SHLDQ - Sears Holdings Corp

[Luke 532]

Quick update on short interest...

 

Short (as of 2/28/2014): 17.422M

Lampert/Berkowitz/Tisch: 79.597M

Outstanding: 106.451M

Float: 26.854M

Horizon/Chou/OldWest/BakerSt/Force/GoodHaven/Fine = ~10.009M

 

Short interest as % of float: 64.9% (assuming zero shares are long-term oriented of those held by Horizon Kinetics, Baker Street, Old West, Chou, Force Capital, etc.)

 

[adesigar]

Lands End Info updated today

 

http://www.searsholdings.com/invest/lai.htm

[TwoCitiesCapital]

Quick update on short interest...

 

Short (as of 2/28/2014): 17.422M

Lampert/Berkowitz/Tisch: 79.597M

Outstanding: 106.451M

Float: 26.854M

Horizon/Chou/OldWest/BakerSt/Force/GoodHaven/Fine = ~10.009M

 

Short interest as % of float: 64.9% (assuming zero shares are long-term oriented of those held by Horizon Kinetics, Baker Street, Old West, Chou, Force Capital, etc.)

 

Realistically, this potentially means that short interest is now greater than the float....and Lampert has 1.5B in cash/receivables  that could potentially be actioned into something positive. I'm not saying he will, I'm simply saying that's that's a large % of the current market cap that has a lot of optionality and the shorts won't have anywhere to pick up shares if he does do something with it....

 

Things could get very interesting.

[TeddyLampert]

RE: Latest company developments and thoughts on competitive advantage

 

Anyone who read the Chairman's letter and scratched their heads wondering what Eddie was smoking should probably read today's latest blog post:

 

http://blog.searsholdings.com/leadership-viewpoint/fulfilling-the-promise-of-integrated-retail-a-store-based-network-providing-one-and-two-day-service-for-online-orders/

 

In the Feb 2014 Chairman's letter, Eddie writes: "Over the course of the 2013 holiday season, many retailers—including and especially Amazon—competed intensely on the basis of price. As a result, many retailers reported disappointing sales and profits for the important fourth quarter of the year. We also competed on speed and this is where I think the seeds of Sears Holdings' competitive advantage may take root." (emphasis mine).

 

When I read that last sentence, I was intrigued. Anyone who's studied Buffett (and Lampert surely has) knows the importance of a durable competitive advantage and doesn't throw around that term lightly. So when Eddie used that term in his letter, my ears pricked up. Unfortunately, the letter did not go into any detail about what he meant, so like all of you, I was disappointed. I was ready to jump aboard the Eddie's-an-idiot bandwagon until I saw today's blog post, which was intriguing.

 

Fast forward to the blog post: I think this surrogate of Eddie's is laying out the details of what Sear's long term competitive advantage might be. To summarize, Sears has the advantage of one of the largest and most complex supply chains in the industry, capable of distributing small high value items like jewelry to large bulky items like fridges. "SHC has deployed a network of 13 Sears stores and 17 Kmart stores that provides two-day coverage to 99 percent of the population using cost effective ground transportation. It also provides next day services to 80 percent of the U.S. population. Consolidating demand into a small number of strategic geographical locations enables stores to fulfill hundreds of orders per day." Additionally: "We have also worked very closely with our Online Business Unit to make changes to our sourcing logic so that online orders are automatically sourced based on the lowest total fulfillment cost, while ensuring orders will meet the promise date to the member." (I'm just assuming the low fulfillment cost is passed onto the consumer).

 

Eddie has identified that Sears's retail value proposition is going to be convenience (i.e. high speed delivery) and low(ish) cost (won't cost you much more to ship via Sears than thru other online outlets).

 

Will this work? I don't know and can't claim to know. My opinion is worth the html it's written in, but here's my two cents. Greenwald writes in Competition Demystified that one of the most durable competitive advantages is economies of scale combined with customer captivity (in other words, a supply advantage plus a demand advantage). Sears achieves economies of scale through its distribution network, which allows it to ship quickly at lower cost. Sears tries to create a demand advantage through SYW, giving customers a reason to return to the SYW platform. You might call this Eddie's attempt at customer habit formation. 

