

 

I hear you.  I guess I don't view SHLD from a retail perspective so I don't try to compare the individual business segments to their retail counterparts.  I view SHLD as a collection of businesses and try to gauge how their individual actions might produce vs. the competition in the future.

 

Do I expect Lampert to be a great retailer?  No.  But that's not the thesis.  Any retail success is 100% gravy.

 

Will Farney do the same thing he did at Microsoft?  No clue.  But he does have a ton more to work with in terms of assets and a parent company that isn't afraid of investing when/if he repeats his past successes.

 

As a Broncos fan, I can't even think about football right now.  I was hoping for Sox in October and Denver in February but it wasn't meant to be.  Here's hoping baseball gets here fast and the Sox can do some more damage this year.  Congrats on the Seahawks, by the way, the buzz must be crazy fun up there in Seattle right now.  My eldest brother lives in Tacoma and is loving it.

[adesigar]

Was 30% of the value of the portfolio back when the stock was much higher.  I've added calls and a small amount of common in the past 4 weeks... so it's less than 30% of the current portfolio value as of right now, but may very well rise above 30% once SHLD is back in the 55-65 range (that depends on how my other investments perform in the interim, of course).  Avg price on common is $48.xx (down from $49.xx before my small buys in the past week or two).

 

Nice :) . I had started to think I was the only one crazy enough to have a very large position in SHLD.

[peridotcapital]

To me, it's like football. Are the Jacksonville Jaguar players talented? Sure, if you compare them with 99% of the population. But when they go up against the Seahawks you won't be impressed and their results won't look anything like their resumes.

 

Is Eddie Lampert very smart? Of course, but does he stand a chance up going against Terry Lundgren at Macy's, or any other retail CEO with decades of industry experience? I think we've seen the answer. I don't think Eddie's revolving door of senior managers has been full of idiots, but that doesn't mean they can/will get the job done at SHLD. 

 

Sean Farney might have built a beautiful data center for Microsoft in Chicago, but does that mean he'll be able to build Ubiquity into a formidable data center competitor? As we've seen with Sears, it's not just who you are, it's what you have to work with and what your competitors are doing that will also impact your success.

 

I'm not short, so I'm rooting for them! And I'm hoping to be impressed by Eddie in early May... the stock in the low 30's is not something to ignore... even for skeptics like me.

 

I hear you.  I guess I don't view SHLD from a retail perspective so I don't try to compare the individual business segments to their retail counterparts.  I view SHLD as a collection of businesses and try to gauge how their individual actions might produce vs. the competition in the future.

 

Do I expect Lampert to be a great retailer?  No.  But that's not the thesis.  Any retail success is 100% gravy.

 

Will Farney do the same thing he did at Microsoft?  No clue.  But he does have a ton more to work with in terms of assets and a parent company that isn't afraid of investing when/if he repeats his past successes.

 

As a Broncos fan, I can't even think about football right now.  I was hoping for Sox in October and Denver in February but it wasn't meant to be.  Here's hoping baseball gets here fast and the Sox can do some more damage this year.  Congrats on the Seahawks, by the way, the buzz must be crazy fun up there in Seattle right now.  My eldest brother lives in Tacoma and is loving it.

 

I think you are better than I am at taking the Buffett view (pretend the market closed for 5 years... would you feel good about your investment when it opens again) in cases where I don't know what the business will look like in 5 years. It's hard for me to ignore the retail side when right now the entire business is crappy retail. Once we start seeing a path to where the assets are generating material revenue from other sources, I think I'll be more on board. I'm just not completely sold because 5 years ago I would have thought we would be there already.

 

700,000 people in downtown Seattle for the Seahawks victory parade today... insanity. My wife just applied for a job at the VA hospital in Tacoma (her fellowship in Seattle ends this fall).

[heth247]

Is Eddie Lampert very smart? Of course, but does he stand a chance up going against Terry Lundgren at Macy's, or any other retail CEO with decades of industry experience? I think we've seen the answer. I don't think Eddie's revolving door of senior managers has been full of idiots, but that doesn't mean they can/will get the job done at SHLD. 

 

I am not sure if "decades of retail experience" is a plus or minus at this time, when the retail industry is undergoing a "paradigm shift".

[Luke 532]

More interesting commentary from the GGP call...

 

On the Norwalk mall development, this is the first new mall you’ve built in a long time. And I’m just curious, given the clean slate you’re giving here in the design as we are in this “new omni-channel world,” can you perhaps give us some insight on how this design is evolving and if there’s anything different that you’re — any different approaches you’re taking as you design it maybe from a — in terms of building technology into the “bricks and mortar” storage space or anything that the retailers are asking for?

