SHLDQ - Sears Holdings Corp

[adesigar]

Another Bishop Article

 

http://seekingalpha.com/article/2086383-sears-hometown-and-outlet-stores-growing-channel-in-the-sears-holdings-ecosystem

[alertmeipp]

how would this split off impact the short?

 

[muscleman]

how would this split off impact the short?

 

I searched online and some page says this will automatically open a short position of LE for existing SHLD short sellers. I think that makes sense.

So if your SHLD shares are lent out, your new LE shares are automatically lent out.

[alertmeipp]

so LAND will have high percentage shorted right off the bat? Interesting...

[BTShine]

so LAND will have high percentage shorted right off the bat? Interesting...

 

Yes.  That's what I was told by my brokerage when inquiring about the OSH spin off a few years ago. 

[Matson125]

Most of the large shareholders, specifically Fairholme don't seem to have an appetite for any of the Sears spin-offs.  The selling by Fairholme  etc. which all have sold their shares in SHOS should give them time to unwind their short.

[bizaro86]

so LAND will have high percentage shorted right off the bat? Interesting...

 

That IS interesting. Would that have the tendency to offset some of the normal spin-off dynamics? Some holders of SHLD will get the new shares, and sell them without much research. But some of those short SHLD won't have a strong conviction about LE, and will probably buy to cover without much research. When you consider that ESL probably will keep his LE position, it seems like there is a potential for a supply/demand imbalance in LE shares...

[BTShine]

Forbes article on the spin-off.  http://www.forbes.com/sites/joecornell/2014/03/14/sears-holdings-to-spin-off-lands-end/

 

Am I the only one that questions the reporting of someone that doesn't spell Lampert's name right?  I swear half of the reporters spell his name wrong, using a 'b' instead of a 'p'. 

 

Sorry about sweating the small stuff.  It just makes me wonder how closely they checked the other information they're using. 

[Luke 532]

Forbes article on the spin-off.  http://www.forbes.com/sites/joecornell/2014/03/14/sears-holdings-to-spin-off-lands-end/

 

Am I the only one that questions the reporting of someone that doesn't spell Lampert's name right?  I swear half of the reporters spell his name wrong, using a 'b' instead of a 'p'. 

 

Sorry about sweating the small stuff.  It just makes me wonder how closely they checked the other information they're using.

 

You're not alone.  That stuff drives me crazy.  Bronte Capital mentioned on his blog awhile back how he did a ton of research and read a bunch of shareholder letters when he was bearish, yet spelled it LamBert numerous times.  It's tough to consistently spell it wrong if you are actually doing that amount of research.  With that said, I've never accused the media of doing much research so I shouldn't be surprised.

[Guest wellmont]

I think he has got the LE spin valuation pretty correct. My guess is it will trade closer to this number than $20. Perhaps $14-$15.

[adesigar]

Forbes article on the spin-off.  http://www.forbes.com/sites/joecornell/2014/03/14/sears-holdings-to-spin-off-lands-end/

 

Am I the only one that questions the reporting of someone that doesn't spell Lampert's name right?  I swear half of the reporters spell his name wrong, using a 'b' instead of a 'p'. 

 

Sorry about sweating the small stuff.  It just makes me wonder how closely they checked the other information they're using.

 

Worse are articles where they use Lampert and Lambert in the same article.

[TeddyLampert]

RE: Lands End valuation

 

The Forbes piece, a contribution by Spin Off Research, gives LE a valuation of $11/shr using EV/Sales of 5.5x. That's equivalent to 5.5x P/E on 2015E earnings of ~$2.00/shr. Seems low to me.

 

The article uses Nordstrom as a comp and thinks LE should trade lower than JWN because it's "smaller" and "higher risk". Let's think about that for a second. It is smaller, but is it higher risk? Nordstrom operates in the department store retail format, selling all kinds of high end apparel. LE sells quality basics and uniforms mostly direct, which should have better operating efficiencies and better margins than department retail.

 

Nordstrom trades at 7.5x EV/EBITDA, ~ 1x EV/Sales, and 14x Fwd P/E. It is less levered at 1x ND/EBITDA. Earns EBIT margins of close to 11% (again, LE should be able to improve from it's EBIT margins of 8%).

 

Sure JWM and LE both sell clothes, but the business models are quite different and JWM just isn't a great comp. There's folly in just choosing a single company for comparison purposes.

