SHLDQ - Sears Holdings Corp

[bmichaud]

SHLD is directionally tracking JCP stock price virtually tick for tick today, but also the past month or so. So bizarre. Can't figure it out.

 

Joint BK announcement coming down the pike?

[Luke 532]

SHLD is directionally tracking JCP stock price virtually tick for tick today, but also the past month or so. So bizarre. Can't figure it out.

 

Joint BK announcement coming down the pike?

 

Definitely joint BK announcement (nevermind the actual financials of a company, relying on headlines is usually good enough to outperform).  It's so obvious that they're pretty much the exact same company.  I bet it's so easy to see that even CNBC, Motley Fool, etc. can see it.  ;)

[bmichaud]

hahaha  8)

[heth247]

That seems very, very optimistic. 2013 FCF ex-pension is likely to be in the neighborhood of negative $500M. Closing 300 stores and cutting traditional marketing will reverse that figure by $1.25B-$1.50B? That would likely be an EBITDA margin of positive 3-4%.

 

I think we should not use 2013 numbers which is in the middle of the transformation as the reference.  I am inclined to use the reference that the retail side is break even, after pension contribution.

[wisdom]

I will once again raise this - is this a problem with the retail industry and not related to Lampert? He has a high profile and he is doing things differently- so it easy to take shots at him and mock him because he is refusing to follow the establishment's way of doing things.

 

Bring up stock prices for HD, target, walmart, Lowe's, Costco and SHLD since SHLD was set up. Nordstrom seems to be the exception.

 

SHLD stock price has done just as well as others over that time - perspective might help. Yet we hear about how great everyone else is and Lampert is clueless and blowing things up.

 

It is retail that is in transition and we will know who the winners are in a few years. The winner in this transition is likely to garner a disproportionate amount of the spoils.

 

Transition = opportunity for newbies as they can knock out the established/bureaucratic organizations.

 

[DCG]

I will once again raise this - is this a problem with the retail industry and not related to Lampert? He has a high profile and he is doing things differently- so it easy to take shots at him and mock him because he is refusing to follow the establishment's way of doing things.

 

Bring up stock prices for HD, target, walmart, Lowe's, Costco and SHLD since SHLD was set up. Nordstrom seems to be the exception.

 

SHLD stock price has done just as well as others over that time - perspective might help. Yet we hear about how great everyone else is and Lampert is clueless and blowing things up.

 

It is retail that is in transition and we will know who the winners are in a few years. The winner in this transition is likely to garner a disproportionate amount of the spoils.

 

Transition = opportunity for newbies as they can knock out the established/bureaucratic organizations.

 

 

Well, Home Depot made a $45 billion profit last year. Lowes made about $2 billion in profit last year, as did Costco. $17 billion for Walmart. SHLD has lost over $4 billion over the last couple years.

[peridotcapital]

That seems very, very optimistic. 2013 FCF ex-pension is likely to be in the neighborhood of negative $500M. Closing 300 stores and cutting traditional marketing will reverse that figure by $1.25B-$1.50B? That would likely be an EBITDA margin of positive 3-4%.

 

I think we should not use 2013 numbers which is in the middle of the transformation as the reference.  I am inclined to use the reference that the retail side is break even, after pension contribution.

 

The last time SHLD was FCF breakeven ex-pension was 2010. If they are closing stores and increasing the % of sales from SYW, why would margins revert back to pre-transformation levels while the transformation is being accelerated? I don't think it is coincidence that as more stores are closed and the more SYW is emphasized, the higher the retail losses have gotten. There does not seem to be any evidence of that trend reversing meaningfully over the next couple of years. I don't doubt that Eddie can pull a lever or two to stop it from getting worse (cut ad spending, cut SYW points promotions, etc), but with $500M in annual interest expense and capex, FCF breakeven or better seems like a tough task, especially when SSS are accelerating the wrong way.