 

I don't know if this will work, but let me give you a personal example of the utility of reward-based loyalty programs. The other month I got an email from American Advantage with my mileage summary. I rarely check these spam emails, but on a lark, I did, and discovered that I had 100,000 miles expiring in 3 months! I shopped damn hard to accumulate those miles but as I had no plans to travel soon, I was told I had to pay $150 to "extend them" for 1 more year. Well, I did the math. 100K of miles can buy 2 domestic tickets, which would be around $300 each.  Realizing I have to pay $150 to retain $600 of value, I made the extension payment, hating myself in the process. If Munger were already dead, I imagine his ghost would have been hovering over me, making some wisecrack about the behavioral power of scarcity and how asymmetric losses feel stronger than equivalent gains. That's the power of SYW. The key to understanding why SYW has a decent chance of working is that those points (i.e. cash) expire in a few months after issue. That drives more sales. I just checked on Sears' site and saw that if I buy a $650 washer, I will get $6.50 in points. You can be pretty sure that I will shop again just to redeem those points, and I'm likely to spend more than $6.50 simply because there aren't that many things other than ladies pantyhose that I can buy for $6.50. For the record, I do not have a ladies pantyhose fetish.   

 

I wouldn't have really appreciated the psychology behind a loyalty program with an expiration element until it happened to me. Think about Eddie as the mad scientist named Skinner with a box of pigeons he's feeding points to each time they push their beak on a bar, but he's yanking away the points if they aren't consumed fast enough. Eventually those pigeons learn to consistently direct their shopping to SYW in order to use and accumulate more points.

 

To be balanced, let me also consider some cons:

-First of all, I've been on the SYW site, and I still think it's hard to navigate and find the merchandise I want. I still think Amazon has more of the random things I want to buy at this point, for instance a wider selection of ladies pantyhose. I don't understand the whole Pinterest-meets-shopping catalogue at all and find it annoying to scroll through.

-Second, Amazon probably will still be cheaper because it doesn't pay sales tax because of the location of its distribution centers. I also have not quantified and compared the cost of fulfillment for Sears vs. Amazon.

-Third, the Sears program seems to target only those products that can be mailable, and I don't know if a Craftsman powersaw counts. A TV or fridge probably wouldn't.

-Fourth, there is obviously a lot of execution risk. We won't really know Sear's true capability or financial results until the next X-mas season and also because Eddie is a bully and won't tell us anything. 

-Lastly, why can't Walmart or Target also offer the same 2 day or 1 day delivery by utilizing their store networks? The rhetorical answer is that they can, but Sears does have those wonderful Sears-only brands such as K,C,D, but, oh wait, I don't know if those products are mailable... argh

 

All of the above is just ivory-tower musing. As other's have mentioned, it's not about SYW, it's about SMM (Show Me the Money). The above matters insofar as it can help SHLD return to a free cash flow positive state. Judging from most of the recent posts in this thread (I tried to read starting from page one but gave up at page 200), most longs who are still in SHLD simply believe in the NAV providing a margin of safety... while they await the epic short squeeze  ;D 

 

Teddy

 

 

 

 

 

 

 

[TeddyLampert]

Just for the hell of it, I Googled the author of Sear's latest blog post, Raj Penkar, SVP and President, Supply Chain.

 

An interesting article appears:

http://blog.nrf.com/2012/05/07/how-sears-adjusts-the-supply-chain-model-for-an-omnichannel-reality/

 

He was featured as the guest speaker at the May 2012 NRF Global Supply Chain Summit.

 

The takeaway is that Sears has been experimenting with its supply chain since at least 2012 (Penkar was hired in 2011) to bring about "integrated retail." Perhaps with this latest blog post, Sears is announcing that it's ready for primetime (though Eddie in his letter did say Sears failed as did all the other retailers this past holiday season in fulfilling orders on time...again, argh). 

 

 

Sears has piloted a few new supply chain models that leverage existing inventory and existing retail distribution centers, meaning a small number of store locations now fulfill online orders. More than 90 percent of online orders for big-ticket items are delivered the next day using a network of nearly a dozen of what Sears calls direct delivery centers and marketing delivery operations across the nation. So even if an order comes in at 5 p.m., a direct delivery center (DDC) ships the item to the marketing delivery operation (MDO) in the customer’s neck of the woods, and by the next morning, a trained technician is delivering and installing your fridge.

 

For smaller items, Sears checks the nearest store capable of shipping first. Though Raj said stores can’t reach the same level of efficiency as a DC, with a few adjustments and some trained staff members, a small number of Sears’ stores include a sort of “mini-DC” that allows the store personnel to fulfill orders. Online orders from the region go first to this fully equipped store for fulfillment and to a DC if the inventory isn’t available from the store.