 

Sandeep Lakhmi Mathrani – Chief Executive Officer and Director

 

Actually, the only thing that we’re going to be more cognizant of is to make it more convenient for people to do same-day pickup. Barring that, we’re inspired to build a mall of the highest quality with the best design that people will be attracted to come to. So the only thing is to ensure ease for same-day delivery of same-day pickup.

 

Nathan Isbee – Stifel, Nicolaus & Co., Inc., Research Division

 

Okay. So on the storage side in terms of fulfillment center, that’s not something that you’re really focusing on?

 

Sandeep Lakhmi Mathrani – Chief Executive Officer and Director

 

Actually, if you see what the retailers are doing is it’s not that they’re increasing their store size. I mean, as a matter of fact, Urban Outfitters CEO made a comment that he’s — as much as e-commerce is a threat to directly increasing the size of their stores to show more product to the customer, and they’re using the product in the stores, okay. They’re not actually going into the back room to take out from storage. So that basically becomes easier to pack and ship or pack and have ready for pickup. So it is being incorporated within the store, not put away into what I would call some side room.

[peridotcapital]

Is Eddie Lampert very smart? Of course, but does he stand a chance up going against Terry Lundgren at Macy's, or any other retail CEO with decades of industry experience? I think we've seen the answer. I don't think Eddie's revolving door of senior managers has been full of idiots, but that doesn't mean they can/will get the job done at SHLD. 

 

I am not sure if "decades of retail experience" is a plus or minus at this time, when the retail industry is undergoing a "paradigm shift".

 

Maybe, maybe not. But Macy's is executing extremely well right now, and they're not the only ones. I know mall traffic was down big this holiday season, but the Amazon effect has been around for multiple years now and many mall retailers are holding their own nicely. I guess when I walk a Sears or Kmart store these days I think lack of retail expertise is the problem, and the results seem to reflect that, but maybe I'm wrong.

 

And if online sales are less than 5% of your total, I'm baffled as to why the stores don't seem to be getting real attention. Even if you think you'll eventually close half of them and half of the remaining ones will be half the size, you're still going to be getting the vast majority of your revenue over the next several years from in-store purchases.

[heth247]

Maybe, maybe not. But Macy's is executing extremely well right now, and they're not the only ones. I know mall traffic was down big this holiday season, but the Amazon effect has been around for multiple years now and many mall retailers are holding their own nicely. I guess when I walk a Sears or Kmart store these days I think lack of retail expertise is the problem, and the results seem to reflect that, but maybe I'm wrong.

 

And if online sales are less than 5% of your total, I'm baffled as to why the stores don't seem to be getting real attention. Even if you think you'll eventually close half of them and half of the remaining ones will be half the size, you're still going to be getting the vast majority of your revenue over the next several years from in-store purchases.

 

Yes, there is definitely uncertainty. How I wish that Eddie could show us more about what "metrics"  are improving and convincing him that he is moving in the right direction.

 

I have to admit that I am biased regarding his approach, because I just started to read the book "The Outsiders".

 

[Luke 532]

Yes, there is definitely uncertainty. How I wish that Eddie could show us more about what "metrics"  are improving and convincing him that he is moving in the right direction.

 

This quote from txlaw always parades through my brain when I hear the word "uncertainty"...

Btw, those who say investing in SHLD is speculating are confusing the difference between risk and uncertainty. 

 

Further, they clearly haven't done any analysis to determine what the potential payoff is in relation to the opportunity cost.

 

I have to admit that I am biased regarding his approach, because I just started to read the book "The Outsiders".

 

Fantastic read, but (insert obligatory survivorship bias disclaimer here)  :)

 

[alertmeipp]

When in Feb is the conference call? TIA

[Luke 532]

When in Feb is the conference call? TIA

 

The Company currently plans to release financial results for its fiscal 2013 fourth quarter and full year on or about February 27, 2014, before the market opens and hold an analyst and investor conference call on that date.

[mcliu]

My concern with Sears is that:

 

1) The real estate value is quite uncertain. Cap rates are at very low today, but that may change in the future. What kind of sensitivities do these assets have to cap rate increases? If you assume that cap rates rise from the current sub 5% on Class A retail to 10% in 10 years, the real estate may only be worth half of what it is.

 

2) Timing of asset sales is also uncertain. There's a huge impact on IRRs if you assume that the assets get liquidated over a 5, 10 or 20 year period.

 

It seems like slight changes to 1) and 2) can have a pretty big impact on your IRR and the dispersion of outcomes.

 

Would like to hear your thoughts.