SHLDQ - Sears Holdings Corp

[BTShine]

I wouldn't be so concerned about it.  LE can get out of the SYW program in a few years if they want.  Rewards programs are normal course in retailing today.  Nordstrom even has a rewards program.   

[20ppy]

SYW is really the digital marketing way of spending ad money more efficiently like Groupon. I believe it replaces traditional ad yet costs much less because it's more targeted and effective. So why SYW is so scary to some people here on this board ? It is digital marketing.

[constructive]

SYW is really the digital marketing way of spending ad money more efficiently like Groupon. I believe it replaces traditional ad yet costs much less because it's more targeted and effective. So why SYW is so scary to some people here on this board ? It is digital marketing.

 

If it's so effective why do their operating results keep disappointing?

 

There's plenty of evidence that Sears is successful at signing people up to SYW. But there's no evidence that the heavy emphasis on SYW spending is beneficial for the business. You just have to take ESL's word for it.

 

edit: I also think Groupon is a lousy business. Local coupons are not scalable enough, and their value proposition for businesses is too expensive compared to other ad platforms.

[20ppy]

I am very excited that SYW has been implemented by Eddie. Not only it net saves money, it will also provide endless benefits with analytics of their user data, real-time reporting and business pulse read. Heck, they can even make SYW a big business on it's own with the world going in the direction of digital marketing, big and fast growing business.

[20ppy]

Could it be because Eddie is proceeding very cautiously and still spends the traditional ad dollars ? If we could see positive CF in Feb, maybe Eddie begins to simply reduce the traditional ad money?

 

SYW is really the digital marketing way of spending ad money more efficiently like Groupon. I believe it replaces traditional ad yet costs much less because it's more targeted and effective. So why SYW is so scary to some people here on this board ? It is digital marketing.

 

If it's so effective why do their operating results keep disappointing?

 

There's plenty of evidence that Sears is successful at signing people up to SYW. But there's no evidence that the heavy emphasis on SYW spending is beneficial for the business. You just have to take ESL's word for it.

 

edit: I also think Groupon is a lousy business. Local coupons are not scalable enough, and their value proposition for businesses is too expensive compared to other ad platforms.

[muscleman]

SYW is really the digital marketing way of spending ad money more efficiently like Groupon. I believe it replaces traditional ad yet costs much less because it's more targeted and effective. So why SYW is so scary to some people here on this board ? It is digital marketing.

 

If it's so effective why do their operating results keep disappointing?

 

There's plenty of evidence that Sears is successful at signing people up to SYW. But there's no evidence that the heavy emphasis on SYW spending is beneficial for the business. You just have to take ESL's word for it.

 

edit: I also think Groupon is a lousy business. Local coupons are not scalable enough, and their value proposition for businesses is too expensive compared to other ad platforms.

 

I think the idea of SYW is decent, but the execution is probably quite terrible. For example:

I went to Sears this weekend and bought two hand vacuums. They were $20 each. I told them that I wanted two transactions. I wanted to buy one vacuum first so I can get some points, and then I will buy the 2nd vacuum and use the points that I accumulated from the 1st vaccum.

So after I bought the 1st vacuum, they told me that on my account I had $7 in points that can be applied to the 2nd vaccum. I was quite surprised. How can I get $7 points when I just buy a $20 vacuum? Is there any platform bugs that gave me more points than I should have? I asked them how did I get those $7 worth of points. They looked through their computer and told me that they had no clue. WTF! ::)

In addition, they tried to check me out through their ipad, but the connection wasn't working because "the network is too busy". Come on! The mall was quiet and there wasn't even many people.

 

[20ppy]

SYW is saving money, the true "useless" and ineffective spending is the traditional ad money because its impacts are watered down by Sears' deteriorating reputation as an old retailer. SYW saves the day.

[heth247]

So after I bought the 1st vacuum, they told me that on my account I had $7 in points that can be applied to the 2nd vaccum. I was quite surprised. How can I get $7 points when I just buy a $20 vacuum? Is there any platform bugs that gave me more points than I should have? I asked them how did I get those $7 worth of points. They looked through their computer and told me that they had no clue. WTF! ::)

 

Not sure if this is a "bug" or "feature". Maybe the analytics engine figured out that you are a fairly new SYW member and wants to get you hooked. When you earn $7 on a $20 transaction, ordinary people will respond with "What a deal, SYW is awesome!". Only SHLD shareholder disguised as "customer" will respond with "you idiot, giving my money away..." :-)

 

But definitely agree on the "networking busy" one ....