 

The model has been successful for Sears, along with other strategies to leverage existing inventory, assets and real estate, such as modifying retail distribution centers to fulfill online orders as well.

 

When fielding questions from the audience, Penkar stressed the importance of selecting a small number of stores that fulfill a large number of online orders, and then equipping those stores with the resources and staff needed to do the job well. After all, the goal is to provide a seamless customer experience regardless of where an order comes from. That’s the challenge of the integrated, or omnichannel, retail supply chain of today.

 

[MrB]

"My opinion is worth the html it's written in, but here's my two cents"...LOL..good one

[peridotcapital]

While I don't dispute that their distribution network is a competitive advantage over many other retailers, I think the biggest problem is that they are losing shoppers, due in large part to the fact that the Sears and Kmart brands are in decline. Will SHLD be able to provide better service to those customers that have stayed/want to stay loyal to them? Absolutely. Will new shoppers leave their current favorite retailers and come over to Sears/Kmart/SYW? I don't think they will. As a result, I don't think Eddie can grow the retail business from here. If it got small enough then yes, perhaps it could grow with new brand extensions etc that are completely removed from the core Sears/Kmart, but I don't think he can grow from a $30B base given the sheer number of competitors out there, coupled with the dying brands he has to work with.

 

All of that said, would he accept falling sales if he can get to cash flow positive? Absolutely. In that scenario you could get to a retail operations valuation of a couple billion dollars, which the bulls would probably take in a heartbeat. I'm just not sure the market will reward a marginally profitable, declining retail business with much of a valuation. If Macy's is growing and fetches 6x cash flow, Sears retail would likely only be worth 4-5x cash flow.

[BTShine]

Another deal with Nordstrom Rack and Sears.  Today they announced JWN is leasing 35,000 square feet at The Mall at Sears in Anchorage.  Deal is done with Seritage.

 

http://www.reuters.com/article/2014/03/12/ak-nordstrom-rack-idUSnPnSFz8Dp8+164+PRN20140312

 

 

[peridotcapital]

Another deal with Nordstrom Rack and Sears.  Today they announced JWN is leasing 35,000 square feet at The Mall at Sears in Anchorage.  Deal is done with Seritage.

 

http://www.reuters.com/article/2014/03/12/ak-nordstrom-rack-idUSnPnSFz8Dp8+164+PRN20140312

 

Maybe we should start a thread (a la the store closure one) to keep track of SHLD's third party tenants and the square footage they occupy. Would be a good way to work together to value their commercial real estate business...

 

Edit:

Here we are: http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/shld-announced-third-party-tenant-leases/

 

Please post links to future deals (or ones I missed) and I'll keep a running tally of the leased space...

 

[gr33ngi4nt]

http://www.sec.gov/Archives/edgar/data/799288/000119312514096770/d632333dex991.htm

 

Updated LE filing.

 

Record date is 5:30 p.m. Eastern time on March 24, 2014. Each SHLD share as of the record date will entitle the holder to receive 0.300795 shares of LE common stock, which will trade on NASDAQ.

 

Expected distribution date is April 4, 2014.

 

 

[muscleman]

http://www.sec.gov/Archives/edgar/data/799288/000119312514096770/d632333dex991.htm

 

Updated LE filing.

 

Record date is 5:30 p.m. Eastern time on March 24, 2014. Each SHLD share as of the record date will entitle the holder to receive 0.300795 shares of LE common stock, which will trade on NASDAQ.

 

Expected distribution date is April 4, 2014.

 

Does the net income here already include the estimated interest cost that ELS would like LE to borrow and pay to SHLD?

if we assume 7% interest for the $500 loan, then the interest cost would be $35, which is half of the net income.

[T-bone1]

http://www.sec.gov/Archives/edgar/data/799288/000119312514096770/d632333dex991.htm

 

Updated LE filing.

 

Record date is 5:30 p.m. Eastern time on March 24, 2014. Each SHLD share as of the record date will entitle the holder to receive 0.300795 shares of LE common stock, which will trade on NASDAQ.

 

Expected distribution date is April 4, 2014.

 

Does the net income here already include the estimated interest cost that ELS would like LE to borrow and pay to SHLD?

if we assume 7% interest for the $500 loan, then the interest cost would be $35, which is half of the net income.

 

Last I heard the loan should price tonight and talk was LIBOR+350 or so, not sure if there was a floor. 

[BTShine]

http://www.sec.gov/Archives/edgar/data/799288/000119312514096770/d632333dex991.htm

 

Updated LE filing.

