SHLDQ - Sears Holdings Corp

[TeddyLampert]

You're right, I'm a moron because I double counted the appliance sales. That $4.7 mm is inclusive of SHOS sales I presume. Thanks for pointing that out. 

[BTShine]

SHOS has COGS of $1.84 B and revenue of $2.45 B.  So, SHLD does miss out on claiming the additional $600 million in revenue from the markup now that SHOS is outside of the SHLD umbrella.  That $600 million is matierial when studing the revenue of the Kenmore brand (call it $400 million being Kenmore related).

 

 

 

 

[spmurphy25]

Thanks for the 10K summary.  The 2 big things I took away from the filing were the following. 

 

1)  Tax assets went up significantly. The filing says that Sears has $4.6 bil in gross tax assets.  While the current business would never generate enough profits to monetize those, a REIT conversion could be very tax-efficiently implemented. "At the end of 2012 we had a federal and state net operating loss (“NOL”) deferred tax asset of $722 million and a valuation allowance of $2.7 billion. In 2013, there was a net increase to the federal and state NOL deferred tax asset of $465 million, bringing the ending balance to $1.2 billion. The increase in NOLs resulted from additional federal and state losses incurred during 2013, netted against state NOL expirations. The valuation allowance increased by $623 million to $3.4 billion at the end of 2013. Additional valuation allowances for federal and state were created against NOLs, Kmart state separate entity deferred tax assets, and other deferred tax assets, and were netted against state valuation allowance reversals due to expiring state NOLs."

 

2) The announcement about the Sears Re formation and transfer of assets also could be very important.  Why?  Bears have argued that the insurance business might be significantly  under-capitalized.  The announcement that Sears Re distributed the REMIC securities out of the insurance entity shows that it was actually over capitalized, and the KCD royalties are more than sufficient to support the liabilities.  Why is this even more important?  They have now formally separated the 125 stores (valued at $1.3 bil in 2013) freeing them of any restrictions and liabilities.  These stores are now unencumbered by the insurance liabilities and can now be contributed to a REIT.    This may also have implications to the spin/sale of the warranty business, but I'm still trying to understand it better.

 

3) Last point I'd make - if you back Sears Canada out of the Non-Guarantor business - then KCD EBITDA was only down 3% Y/Y in Q4.  For the year it generated $950 mm in EBITDA.  (that is all before gains from asset sales, impairments and D&A)  Interesting.....

 

[abitofvalue]

I can't see a scenario in which Sears can or would want to pull-off a REIT conversion.  It would require REIT shareholders to be willing to support a single-name REIT with Sears as a majority shareholder and primary leasor.  What exactly would be the attractiveness of such an investment? The real estate is only valuable if you can replace Sears stores with higher rent paying tenants.  SHLD is hardly likely to structure a spin-off in a manner that could see it being asked to vacate a property it doesn't want to.

 

Besides, for SHLD it makes little sense to spin-off real-estate to a REIT and then pay rent to it given the fact that Sears currently makes losses and has huge NOLs (to the point they are actually expiring), Sears isn't going to be paying any taxes in the near future. Plus, adding rent expense to an already weak business will increase the time to profitability, increase cash needs putting pressure on liquidity.  SHLD gets minimal tax advantages from a REIT conversion but a REIT conversion does put additional pressure on SHLD's liquidity.

 

[muscleman]

I just sold my SHLD position today. Only a 4% position, and I have only made a tiny profit after the interest paid.

LE spin off record date is March 24th, so I should be able to receive those shares, right? Settlement is T+3, so today is the T, +3 business days is March 24th. Or I need to sell tomorrow to receive LE shares?

 

Anyway, the primary reasons for my decision are:

1. Great idea, but poor execution. A few examples:

  a. I have heard of iPad/iPhone checkout not working properly ever since they equipped these devices over one year ago. As of last weekend, I went to Washington Square in Portland, and I still    experienced the same problem. The staff tried to check me out but because "network is busy due to too many people checking out", which is bullshit as I saw no one. Come on, if Eddie spent so much money to equip his staff with these expensive toys, he had better make them working properly. In addition, since these ipads cannot properly work due to the network issues, I strongly doubt that his next big capex item, the digital price stickers, which receive price updates controlled by a computer through wifi, will also malfunction.

    b. I got some weird big SWY points. I bought two vacuum cleaners (both are $19.99). I checked out one first so I can earn some SYW points to apply to the second one. So I got a $7 SYW points after I checked out the first one, and their staff could not figure out why. Normally it is supposed to be just a few cents. Maybe there is some software bug.

    c. My wife saw a pair of socks selling for $3.99 for two. She took them to the counter and they were actually $0.99. Which other store would do this? If something is on sale, they would put up big signs in obvious places so shoppers would be attracted inside and hopefully buy some more other stuffs.