 

[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.

 

 

I disagree. If you read the filing, it says total estimated fees will be $33-39 mm for the next 3 years. That is $11-13 mm per year the next 3 years.

 

There's no evidence that SYW has had a run rate of $12 mm/year in the past. The filing under "Related Parties - Note 11" says that the costs of SYW have been around $4 mm/year the past 2 years. The confusion stems form the wording of "SYW will increase by $11 mm... per year."

 

So at most, the cost of SYW per year will be $14-17 mm per year (the $11-13 mm + $4 mm).

 

Last year, sales totaled ~ $1.5 bn, so the SYW represents less than <1% of sales. I don't work in retail, but I know that's not a lot to spend on marketing.

 

SYW is mostly a variable cost program. The more people SPEND, the more points customers get, though this increases the "cost" of SYW on the income statement. But this encourages more future spending (i.e. the incremental revenue mgmt discussed previously). Traditional ad spending is a fixed cost, which is more hurtful to your profits as there is negative SG&A leverage.

 

It says the $4 mm per year is " 'General Corporate Services'

Related party costs charged by Sears Holdings to the Company for general corporate services for 2012, 2011 and 2010 are as follows:  $4.586  $4.181  $0"

 

Do you think this is expense allocated to LE for SYW expenses other than points?  Could it be a portion of the costs of programmers or other SYW related employees at corporate headquarters that are allocated to LE? 

 

  I can't believe SYW expense would only be $4 mm (maybe it is, and I'm totally off).  With 75% of LE customers using SYW, and a minimum of 1% back in points, on revenue of $1.6 billion this would mean LE incurred expenses of (coincidentally) $12 million in points last year. 

 

 

[TeddyLampert]

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.

 

I disagree. If you read the filing, it says total estimated fees will be $33-39 mm for the next 3 years. That is $11-13 mm per year the next 3 years.

 

There's no evidence that SYW has had a run rate of $12 mm/year in the past. The filing under "Related Parties - Note 11" says that the costs of SYW have been around $4 mm/year the past 2 years. The confusion stems form the wording of "SYW will increase by $11 mm... per year."

 

So at most, the cost of SYW per year will be $14-17 mm per year (the $11-13 mm + $4 mm).

 

Last year, sales totaled ~ $1.5 bn, so the SYW represents less than <1% of sales. I don't work in retail, but I know that's not a lot to spend on marketing.

 

SYW is mostly a variable cost program. The more people SPEND, the more points customers get, though this increases the "cost" of SYW on the income statement. But this encourages more future spending (i.e. the incremental revenue mgmt discussed previously). Traditional ad spending is a fixed cost, which is more hurtful to your profits as there is negative SG&A leverage.

 

It says the $4 mm per year is " 'General Corporate Services'

Related party costs charged by Sears Holdings to the Company for general corporate services for 2012, 2011 and 2010 are as follows:  $4.586  $4.181  $0"

 

Do you think this is expense allocated to LE for SYW expenses other than points?  Could it be a portion of the costs of programmers or other SYW related employees at corporate headquarters that are allocated to LE? 

 

  I can't believe SYW expense would only be $4 mm (maybe it is, and I'm totally off).  With 75% of LE customers using SYW, and a minimum of 1% back in points, on revenue of $1.6 billion this would mean LE incurred expenses of (coincidentally) $12 million in points last year. 

 

 

 

BTShine,

 

I think you're right. I'm deleting my previous post to avoid creating any confusion. The $4 mm seems to be for a separate related party transaction -- "corporate services" and does not seem to reflect the cost of the points, which is supposed to be in COGS, but which is not broken out.

 

I think your back of the envelope math also seems pretty accurate. Assuming SYW points represent 1% of sales, you do get to around $12 mm, which is probably what's baked into COGS.

 

One interesting tid bit: Gross margins in 2010 was 49%. In 2011 when they started SYW, gross margins fell to 44%. Some other factors must be at work to depress margins, in addition to the effects of SYW. 

 

 

[TeddyLampert]

RE: Valuation of SHLD post LE spin off and current implied LE valuation

 

Anyone have any thoughts on how SHLD will trade after the spinoff of LE?