 

Record date is 5:30 p.m. Eastern time on March 24, 2014. Each SHLD share as of the record date will entitle the holder to receive 0.300795 shares of LE common stock, which will trade on NASDAQ.

 

Expected distribution date is April 4, 2014.

 

 

 

 

Does the net income here already include the estimated interest cost that ELS would like LE to borrow and pay to SHLD?

if we assume 7% interest for the $500 loan, then the interest cost would be $35, which is half of the net income.

 

 

Muscleman, you're right that $35m is 1/2 the value of the net income.  But, it will not cut the net income in half.  That's a very important difference for us. 

 

Interest expense reduces taxable income, or pre-tax income.  So, for example:

Assuming 40% tax rate.

 

Sears EBIT Pre-Spin Off (hypothetically)  $120 million

Taxes of $48 million (48 = 40%*120)

Pre-Spin Off Net Income of $72 million

 

-------

 

Post Spin Off Pro Forma with $35 Million Interest Expense

Sears EBIT $120 million

Less Interest of $35 million

 

Pre Tax Earnings of $85 million

Less Taxes of 40% (.4 * 85 = $34 million)

 

Net Income of $51 Million

 

 

In our example, Net Income will be reduced from $72 to $51 million.

 

 

[dingo]

Looks like interest expense 24.2mm per filing. With the numbers provided ends up being NI of approximately $60mm over ~32mm shares or just under $2 in EPS.

[BTShine]

From today's filing.  Looks like they expect interest costs to be between $23 and $27 million.  After taxes that'll reduce Net Income by approx. $18 million.

 

-----

Debt Service Costs. We will also incur increased costs as a result of interest charges on the expected borrowings under the ABL Facility to fund short-term working capital needs and on the Term Loan Facility of approximately $515 million. We anticipate the interest costs related to these Facilities to be approximately $23 to $27 million for 2014, and that the interest expense on a pro forma basis would have been approximately $20 to $24 million for the 39 weeks ended November 1, 2013 and $27 to $31 million in 2012. The interest costs include approximately $2 million as noncash expense in each of the periods above. Expected annual payments under the Facilities are expected to be the cash interest charges plus the Term Loan Facility seven year amortization at a rate equal to 1% per annum, or approximately $4 million in 2014 and approximately $5 million per year over the remaining term.

[phil_Buffett]

the Price range of the spinoff is unclear or?

[BTShine]

It's unclear.  There will be around 32 million shares of Lands' End.  And their pro-forma trailing EPS will be around $2/share ($60 million), so the shares will likely trade between $20 and $30. 

 

Since this is a spin-off there will not be any official range or valuation for the shares provided by SHLD or investment bankers.

[phil_Buffett]

It's unclear.  There will be around 32 million shares of Lands' End.  And their pro-forma trailing EPS will be around $2/share ($60 million), so the shares will likely trade between $20 and $30. 

 

Since this is a spin-off there will not be any official range or valuation for the shares provided by SHLD or investment bankers.

 

thanks BTShine  :)

[ZenaidaMacroura]

What is the board's thought about these distributed shares?  Is this like the typical spinoff where (a la greenblatt) it pays to hold or should we unload the LE equity and focus on the core SHLD?

[adesigar]

What is the board's thought about these distributed shares?  Is this like the typical spinoff where (a la greenblatt) it pays to hold or should we unload the LE equity and focus on the core SHLD?

 

That will depend on the price they trade at. Personally I plan to sell the shares.

[muscleman]

What is the board's thought about these distributed shares?  Is this like the typical spinoff where (a la greenblatt) it pays to hold or should we unload the LE equity and focus on the core SHLD?

 

That will depend on the price they trade at. Personally I plan to sell the shares.

 

How to report tax on these sales? Is it like, ok, we bought these shares at a cost of 0, and sold at, say, 3? In that case, what is the date for the purchase? If the purchase date is the spin off date, that would be short term cap gain, which is huge.

[heth247]

How to report tax on these sales? Is it like, ok, we bought these shares at a cost of 0, and sold at, say, 3? In that case, what is the date for the purchase? If the purchase date is the spin off date, that would be short term cap gain, which is huge.

 

Isn't SHLD supposed to provide the tax treatment infor and cost basis for those shares some time later in the year or early next year?

[adesigar]

What is the board's thought about these distributed shares?  Is this like the typical spinoff where (a la greenblatt) it pays to hold or should we unload the LE equity and focus on the core SHLD?

 

That will depend on the price they trade at. Personally I plan to sell the shares.