[wisdom]

Retail is one of the areas of the market that is still cheap. There is a transition that is taking place and consumers have high debt loads at the sametime. It is upto you to decide who is going to be the winner in this transition.

 

You do not have to invest in SHLD just because a few have chosen to do so.

 

Turnarounds are very hard and rarely successful. It might be easier to bet on a profitable retailer. It is also possible that SHLD is misunderstood and a large SH may not be helping this by not talking up his investment ala Bill Ackman and Icahn, etc.

 

If you see more value in SHLD and want to partner up with someone who is not promotional - you may choose SHLD over other retailers.

 

I have seen more positive write-ups all over the place about Bill Ackman because he talks a good game - checkout his investments in SHLD, TGT and JCP.

[heth247]

The last time SHLD was FCF breakeven ex-pension was 2010. If they are closing stores and increasing the % of sales from SYW, why would margins revert back to pre-transformation levels while the transformation is being accelerated? I don't think it is coincidence that as more stores are closed and the more SYW is emphasized, the higher the retail losses have gotten. There does not seem to be any evidence of that trend reversing meaningfully over the next couple of years. I don't doubt that Eddie can pull a lever or two to stop it from getting worse (cut ad spending, cut SYW points promotions, etc), but with $500M in annual interest expense and $200M in capex, FCF breakeven or better seems like a tough task, especially when SSS are accelerating the wrong way.

 

Hi, Chad, I was talking about EBITDA number, not FCF. But I agree that FCF is important too, and have no doubt that it is the ultimate number Eddie is targeting. Interest expense can be reduced by paying down debt (e.g. with proceeds from asset sale).

 

Again, my numbers could be off, but just want to point out that currently they spend $300m~500m on pension and $1.5b on traditional marketing a year, that's a lot of fat that can be gone or cut and then goes directly to the bottom line.

[ERICOPOLY]

I will once again raise this - is this a problem with the retail industry and not related to Lampert? He has a high profile and he is doing things differently- so it easy to take shots at him and mock him because he is refusing to follow the establishment's way of doing things.

 

Bring up stock prices for HD, target, walmart, Lowe's, Costco and SHLD since SHLD was set up. Nordstrom seems to be the exception.

 

SHLD stock price has done just as well as others over that time - perspective might help. Yet we hear about how great everyone else is and Lampert is clueless and blowing things up.

 

It is retail that is in transition and we will know who the winners are in a few years. The winner in this transition is likely to garner a disproportionate amount of the spoils.

 

Transition = opportunity for newbies as they can knock out the established/bureaucratic organizations.

 

 

Well, Home Depot made a $45 billion profit last year. Lowes made about $2 billion in profit last year, as did Costco. $17 billion for Walmart. SHLD has lost over $4 billion over the last couple years.

 

Three days before Christmas, there were no lines at the checkout at the local Sears store in Santa Barbara, and few customers in the store.  Less than a minute later I was in Williams-Sonoma next door and there was about a 40 minute wait in the checkout line.  The store was mobbed with shoppers.

 

Right, so if retail is in transition, why is the transition happening so much faster at Sears compared to Williams-Sonoma?  What are they doing to bring shoppers into their store that Sears is not doing?  And why isn't Sears doing that very thing?

 

There were more shoppers in that one tiny store compared to the entirety of the Sears store.  And all they do is sell kitchen stuff, so just one category of items.

 

[JSArbitrage]

I will once again raise this - is this a problem with the retail industry and not related to Lampert? He has a high profile and he is doing things differently- so it easy to take shots at him and mock him because he is refusing to follow the establishment's way of doing things.

 

Bring up stock prices for HD, target, walmart, Lowe's, Costco and SHLD since SHLD was set up. Nordstrom seems to be the exception.

 

SHLD stock price has done just as well as others over that time - perspective might help. Yet we hear about how great everyone else is and Lampert is clueless and blowing things up.