 

As it is, SHLD doesn't trade on any profit metric (e.g. EPS, EBIT, EBITDA). This might indicate SHLD already is trading at a heavy discount to NAV. You could also look at EV/Sales just because sales is measurable. Let's use that as an exercise:

 

Sales for SHLD post LE: $36.2 - 1.5 = 34.7

Current EV/Sales multiple: 0.2x

Post spin EV = $6.94

Total Debt = $4.2

Cash = $1.0 + 0.5 (from LE distribution) = $1.5

Net Debt = $2.7

New MV = $4.24

Shares = 106 mm

 

New share price = $40 /shr

 

Today's share price = $44.8

 

Implied MV of LE: $4.8x EDIT: 106 mm shares = $509 mm or $16 on the new share count of 32 mm

 

Add: Net Debt = $500 mm

 

LE implied EV = $1 bb

 

Some implied valuation metrics for LE:

 

P/E = 7-8x LTM

EV/EBIT = 7.8x

EV/EBITDA = 6.7x

EV/Sales = 0.66

 

Takeaways:

 

1) It becomes very hard to value the remaining SHLD loss-making retail operating entity without its profitable "crown jewel" Lands End. This might just force Wall Street to actually give heed to the remaining NAV. Admittedly, this is a bit wishful thinking. If you really think about it, it's almost a zen riddle why SHLD has a positive market value today since it has no positive profit metrics! (it would logically follow that SHLD must be trading on a massive discount to NAV or on EV/Sales since those things ARE measurable). This gives me some confidence the LE spin off might actually unlock additional value by forcing the street to reexamine SHLD's remaining operations.

 

2) The implied value of LE baked into today's SHLD share price is still cheap. Framed differently, if you offered LE to a rational buyer (perhaps a strategic buyer or a PE firm) for the valuation of 8x EBIT, would they buy it? I'd say the answer would be yes in a heartbeat (especially because there are opportunities to improve its operations judging by the odd margin profile for an asset lite business)

 

Thoughts on what SHLD might trade at post LE Spin?

[phil_Buffett]

RE: Valuation of SHLD post LE spin off and current implied LE valuation

 

Anyone have any thoughts on how SHLD will trade after the spinoff of LE?

 

As it is, SHLD doesn't trade on any profit metric (e.g. EPS, EBIT, EBITDA). This might indicate SHLD already is trading at a heavy discount to NAV. You could also look at EV/Sales just because sales is measurable. Let's use that as an exercise:

 

Sales for SHLD post LE: $36.2 - 1.5 = 34.7

Current EV/Sales multiple: 0.2x

Post spin EV = $6.94

Total Debt = $4.2

Cash = $1.0 + 0.5 (from LE distribution) = $1.5

Net Debt = $2.7

New MV = $4.24

Shares = 106 mm

 

New share price = $40 /shr

 

Today's share price = $44.8

 

Implied MV of LE: $4.8x 32 mm shares = $153 mm

 

Add: Net Debt = $500 mm

 

LE implied EV = $653 mm

 

Some implied valuation metrics for LE:

 

P/E = 2.4x LTM

EV/EBIT = 5x

EV/EBITDA = 4.4x

EV/Sales = 0.42

 

Takeaways:

 

1) It becomes very hard to value the remaining SHLD loss-making retail operating entity without its profitable "crown jewel" Lands End. This might just force Wall Street to actually give heed to the remaining NAV. Admittedly, this is a bit wishful thinking. If you really think about it, it's almost a zen riddle why SHLD has a positive market value today since it has no positive profit metrics! (it would logically follow that SHLD must be trading on a massive discount to NAV or on EV/Sales since those things ARE measurable). This gives me some confidence the LE spin off might actually unlock additional value by forcing the street to reexamine SHLD's remaining operations.

 

2) The implied value of LE baked into today's SHLD share price is very very cheap. Framed differently, if you offered LE to a rational buyer (perhaps a strategic buyer or a PE firm) for the valuation of 5x EBIT, would they buy it? I'd say the answer would be yes in a heartbeat (especially because there are opportunities to improve its operations judging by the odd margin profile for an asset lite business)

 

Thoughts on what SHLD might trade at post LE Spin?