    I think if Eddie cannot get the class-A mall fixed, it is unlikely that he can get other lower class malls fixed. Also if after a whole year of his CEO tenure, these problems still exist, it is unlikely that they will ever fix the problems. Or even if they do, in the future when new problems come out, they will be slow to react.

 

2. Eddie's stubborn decision to turnaround this retail sucker. I am fine if he has poor retail execution skills, if he can quickly liquidate or sublease. What I see is that he keeps burning more and more cash through SYW, and he is willing to let LE take the debt burden so he can have more cash to burn through SYW. I am ok to see this if he is really good at retail execution and fix all the problems quickly. But given my point #1, he does not seem to be good at retail.

[thelads]

you are right that a single tenant reit may be tough. However, if they are to continue to reduce space and lease to tenants such as whole foods, and others then seritage becomes very viable

[Mephistopheles]

I just sold my SHLD position today. Only a 4% position, and I have only made a tiny profit after the interest paid.

LE spin off record date is March 24th, so I should be able to receive those shares, right? Settlement is T+3, so today is the T, +3 business days is March 24th. Or I need to sell tomorrow to receive LE shares?

 

 

I think the T+3 applies to whomever bought your shares today, and they are the ones who will get the LE shares. So you would have had to sell tomorrow to get the shares.

[muscleman]

I just sold my SHLD position today. Only a 4% position, and I have only made a tiny profit after the interest paid.

LE spin off record date is March 24th, so I should be able to receive those shares, right? Settlement is T+3, so today is the T, +3 business days is March 24th. Or I need to sell tomorrow to receive LE shares?

 

 

I think the T+3 applies to whomever bought your shares today, and they are the ones who will get the LE shares. So you would have had to sell tomorrow to get the shares.

 

I see. Thanks!

[Mephistopheles]

On this topic, does anyone know what the stock will do tomorrow since it's the "ex-div" date? I'm assuming that it will just go down by whatever is the market perceived value of LE.

[Guest wellmont]

On this topic, does anyone know what the stock will do tomorrow since it's the "ex-div" date? I'm assuming that it will just go down by whatever is the market perceived value of LE.

 

correct. there should be an adjustment in the share price.

[Mephistopheles]

 

correct. there should be an adjustment in the share price.

 

I'm wondering if I can take advantage of this. I own shares in a Traditional IRA that I'd like to convert to a Roth. Lower the stock price, the lower my tax bill. I converted some at $33, but still have some that I've been holding on to. If I convert them tomorrow, will my LE shares be added to my Roth tax free?

 

Anyone know what the rules are for converting shares ex-dividend, as far as the taxation on dividend payments? Maybe Eric can chime in on this.

[Luke 532]

On this topic, does anyone know what the stock will do tomorrow since it's the "ex-div" date? I'm assuming that it will just go down by whatever is the market perceived value of LE.

 

correct. there should be an adjustment in the share price.

 

I wouldn't count on Mr. Market being rational about day-to-day prices/adjustments.  Whether you're bullish or bearish one thing is clear based on the trading range of the past few years... the market does not know how to value SHLD.  EMH believers would have a hard time explaining SHLD.

[Myth465]

If Lands End wasnt affiliated with Sears would anyone be a buyer?

[Mephistopheles]

If Lands End wasnt affiliated with Sears would anyone be a buyer?

 

I wouldn't, unless it was at the right price.

[alertmeipp]

Nope,  but I am hoping to get some more if someone dump it at all cost.

[tng]

On this topic, does anyone know what the stock will do tomorrow since it's the "ex-div" date? I'm assuming that it will just go down by whatever is the market perceived value of LE.

 

correct. there should be an adjustment in the share price.

 

I wouldn't count on Mr. Market being rational about day-to-day prices/adjustments.  Whether you're bullish or bearish one thing is clear based on the trading range of the past few years... the market does not know how to value SHLD.  EMH believers would have a hard time explaining SHLD.