 

It is retail that is in transition and we will know who the winners are in a few years. The winner in this transition is likely to garner a disproportionate amount of the spoils.

 

Transition = opportunity for newbies as they can knock out the established/bureaucratic organizations.

 

Actually, as a SHLD "bear" (I guess), this is closer to my position.  Lampert isn't dumb.  He isn't lazy.  He's one of the top hedge fund managers ever.  But he is driving the Titanic and his ankle is chained to it.  SHLD got caught in a perfect storm: over-investment in retail space during a glut, low quality brand position when the lower/middle class got destroyed by the Great Recession, and stiff competition against better run enterprises both B&M and online.

 

I honestly believe the retail-turnaround thesis is pretty much a fairy-tale that SHLD investors are deluding themselves with.  There is absolutely zero evidence SHLD survives as a retailer. 

 

The only successful future for Eddie here (IMO) is if he financial engineered the hell out of the balance sheet and he walks away with a basket of spin-offs (SHOS, LE), a basket of brands (Craftsman, Die Hard, Kenmore, etc.), and some unencumbered real estate and leaves debt-holders/pension-holders holding an empty bag. 

 

But the problem is that he has been in this stock for so long that his IRR is DOA.  Any longer and I think he's looking at a sub-10% IRR.  And that's with all the risk he had to take to get it.   

[Luke 532]

But the problem is that he has been in this stock for so long that his IRR is DOA.  Any longer and I think he's looking at a sub-10% IRR.  And that's with all the risk he had to take to get it. 

 

Why would that impact our decision whether or not to invest today at these prices?  I'm of the belief that investment decisions should be made taking today's prices and analyzing the risk/reward going forward.

 

For sure there's been a ton of pain over the last decade, but a buyer today reaps the benefit of that pain in a severely depressed stock price.

[wisdom]

According to that standard his investment in AZO was DOA too until 2006.

 

He is a patient long-term owner.

 

Edit: I would add AN to that as well - DOA until 2010.

[JAllen]

This is an anecdote, like the others others have posted. 

 

 

I Christmas shopped at Sears this year some.  I went in to the Orange Park Mall (close suburb of Jacksonville, FL) location, which by the way gets ~100,000 cars passing on just Blanding Blvd. alone each day, not including I-295 traffic which is the primary interstate bypass for Jacksonville.  The Sears there faces Blanding blvd, and there's a Sears auto outparcel (very little activity, might have actually been closed, though it was 5 PM on a Saturday so not sure).

 

 

Anyways, I was close to being astonished by how many people were in there.  There were 7 people in line before us - we had to wait at least a couple of minutes before being checked out.  The cashier did not ask me to sign up for any SYW or anything else like that, which I expected.

 

 

I was able to buy at least four gifts for family members there - mostly grilling stuff for a new brother in law.  And while I was biased in going into Sears at all to shop, there weren't other gift ideas I had for people but declined to buy elsewhere because of that bias -  I was stuck and didn't have any good ideas, anywhere.  But yeah, the store was almost what I would call full of people.  There were at least two times I had to go to another aisle to walk through to get to where I was going. 

 

 

There were some aisles with little inventory, and no it wasn't stocked like Bed Bath and Beyond, or other retailers.  I didn't see any horrible things like no tiles or just crappy stuff lying about.  But yeah there were quite a few people buying stuff there.  I was surprised.  It's easy to forget that one in five-hundred dollars of the American economy flow through Sears Holdings each year.

[BTShine]

This is an anecdote, like the others others have posted. 

 

 

I Christmas shopped at Sears this year some.  I went in to the Orange Park Mall (close suburb of Jacksonville, FL) location, which by the way gets ~100,000 cars passing on just Blanding Blvd. alone each day, not including I-295 traffic which is the primary interstate bypass for Jacksonville.  The Sears there faces Blanding blvd, and there's a Sears auto outparcel (very little activity, might have actually been closed, though it was 5 PM on a Saturday so not sure).