 

but if you take 4$ from sears share Price away it is more like 15$ per lands share and not 4$(500mio market cap) or iam missing something?

 

i think this could be the Price at the open

[TeddyLampert]

Sorry I used the wrong share count. Should have used 106 instead of 32 mm. I've posted the corrected figures

[phil_Buffett]

Sorry I used the wrong share count. Should have used 106 instead of 32 mm. I've posted the corrected figures

 

no Problem  :). i think your figures could be correct. 16$ per lands end share at the spinoff date

[peridotcapital]

10-K is out. I'll be reading through it today and will post my notes later on in the day...

 

http://www.sec.gov/Archives/edgar/data/1310067/000131006714000007/0001310067-14-000007-index.htm

[ni-co]

RE: Valuation of SHLD post LE spin off and current implied LE valuation

 

Anyone have any thoughts on how SHLD will trade after the spinoff of LE?

 

As it is, SHLD doesn't trade on any profit metric (e.g. EPS, EBIT, EBITDA). This might indicate SHLD already is trading at a heavy discount to NAV.

 

Taking a medium term view, this is why I think that the spinoff won't change the price of SHLD at all. This is not the "crown jewel" of SHLD, but a very nice little business that didn't get any attention from the market. My guess is that, essentially, you're going to get LE for free.

[MrB]

In 2002 Sears bought LE for $1.9Bn at a time it had sales of $1.6Bn and net earnings of about $83m (trading on PE of 23 at time of the deal) http://money.cnn.com/2002/05/13/news/deals/sears/

 

12 years later it is spun off for not much more than half that value and similar sales.

 

In 2002 LE was already an established catalog/web based business.

 

If I am pinning my hopes on SYW/Internet/Integrated retail/Amazon style business then maybe the track record at LE should be serious cause for concern.

[Guest wellmont]

In 2002 Sears bought LE for $1.9Bn at a time it had sales of $1.6Bn and net earnings of about $83m (trading on PE of 23 at time of the deal) http://money.cnn.com/2002/05/13/news/deals/sears/

 

12 years later it is spun off for not much more than half that value and similar sales.

 

In 2002 LE was already an established catalog/web based business.

 

If I am pinning my hopes on SYW/Internet/Integrated retail/Amazon style business then maybe the track record at LE should be serious cause for concern.

 

good insight. it's really no better than an average business at best. lampert tried to sell it, and appears there were no takers. spin offs are often the last resort to extract some value for a business like this. remember this is an asset that was inherited by esl. I think it will trade under $15.

[peridotcapital]

Below are my notes from the 10-K released today. Hope they're helpful.

 

Free cash flow

Negative $1.1 billion for 2013. Pension contributions accounted for $426 million, so retail operations burned ~$700 million.

 

CapEx

$329 million in 2013, vs $378 million in 2012. Interestingly, projected capex for 2014 is "similar to 2013" so despite a large number of store closings in 2014, capex is not going to drop materially.

 

Store closings

Actual store closings in 2013 were 93, vs 239 in 2012 and 65 in 2011. The company "made the decision to close" 145 stores in 2013, vs 80 in 2012 and 247 in 2011. If you extrapolate this data, it seems as though total store closings in 2014 would be in the 150+ range.

 

Advertising costs:

Spent $1.5 billion in 2013, vs $1.6 billion in 2012. Revenue fell faster than the rate of ad spending decline. Should not be surprising, as operational deleveraging should be expected with store closures.

 

Formation of SRe Holding Corporation

More shuffling of the deck chairs:

"In the fourth quarter of fiscal 2013, Holdings contributed all of the outstanding capital stock of Sears Re to SRe Holding Corporation, a direct wholly owned subsidiary of Holdings. Sears Re thereafter reduced its excess statutory capital through the distribution of all REMIC Securities held by it to SRe Holding Corporation."

 

The book value of the REMIC securities is now $700 million, vs $800 million in the year ago period. KCD IP ABS book value remains at $1 billion.

 

Pension

Pension returned +10.5% in 2013 (vs assumption of 7% annual returns). The target allocation is 35 equity/65 fixed income. In my view the 7% hurdle rate seems unlikely to be met in the intermediate term. It implies annual returns of 11% from the equity portion and 5% from the bond portion. Based on where rates and stock valuations are right now, this is a headwind in terms of clearing out the pension gap.