 

How to report tax on these sales? Is it like, ok, we bought these shares at a cost of 0, and sold at, say, 3? In that case, what is the date for the purchase? If the purchase date is the spin off date, that would be short term cap gain, which is huge.

 

Im no expert but here is what I think and others can correct me if im wrong.

 

1. Its a tax free spinoff. Cost basis is split between SHLD and Lands End. so if you bought SHLD for $100 you now have SHLD with cost basis of $90 and Lands End with cost basis of $10. The split will be provided by SHLD in a tax related document later. They had one for OSH.

 

2. For taxes, acquisition date of SHLD shares carries over to Lands End.

[BTShine]

As for the buy/sell advice...

 

I'd recommend buying around $20 or below, and selling around $40 or above.  Coincidentally the same buy/sell prices could apply shares of SHOS. 

[TeddyLampert]

RE: Valuation of Lands End

 

Here's my attempt at laying out the numbers for the LE spin off and my view on valuation.

 

Using the 2014 figures provided in the conference call presentation, and assuming $25 mm of interest expense, you get to $1.99 of EPS.

 

I assume 10x, 15x, and 20x P/E multiples because I want to calculate the implied EV figures. I'm interested in how LE would trade on EV multiples because of all the debt in the capital structure.

 

Below in the table, you will see that at 10x P/E the EV is $1.1 bn. This implies a EV/NOPLAT multiple of 14.4x. At 15x P/E, EV/NOPLAT is 18.4x.

 

Cutting to the chase, if you assume nominal growth going forward, the fair value of LE will be around $20 /shr.

 

My opinion (you can stop reading now):

 

I'm disappointed in how low the valuation came out. I was hoping the business would be worth a lot more. I get the sense that Land's End has probably been under-earning. Returns on Invested Capital (ROIC) are subpar at 7.5%. Returns on tangible capital are much better at 19%. (I am using the new equity capitalisation as spelled out in the 10-12b). Looking at their margins, Gross Margins seem to be ok, and on par with J Crew at 44%. But judging by the lower EBIT margins (LE at 8% vs. J Crew at 11%), there's probably something management can do to improve margins.

 

Normalized at 11%, LE's EBIT would be $171 mm, implying a 10% ROIC and 26% ROTIC. Using this normalized NOPLAT, the EV/NOPLAT adj multiples of between 10.7x-13.7x suggest that LE could be fairly valued between $20-$30. 

 

I think the most critical factor that could re-rate LE to a much higher valuation is if management can generate revenue growth. The declining revenue trends as disclosed in the filing come with no explanation. I find that weird. I'm not sure why LE sales have been on a decline. Management has stated it has some kind of strategic 5-point plan to get the company to $5 bn (I'm not sure what this number refers to--- revenues, market cap, EV?). 

 

http://www.madisonmagazine.com/Madison-Magazine/December-2013/From-Sailing-Gear-to-Leopard-Print-Lands-End-at-50/index.php?cparticle=2&siarticle=1#artanc

 

If the underlying profitability of the business is quite good (and at 19% ROTIC, it is), the textbook theory would be to grow revenues. If Huber, the CEO, can get to $5bn in sales, this would be a homerun.

 

Please reply if you have any insight into the following questions:

 

1) How good is Edgar Huber as a retailer, and as a capital allocator?

2) Why have Lands End sales stagnated over the last 5 years? 

3) How efficiently run has LE been? Are there opportunities to cut fat and improve margins?

4) How will Huber be compensated?

 

 

Adjusted EBITDA	150.0
D&A	22.0
EBIT	128.0
Interest	25.0
Pretax income	103.0
Tax	39.4	38%
Net Income	63.6
Shares	31.98
EPS	$1.99
P/E multiple	10.0	15.0	20.0
Share price	$19.88	$29.82	$39.76
Market Cap	635.7	953.6	1,271.4
Cash	16.3	16.3	16.3
Debt	515.0	515.0	515.0
EV	1,134.4	1,452.3	1,770.1
EV/EBIT	8.9	11.3	13.8
EV/EBITDA	7.6	9.7	11.8
EV/NOPLAT	14.4	18.4	22.4
EV/NOPLAT adj	10.7	13.7	16.7
NOPLAT	$79.0
Capital Employed	1,059
Tang Capital Employed	415
ROIC	7.5%
ROTIC	19.0%
	LE	J Crew
Gross Margins	43.7%	44.0%
EBITDA Margins	9.6%	15.0%
EBIT Margins	8.2%	11.0%