 

 

Anyways, I was close to being astonished by how many people were in there.  There were 7 people in line before us - we had to wait at least a couple of minutes before being checked out.  The cashier did not ask me to sign up for any SYW or anything else like that, which I expected.

 

 

I was able to buy at least four gifts for family members there - mostly grilling stuff for a new brother in law.  And while I was biased in going into Sears at all to shop, there weren't other gift ideas I had for people but declined to buy elsewhere because of that bias -  I was stuck and didn't have any good ideas, anywhere.  But yeah, the store was almost what I would call full of people.  There were at least two times I had to go to another aisle to walk through to get to where I was going. 

 

 

There were some aisles with little inventory, and no it wasn't stocked like Bed Bath and Beyond, or other retailers.  I didn't see any horrible things like no tiles or just crappy stuff lying about.  But yeah there were quite a few people buying stuff there.  I was surprised.  It's easy to forget that one in five-hundred dollars of the American economy flow through Sears Holdings each year.

 

I had similar experiences when walking through some of the suburban Sears locations.

 

JAllen, Can you explain your third paragraph again?  I'm confused about part where you were biased and didn't have other gift ideas, etc.

[peridotcapital]

The last time SHLD was FCF breakeven ex-pension was 2010. If they are closing stores and increasing the % of sales from SYW, why would margins revert back to pre-transformation levels while the transformation is being accelerated? I don't think it is coincidence that as more stores are closed and the more SYW is emphasized, the higher the retail losses have gotten. There does not seem to be any evidence of that trend reversing meaningfully over the next couple of years. I don't doubt that Eddie can pull a lever or two to stop it from getting worse (cut ad spending, cut SYW points promotions, etc), but with $500M in annual interest expense and $200M in capex, FCF breakeven or better seems like a tough task, especially when SSS are accelerating the wrong way.

 

Hi, Chad, I was talking about EBITDA number, not FCF. But I agree that FCF is important too, and have no doubt that it is the ultimate number Eddie is targeting. Interest expense can be reduced by paying down debt (e.g. with proceeds from asset sale).

 

Again, my numbers could be off, but just want to point out that currently they spend $300m~500m on pension and $1.5b on traditional marketing a year, that's a lot of fat that can be gone or cut and then goes directly to the bottom line.

 

If he starts paying down debt then the story gets real good for equity holders very quickly. Considering he just borrowed an extra $1B I'm not sure how close to that we are, but that would be a game-changer for me. I would guess he needs to get to FCF breakeven, not just EBITDA, to take that step.

 

And I think as we have seen with JCP, if you cut back on marketing, your sales will suffer, so I'm not sure it would all drop to the bottom line. It's one thing to hand over a rewards card when you make a purchase, it's entirely another to be regularly engaged with SYW via email and/or a smartphone app. Given the age of the typical Sears shopper, I would bet there is more of the former than the latter, but both count towards the "% of sales from SYW members" metric.

[bmichaud]

Screen print of SHLD debt.

 

Notice HoldCo debt is trading above 90....

SHLD_Debt.bmp

[gg]

The last time SHLD was FCF breakeven ex-pension was 2010. If they are closing stores and increasing the % of sales from SYW, why would margins revert back to pre-transformation levels while the transformation is being accelerated? I don't think it is coincidence that as more stores are closed and the more SYW is emphasized, the higher the retail losses have gotten. There does not seem to be any evidence of that trend reversing meaningfully over the next couple of years. I don't doubt that Eddie can pull a lever or two to stop it from getting worse (cut ad spending, cut SYW points promotions, etc), but with $500M in annual interest expense and $200M in capex, FCF breakeven or better seems like a tough task, especially when SSS are accelerating the wrong way.

 

Hi, Chad, I was talking about EBITDA number, not FCF. But I agree that FCF is important too, and have no doubt that it is the ultimate number Eddie is targeting. Interest expense can be reduced by paying down debt (e.g. with proceeds from asset sale).