 

Discount rate used rose to 4.60% from 4.25% a year ago.

 

Estimated pension contributions: $487 million in 2014, $310 million in 2015, $326 million in 2016, $247.5 million in 2017, $247.5 million in 2018. This cash use is not going away anytime soon.

 

Sublease income

$56 million in 2013, vs $47 million in 2012. As a reference point, the peak since the merger was $60 million (2007) so that could be eclipsed this year.

 

Home appliance sales

Interesting new information here. I don't believe they have broken this out before (correct me if I am wrong). $4.7 billion in 2013, vs $6.0 billion in 2012 and $6.65 billion in 2011. This sheds some light on possible KCD sales. It also helps us see that Baker Street's estimate for Kenmore sales ($4 billion annually just for that single brand) is way too high. There is no way Kenmore accounts for 85% of Sears' home appliance sales given how many brands they carry.

 

Commercial paper

Last year ESL and Eddie personally together held $285 million of Sears commercial paper. This year it is zero.

 

Gross margins

Sears Domestic GM dropped 260 basis points in 2013. How much was due to SYW? They don't say, but they do say that sales to SHO at cost impacted GM by 120 basis points (a full year of SHO operating on its own), so the SYW impact could not be more than 140 basis points, and it likely does not account for the entirety of the differential.

 

Services segment data

Another set of new data here. Previously they had grouped "services" (auto centers, extended warranties, and home services) and "other" (SHO revenue, credit revenue) together and you had to guess the breakdown. Now they break them out. Domestic services revenue in 2013 was $2.5 billion, vs $2.6 billion in 2012. This proves that Baker Street was also too optimistic on their values for the services businesses, something I had already concluded. Baker Street claimed Home Service and Auto Centers each did $2 billion in annual revenue, plus $500 million from extended warranties, for a "services" total of $4.5 billion. The actual number is 44% below their estimates.

 

Non-Guarantor Subs

Revenue in 2013 totaled $7.2 billion, down 10% from $8.0 billion in 2012. Cash operating income (OI plus D&A) was $882 million, a drop of 14% from $1.02 billion in 2012. Cash flow, however, increased to $1.23 billion from $1.05 billion. The Canadian monetizations played a large role there. 

[ni-co]

In 2002 Sears bought LE for $1.9Bn at a time it had sales of $1.6Bn and net earnings of about $83m (trading on PE of 23 at time of the deal) http://money.cnn.com/2002/05/13/news/deals/sears/

 

12 years later it is spun off for not much more than half that value and similar sales.

 

In 2002 LE was already an established catalog/web based business.

 

If I am pinning my hopes on SYW/Internet/Integrated retail/Amazon style business then maybe the track record at LE should be serious cause for concern.

 

good insight. it's really no better than an average business at best. lampert tried to sell it appears there were no takers. spin offs are often the last resort for a business like this. remember this is an asset that was inherited by esl. I think it will trade under $15.

 

I disagree. LE has had a pre-tax ROCE of about 20-25% for the last few years. This is not a software company, but it's not a bad business. Through all those years under the Sears hood, LE has been nicely profitable. Where do you think those profits went? They went straight to Sears to pay for its bills. Where do you think those profits will go in the future? They will go into LE's own business and grow its business.

 

Lampert spins LE off because he couldn't get what he thinks LE is worth. That doesn't mean that it's a bad business.

[thepupil]

Great work Chad!

 

I come to similar conclusions but won't be able to sit down with it and fully absorb until the weekend. I'm disappointed by the sublease income. When I look at "what will make or break Sears" its the sheer amount of minimum lease payments that just aren't going away at a fast enough rate. We need more subleases  to hope to fully own the real estate trapped in the retail subs.

 

Sears Re transaction is a BIG deal in my opinion, awesome catch by you.. It makes those assets explicitly belong to the senior holdco noteholders and common equity guys, not the landlords, or SRACs or anyone else with a claim on SHLD. Those are ParentCo assets just like Sears Canada that got spun. Anyone disagree here?

 

 

Pension situation looks good in my opinion. It looks like you put a billion in there and get 100 bps of rate backup and you will be fully funded. the plan return assumptions may seem aggressive, but the liability discount rate is a big driver of the calculations. SHLD is long stocks and bonds and short a very high duration liability.