 

Hmm... so far it's up at the open.

[thepupil]

I'd be careful with the assumption that those who sell before the distribution date will get Lands End. I was long ALEX when it split up into two equal ish sized companies. I thought that the stock should have fallen 3 days before the record date  (like when a stock goes ex divvy) but it did not.

 

This may be a similar situation where if you sell in between the the ex distribution date (yesterday) and the record date you wont get both companies.

 

 

I am by no means an expert here, but just be careful. Read the spin off doc very carefully. I'm personally just holding and waiting to see.

 

This was the situation:

 

 

 

Existing shares of Company stock will continue to trade "regular way" on the New York Stock Exchange under the symbol ALEX through the Distribution Date.  However, beginning on or about June 14, 2012, and continuing through the Distribution Date, the public can also begin to trade in the stock of Matson (called "ex-distribution" trading). This stock will be traded under the ticker symbol "MATX WI."  Similarly, beginning on or about June 14, 2012, and continuing through the Distribution Date, the public can also begin to trade in the stock of New A&B (called "when-issued" trading).  This stock will be traded under the ticker symbol "ALEX WI."

 

 

Any holders of Company stock who sell their shares "regular way" on or before the Distribution Date will also be selling their right to receive shares of New A&B stock in the separation.  Any person who purchases Company stock in the "ex-distribution" market under the ticker symbol "MATX WI" on or before the Distribution Date will receive shares of Matson without the right to receive shares of New A&B stock in the separation.  Any holders of Company stock who sell their Company shares "ex-distribution" on or before the Distribution Date will retain their right to receive shares of New A&B common stock in the separation.

 

 

[thepupil]

I find the whole thing very confusing. 

 

 

As discussed under “The Spin-Off—Trading Between the Record Date and Distribution Date,” if you sell your shares of Sears Holdings common stock in the “regular-way” market after the record date but before the distribution, you also will be selling your right to receive shares of Lands’ End common stock pursuant to the spin-off. We expect that the spin-off will be tax-free to Sears Holdings stockholders for U.S. federal income tax purposes, except for any cash received in lieu of fractional shares. See “Material U.S. Federal Income Tax Consequences.”

[Gardenstatevalue]

This might help

 

http://www.nasdaqtrader.com/TraderNews.aspx?id=ETA2014-27

[thepupil]

thanks!  looks like Lands End when issued is 28.75 / 30 market at the moment, NIIICE!!! that's 0.3 * 29 = $8.70 per SHLD share of Lands end market value

[thepupil]

Okay so I see:

 

SHLDV : $37.50  / $38 

LEDMV: $30.50 / $32.00

 

SHLD: $47

 

So the when issued market is telling us that SHLD = $47 = 0.3*LEDMV (about $9) + 1* SHLDV (about $38).

 

Anyone agree/ disagree?

[BTShine]

That looks right to me.  Doesn't mean the market is valuing it correctly, but that looks right.

 

There could be a lot of shorts looking to exit their LE short.  It's possible the buying for LE could be strong now, and for the near future, because of the shorts that want to be short SHLD but not LE.  They will buy LE now to exit that part of the position.

[Guest wellmont]

maybe the land's end reflects short covering?

[TeddyLampert]

thanks!  looks like Lands End when issued is 28.75 / 30 market at the moment, NIIICE!!! that's 0.3 * 29 = $8.70 per SHLD share of Lands end market value

 

Nice to see the first trade. Satisfies a big curiosity about how the market will react to the neglected stepchild of a reviled company. At $29 that's an EV of $1.4 bn and an EV/Ebit of 11x. While on the higher side, perhaps the market is looking through to normalized margins and growth potential.  After all the business has very good +20% returns on capital despite the poor management and negative pact of SYW.

 

I was just thinking more about the business quality. I hate apparel retail but the nice thing about LE is it has a differentiated loyal customer base. Joel Greenblatt once mentioned how freaking loyal the customers of Chicos is despite all the problems management had in running the business. Seems like LE has a similarly loyal following though it'd be nice to see some quantifiable evidence. LE probably does not need SYW to drive incremental sales so in three years getting rid of SYW could provide a 100 bp or higher gross margin lift. Look at google trends and you'll see that LL Bean and Eddie Bauer have long term declining trends but LE is much steadier. Brand value is likely still there.

 

 

[JSArbitrage]

LOL @ "TeddyLampert" with that icon.