 

Again, my numbers could be off, but just want to point out that currently they spend $300m~500m on pension and $1.5b on traditional marketing a year, that's a lot of fat that can be gone or cut and then goes directly to the bottom line.

 

If he starts paying down debt then the story gets real good for equity holders very quickly. Considering he just borrowed an extra $1B I'm not sure how close to that we are, but that would be a game-changer for me. I would guess he needs to get to FCF breakeven, not just EBITDA, to take that step.

 

And I think as we have seen with JCP, if you cut back on marketing, your sales will suffer, so I'm not sure it would all drop to the bottom line. It's one thing to hand over a rewards card when you make a purchase, it's entirely another to be regularly engaged with SYW via email and/or a smartphone app. Given the age of the typical Sears shopper, I would bet there is more of the former than the latter, but both count towards the "% of sales from SYW members" metric.

 

Chad, curious if you think there's a possibility that equity holders make off well AND debt holders do poorly. That scenario would be driven by the ability for SHLD to spin off assets to equity holders. I know there are some 125 properties tied to a REMIC owned by Sears Re, and the licensing for the main brands are tied to another asset back security, and there is also inventory that backs some of the bonds. But beyond that, other real estate could get leased out, put in a REIT and spun out; alternatively, they could sell a bunch of real estate and pay a one time dividend to equity holders, perhaps large enough to qualify as a return of capital and minimize the tax impact.

[adesigar]

Is there a way to search inside a thread for information ?

 

Anyways a small store in a store concept at Sears.

https://www.multivu.com/mnr/55931-sears-kmart-scrubology-expanding-nationwide-work-n-gear

http://www.scrubology.com/store_locator.aspx

 

 

[adesigar]

Agreed on the location, it's definitely the nicest mall in the area.  Ross Park has been upscaling over the past few years, if Sears wanted out I'm sure they could find someone.

 

I had a realization after typing this.  I wonder if Sears' strategy is to be a baby boomer, retiree store?  If so it might be genius.  Most retailers are targeting a younger segment of the population, there aren't many retailers specifically targeting boomers.  A few that do like Coldwater Creek and Chicos seem to be doing well.  There's a lot of mindshare with the 50-60+ segment for Sears as well.

 

Consumer Cellular seems to agree that baby boomers go to Sears

https://www.consumercellular.com/about/PressRelease/261

[heth247]

If he starts paying down debt then the story gets real good for equity holders very quickly. Considering he just borrowed an extra $1B I'm not sure how close to that we are, but that would be a game-changer for me. I would guess he needs to get to FCF breakeven, not just EBITDA, to take that step.

 

And I think as we have seen with JCP, if you cut back on marketing, your sales will suffer, so I'm not sure it would all drop to the bottom line. It's one thing to hand over a rewards card when you make a purchase, it's entirely another to be regularly engaged with SYW via email and/or a smartphone app. Given the age of the typical Sears shopper, I would bet there is more of the former than the latter, but both count towards the "% of sales from SYW members" metric.

 

So 700m-1b EBITDA still translates to about 0m-300m FCF if we assume 500m interest expense and 200m capex, which can be used for either share buyback or paying down debt. The 1b term loan they took in last Oct. is still cheap money, considering the rising interest environment for the next few years. I actually don't think they should pay it down too fast.

 

JCP changed their marketing strategy overnight, but Eddie has been investing in and testing SYW for years. I am sure Eddie will have to see enough data to convince him before cutting back or pulling the plug on traditional marketing.

 

[peridotcapital]

Chad, curious if you think there's a possibility that equity holders make off well AND debt holders do poorly. That scenario would be driven by the ability for SHLD to spin off assets to equity holders. I know there are some 125 properties tied to a REMIC owned by Sears Re, and the licensing for the main brands are tied to another asset back security, and there is also inventory that backs some of the bonds. But beyond that, other real estate could get leased out, put in a REIT and spun out; alternatively, they could sell a bunch of real estate and pay a one time dividend to equity holders, perhaps large enough to qualify as a return of capital and minimize the tax impact.