 

All in all, the depleting liabilities that i want to see go down (pension and lease) are going down but not quickly enough because retail ops are lighting fire to cash. Next we need a Sears Auto Centers Spin w/ exit dividend, maybe make the KCD / REMIC LLC release from Sears Re more public somehow, maybe a rights offering to inject some cash to help all the reshuffling slicing and dicing (i would lovea rights offering inject a billion into SHLD, have them put it in the pension and then tender for all the bonds with the funded pension, i don't get why SHLD wants to pay outside bondholders interests when they could be sending that interest to the pension)

 

I still see lots of rabbits to be pulled out of the hat. Lots of chances for alchemy and transfer of wealth to equity holders at the expense of all other stakeholders.

[ni-co]

Below are my notes from the 10-K released today. Hope they're helpful.

 

Home appliance sales

Interesting new information here. I don't believe they have broken this out before (correct me if I am wrong). $4.7 billion in 2013, vs $6.0 billion in 2012 and $6.65 billion in 2011. This sheds some light on possible KCD sales. It also helps us see that Baker Street's estimate for Kenmore sales ($4 billion annually just for that single brand) is way too high. There is no way Kenmore accounts for 85% of Sears' home appliance sales given how many brands they carry.

 

Thank you, great work! Where did you find the home appliance sales figures within the 10K? I couldn't find them. Could the 2013 sales decline be a result of the SHOS spin-off?

[peridotcapital]

Below are my notes from the 10-K released today. Hope they're helpful.

 

Home appliance sales

Interesting new information here. I don't believe they have broken this out before (correct me if I am wrong). $4.7 billion in 2013, vs $6.0 billion in 2012 and $6.65 billion in 2011. This sheds some light on possible KCD sales. It also helps us see that Baker Street's estimate for Kenmore sales ($4 billion annually just for that single brand) is way too high. There is no way Kenmore accounts for 85% of Sears' home appliance sales given how many brands they carry.

 

Thank you, great work! Where did you find the home appliance sales figures within the 10K? I couldn't find them. Could the 2013 sales decline be a result of the SHOS spin-off?

 

You might have missed it because they expressed it as a % of revenue, not a dollar amount. I just shared the latter to save you a step.

 

As for the revenue decline (total of ~$3.7B year-over-year), about $500 million was due to the SHO split and another $500M was the loss of the 53rd week from 2012, so really only about $2.7B of lost business, which was about evenly split between closed stores and lower same store sales from those that remain open.

[TeddyLampert]

 

Home appliance sales

Interesting new information here. I don't believe they have broken this out before (correct me if I am wrong). $4.7 billion in 2013, vs $6.0 billion in 2012 and $6.65 billion in 2011. This sheds some light on possible KCD sales. It also helps us see that Baker Street's estimate for Kenmore sales ($4 billion annually just for that single brand) is way too high. There is no way Kenmore accounts for 85% of Sears' home appliance sales given how many brands they carry.

 

Services segment data

Another set of new data here. Previously they had grouped "services" (auto centers, extended warranties, and home services) and "other" (SHO revenue, credit revenue) together and you had to guess the breakdown. Now they break them out. Domestic services revenue in 2013 was $2.5 billion, vs $2.6 billion in 2012. This proves that Baker Street was also too optimistic on their values for the services businesses, something I had already concluded. Baker Street claimed Home Service and Auto Centers each did $2 billion in annual revenue, plus $500 million from extended warranties, for a "services" total of $4.5 billion. The actual number is 44% below their estimates.

 

Great work and valuable addition to the message board. Some thoughts:

 

RE: Home appliance sales

 

I was looking over the Baker Street presentation, and they get the Kenmore sales estimate of $4 bn from Sears via a job posting appears on Linked In. I think this $4 bn includes sales by Sears stores as well as sales made through SHOS. The SHOS sales disclosed in the 10K in the "Other" category highlighted above and this is equal to $2 bn in 2013. So add that up: $4.6 + $2 bn = $6.6 bn in total. If Kenmore's total sales is $4 bn, then that's equal to 61% of the $6.6 bn in appliance sales. That's a high percentage but not outrageous like 85%. I don't think we can conclude that Baker Street's estimate was wrong on this one.