 

Back to LE: 

 

Let's just focus on how much a private buyer would pay for the entire business and ignore the noise that comes from specious company-specific comparisons.

 

LE generated $128 mm of EBIT in 2013. (Just in 2010, it generated EBIT of $193 mm). Assuming growth of inflation going forward, the business might trade at 8-9x EV/EBIT, which equates to a share price of $16-20 / shr. 

 

From what I have read so far, there seem to be opportunities to expand the business by growing internationally, so it is not unreasonable to think that the bottom of the range should be around $20. A smaller player like LE should certainly have better growth prospects than a big retailer like JWN, which has 10x more sales.

 

I think it's important to understand why EBIT has fallen so much in just 3 years. Back in 2010, LE was earning higher EBIT and EBIT margins closer to 12%. If the company can return to these levels, LE could be worth more than $40/shr.

 

If anyone has any insight into what has been happening at LE, it would be great to hear from you. Pointing out that Lampert is spelled with a "P" instead of a "B" is fine and dandy and is a nice way to blow off steam on a day when SHLD drops 3%, but it does not advance our understanding of SHLD as a business or investment.

 

8)

 

[heth247]

RE: Lands End valuation

 

I think it's important to understand why EBIT has fallen so much in just 3 years. Back in 2010, LE was earning higher EBIT and EBIT margins closer to 12%. If the company can return to these levels, LE could be worth more than $40/shr.

 

If anyone has any insight into what has been happening at LE, it would be great to hear from you. Pointing out that Lampert is spelled with a "P" instead of a "B" is fine and dandy and is a nice way to blow off steam on a day when SHLD drops 3%, but it does not advance our understanding of SHLD as a business or investment.

 

 

Some guesses of the reasons are:

1) LE started to participate in the SYW program in 2010.

2) LE has been just mismanaged by SHLD.

 

[ni-co]

Some guesses of the reasons are:

1) LE started to participate in the SYW program in 2010.

2) LE has been just mismanaged by SHLD.

 

2) is exactly why it usually pays to wait before selling spinoffs. According to Joel Greenblatt patience is key:

 

Another reason spinoffs do so well is that capitalism, with all its drawbacks, actually works. When a business and its management are freed from a large corporate parent, pentup entrepreneurial forces are unleashed. The combination of accountability, responsibility, and more direct incentives take their natural course.

…

It may be that it takes a full year for the initial selling pressure to wear off before a spinoff's stock can perform at its best. More likely, though, it's not until the year after a spinoff that many of the entrepreneurial changes and initiatives can kick in and begin to be recognized by the marketplace.

 

JG in "You Can Be a Stock Market Genius"

[Spekulatius]

The 5.5x EBITDA multiple seems too low for LE, given the relatively asset light business model. I also agree that SHLD has mismanaged LE and there is a good chance, that they can perform better on their own.

 

I like the LE brand and have bought their products for more than 10 years. They are reasonably priced (especially when purchased on sale, durable and very comfortable. I do think they have stagnated ever since Sears bought them and also I cannot confirm this, I believe LL Bean has successfully attacked their market (I find myself buying more LL. Bean and less LE products recently).

 

What is nice about LE, is that their brand image is completely separate from Sears, unlike the SHOS spinoff, which carries the same brand and is part of the dying Sears ecosystem.

 

The above is the reason why I think the LE spinoff could be a success.

[alertmeipp]

http://ca.reuters.com/article/idCABREA2F0EL20140316?p=BREA2F0EL-OCABS

 

[muscleman]

I read through this filing again, and I did realize that it is likely SYW that dramatically reduced LE's net income. What's confusing to me is what will happen after the spin off? Will SYW continues like this?

http://www.sec.gov/Archives/edgar/data/799288/000119312514096770/d632333dex991.htm#fin632333_22

 

Since Berger King participates in this program, I bet it must be beneficial for them. But how?

[heth247]

I read through this filing again, and I did realize that it is likely SYW that dramatically reduced LE's net income. What's confusing to me is what will happen after the spin off? Will SYW continues like this?

http://www.sec.gov/Archives/edgar/data/799288/000119312514096770/d632333dex991.htm#fin632333_22

 

Since Berger King participates in this program, I bet it must be beneficial for them. But how?

 

I remember reading something like, after spin off, LE will only pay Sears a flat fee annually for SYW, e.g. $3~4MM, and Sears will reimburse LE the SYW points that are redeemed.