I will give you my opinion, but also preface it by saying I focus much more on the equity side of things, vs debt, so there are people who would understand the ability for Eddie to screw over the debt holders better than I would.

 

As far as I know most of the valuable real estate (e.g. the owned Sears properties) are owned by Sears Roebuck. So to spin those off you either have to spin that subsidiary, or have Seritage buy the properties from them, either prior to being spun (with cash allocated to Seritage by Eddie) or after a spin out (raise the capital via the public markets after you make your intentions clear).

 

Again, I'm not an expert on corporate structures, etc but the second option seems very messy to me. It would be a related-party transaction and if it has the effect of screwing over debt holders I think it would be difficult. Now, could he spin out Sears Roebuck at some point, once the operations have been stabilized? That seems plausible, but again, given that the debt is backed by inventory, etc, I would think he would have limitations in terms of which properties could be spun based on how they were operating (landlord, operating store, or combination of both). Given that the strategy seems to be to have a smaller Sears operate alongside a rent-paying tenant of yours, splitting these businesses up just seems extremely difficult to me.

 

I would love to hear opinions on these issues from those who have a stronger background in corporate structures than I do...

[Guest wellmont]

Screen print of SHLD debt.

 

Notice HoldCo debt is trading above 90....

 

there is a theory out there that he will bankrupt the SRAC subsidiary while keeping the holdco intact. But I don't think he does that. Because even if he just puts that one sub in CH 11, the media is going to crucify him and all you will read is "Sears is going bankrupt", even though technically that would be false. And this negative media exposure would send a very bad message to vendors, creditors, and customers, creating a negative feedback loop. If this theory has any credence, the SRAC debt may be undervalued.

[enoch01]

Screen print of SHLD debt.

 

Notice HoldCo debt is trading above 90....

 

there is a theory out there that he will bankrupt the SRAC subsidiary while keeping the holdco intact. But I don't think he does that. Because even if he just puts that one sub in CH 11, the media is going to crucify him and all you will read is "Sears is going bankrupt", even though technically that would be false. And this negative media exposure would send a very bad message to vendors, creditors, and customers, creating a negative feedback loop. If this theory has any credence, the SRAC debt may be undervalued.

 

I would be careful with this line of thinking.  Lampert has shown himself relatively immune to such external influences.  He structured the SRAC debt to protect the holding company, for a reason.  Rumor is that he is already factoring receivables anyway.  I don't think customers would care one way or another at this point.

[JSArbitrage]

But the problem is that he has been in this stock for so long that his IRR is DOA.  Any longer and I think he's looking at a sub-10% IRR.  And that's with all the risk he had to take to get it. 

 

Why would that impact our decision whether or not to invest today at these prices?  I'm of the belief that investment decisions should be made taking today's prices and analyzing the risk/reward going forward.

 

For sure there's been a ton of pain over the last decade, but a buyer today reaps the benefit of that pain in a severely depressed stock price.

 

It shouldn't impact your decision.  But it goes against the argument that Lampert is so damn smart he's going to make a ton of money on SHLD.  If he makes 3X his money over a 20 year period, he's pretty much lost and maybe he's not the guaranteed above market returns jockey the SHLD bulls are betting on. 

 

Again, I use the term SHLD bear loosely to describe myself because there are ways for him to make money here.  But most of the arguments I hear are speculation and not investing.  It's the "I bet Lampert's secret plan is going make me tons of money!" stuff floating around here I disagree with.

 

Again, not saying you won't make money at this price.  But I am saying that blind faith in Lampert is misguided.  WEB once said when a smart person gets ahold of a business with bad economics, the business usually wins.