 

RE: Service segment data

 

Baker street again refers to a Linked In job posting that refers to the Sears Auto business as being a $2 bn revenue business. A close read shows that the $2 bn includes aftermarket service and merchandise. The disclosure on page 109 of the 10k says the following: "Hardlines consists of appliances, consumer electronics, lawn & garden, tools & hardware, automotive parts, household goods..." Thus, there is a chance that some of Baker's $2 bn in Auto revenues is captured under Hardlines. The same is true with the Home Services. Some of those $2.5n revenues cited by Baker includes parts revenues based on the Linked In job postings. In fact page 109 of the Baker presentation pretty much says the "service" portion of Home Services is around $1 bn, which is half of the 10K figure. To summarize, there's a classification problem with product and services revenues which makes it hard to conclude that Baker is wildly off the mark.

 

Let's just step back and use the figures that have been provided. Eddie is telling us the services business produces revenue of $2.5 bn. Let's assume this is pure, high margin service revenues. Go to page 107 of the Baker report and let's assume profit margins of 12% (per the diagram on the lower right corner). This gets us to $300 EBITDA. Use the lower end multiple range from the Morgan Stanley report of 9x. This gets us to a valuation for all of services of $2.7 bn.

 

Page 37 of the Baker report base case valuation of the Home + Protection + Auto business = $2.4 bn.

 

Thus far, I'm still of the view that Baker's valuation is in the general ballpark. I recognize fully that they are not an unbiased party and they do have an agenda (so I will remain skeptical reading anything by them), but I don't see the evidence they are being wildly optimistic here.

 

 

[peridotcapital]

 

RE: Home appliance sales

 

I was looking over the Baker Street presentation, and they get the Kenmore sales estimate of $4 bn from Sears via a job posting appears on Linked In. I think this $4 bn includes sales by Sears stores as well as sales made through SHOS. The SHOS sales disclosed in the 10K in the "Other" category highlighted above and this is equal to $2 bn in 2013. So add that up: $4.6 + $2 bn = $6.6 bn in total. If Kenmore's total sales is $4 bn, then that's equal to 61% of the $6.6 bn in appliance sales. That's a high percentage but not outrageous like 85%. I don't think we can conclude that Baker Street's estimate was wrong on this one.

 

 

The problem with using LinkedIn profiles is that those are revenue figures as of a certain point in the past. If you worked for Sears when Kenmore sales were "X" per year, and they are much lower now, you are not going to update your online profile to reflect a smaller business. Sears' appliance sales have dropped 30% in the last 2 years alone and the declines are accelerating. You simply can't continue to use a static figure when the business is declining this quickly. It's just not objective, in my view.

 

Furthermore, it seems you are double-counting SHOS sales in your comments above. If SHLD's 2013 home appliance sales are $4.7B, that includes the Kenmore product they are selling to SHOS at cost. You can't add SHOS's Kenmore product to that figure, as they are already included. Not to mention in your example you assume Kenmore appliances represent 100% of the sales to SHOS, which is not accurate.

 

RE: Service segment data

 

Let's just step back and use the figures that have been provided. Eddie is telling us the services business produces revenue of $2.5 bn. Let's assume this is pure, high margin service revenues. Go to page 107 of the Baker report and let's assume profit margins of 12% (per the diagram on the lower right corner). This gets us to $300 EBITDA. Use the lower end multiple range from the Morgan Stanley report of 9x. This gets us to a valuation for all of services of $2.7 bn.

 

Page 37 of the Baker report base case valuation of the Home + Protection + Auto business = $2.4 bn.

 

Thus far, I'm still of the view that Baker's valuation is in the general ballpark. I recognize fully that they are not an unbiased party and they do have an agenda (so I will remain skeptical reading anything by them), but I don't see the evidence they are being wildly optimistic here.

 

I think both the $300M and the 9x multiple are too high here, but that's purely an opinion since nothing has been disclosed. I will point out, however, that Baker Street's base case for Sears Auto Centers was a $500M valuation. I think this asset is fairly stable in terms of the business fundamentals, so they are likely more on target there with their revenue estimate than the others. That would leave ~$2 billion in value for home services and extended warranty. That is where I think the numbers are too optimistic (these businesses are declining quickly --- appliance sales dropped 20% in 2013 alone!), but again, it's just an educated guess. Now, if Eddie spins out Auto Centers, this process gets a whole lot easier... :)