[BTShine]

Interesting part of the LE filing:

Pg 45 2nd Paragraph

 

We expect that the existing arrangements, as reflected in the historical financial statements contained therein, are not materially different from the arrangements that will be entered into with Sears Holdings in connection with the spin-off, with the exception of the Shop Your Way program. Net annual costs associated with the Shop Your Way program are estimated to increase by approximately $11 to $13 million in 2014. The additional investment in the Shop Your Way program is anticipated to be offset by increased profits from incremental revenue and reductions in promotions and advertising expense, as we expect to reduce our dependency on other marketing efforts as member engagement through the program continues to grow.

[BTShine]

Another piece applicable to Shop Your Way and Lands End.

 

Shop Your Way Retail Establishment Agreement

Lands’ End and SHMC expect to enter into a Shop Your Way retail establishment agreement in connection with the spin-off that will govern our participation in the Shop Your Way program. Under this agreement, SHMC will issue rewards points to Shop Your Way members when they purchase program-eligible merchandise and services from us and we will accept rewards points redemptions from members as full or partial payment for eligible merchandise and services purchased from us. We will pay SHMC an agreed-upon fee for points issued in connection with the purchase of program-eligible merchandise and service from us and, depending on the applicable burn rate for the quarter (i.e., ratio of points redeemed in Lands’ End formats to points issued in Lands’ End formats in the previous 12 months), we will pay additional fees to SHMC or SHMC will reimburse fees to us for points redeemed in Lands’ End formats, as set forth in the agreement. Total fees during the three year term of the agreement are currently estimated to be approximately $33 to $39 million. At our election, SHMC will provide us program related marketing and analytic services. Lands’ End and SHMC will jointly own transaction information related to purchases made by Shop Your Way members in Lands’ End formats, while all information relating to members of the program and the program itself will be owned by SHMC. We will be permitted to engage in promotional, marketing, loyalty or other similar activities outside the Shop Your Way program so long as such activities do not conflict with, and are not promoted in the aggregate more prominently or comprehensively than, the Shop Your Way program. Each party will indemnify the other against third-party claims, including relating to negligence, recklessness or willful misconduct, breach of agreement, fraud, acts or omissions requested by the other party, or intellectual property violating or infringing the rights of a third party.

The agreement shall expire on the third anniversary of the distribution date and either party may terminate the agreement for a material breach that is not cured within 30 days of receipt of notice by the breaching party, and SHMC may terminate the agreement for cause if Lands’ End fails to accept certain complying changes to the program or if a prohibited stockholding change of Lands’ End occurs.

[heth247]

Oops, looks like they have updated the SYW agreement. It is really a big cost!

[Guest wellmont]

SYW will cost LE $12m per year. this was discussed earlier in the thread. there was no way ESL was going to give LE the benefits of the SYW program without them paying for it.

[BTShine]

SYW will cost LE $12m per year. this was discussed earlier in the thread. there was no way ESL was going to give LE the benefits of the SYW program without them paying for it.

 

No, they will increase by $12 million.  They are likely currently higher than $12 million this past year (I'd guess $30 million or more). 

 

So, it's more accurate to say SYW will cost LE over $30 million a year as it likely has the past few years.

[BTShine]

so no "magical" boost in LE ebitda due to SYW costs going away....

 

Correct.  SYW is here to stay at LE (at least for a couple of years).  The costs wont go away.  But, if Eddie is successful at substituting traditional discounts and marketing with SYW points/promotions and SYW marketing, LE will see better EBITDA and margins.  That's a big 'if', but I think it's possible. 

 

 

[Spekulatius]

so no "magical" boost in LE ebitda due to SYW costs going away....

 

Correct.  SYW is here to stay at LE (at least for a couple of years).  The costs wont go away.  But, if Eddie is successful at substituting traditional discounts and marketing with SYW points/promotions and SYW marketing, LE will see better EBITDA and margins.  That's a big 'if', but I think it's possible. 

 

 

 

So it looks like LE is tied to the mast if the sinking SHLD ship via SYW just like SHOS. As a customer of LE, I don't think that this program makes much sense for LE, but it may make sense for SHLD. This is certainly a big negative for the LE spinoff. Thanks to this thread for bringing this up, as I was jot aware of the extend of LE cost exposure to SYW.