SHLDQ - Sears Holdings Corp

[dowfin1]

Has anyone come across a filing that explains how Edgar Huber and the top management team will be compensated via stock ownership in LE?

 

see ex. 10.9 and 10.10

http://www.sec.gov/Archives/edgar/data/799288/000119312514008029/0001193125-14-008029-index.htm

[tripleoptician]

Thanks for all the discussion around shldv and ledmv - great learning.

I'm still trying to understand how the prices were determined at the beginning of today's trading.

Ledmv seemed to trade at $28 and shldv and $37 at open, making a proposed cumulative shld price of $65. This was far off from the shld open price of $48. What would create such a massive discrepancy?

 

Now the discrepancy is even further at the end of trading with shld @ 48.5 vs  72.2 [38.7(shldv) + 33.5(ledmv)]

So doesn't this discrepancy mean shldv and ledmv are likely to trade down significantly or shld will need to move higher?

 

Thanks in advance and apologies if I'm overlooking something obvious as I have never been involved in a spinoff situation.

[TeddyLampert]

Thanks for all the discussion around shldv and ledmv - great learning.

I'm still trying to understand how the prices were determined at the beginning of today's trading.

Ledmv seemed to trade at $28 and shldv and $37 at open, making a proposed cumulative shld price of $65. This was far off from the shld open price of $48. What would create such a massive discrepancy?

 

Now the discrepancy is even further at the end of trading with shld @ 48.5 vs  72.2 [38.7(shldv) + 33.5(ledmv)]

So doesn't this discrepancy mean shldv and ledmv are likely to trade down significantly or shld will need to move higher?

 

Thanks in advance and apologies if I'm overlooking something obvious as I have never been involved in a spinoff situation.

 

You have to multiply by the spin off share ratio which is 0.3x per LE share to get an equivalent unit of LE embedded in a share of SHLD.

 

So 0.3 x 30 = 9. That's how much LE is in a share of regular way SHLD.

[TeddyLampert]

9 + 38 (shldv) = 47-48 which is today's share price for shld regular way

[alertmeipp]

Someone bid 50 for shld.  Any news?

[thepupil]

http://m.seekingalpha.com/article/2101573

 

Summary of the verbose article: I think remic llc bonds now belong to shareholders, Eddie is liquid, sears sold some stores for a big acctg gain

[oddballstocks]

Thought this was interesting: http://www.footnoted.com/sears-holdings-and-the-art-of-disclosure/

 

Looks like SHLD is very serious about becoming an online retailer, $3.5m for a CIO..

[adesigar]

http://m.seekingalpha.com/article/2101573

 

Summary of the verbose article: I think remic llc bonds now belong to shareholders, Eddie is liquid, sears sold some stores for a big acctg gain

 

Agreed. I thought his first article was good. Everything after that was a paragraph converted into an article to market "The Sears Book".

[luck]

is anybody just gonna ride it out and take the spin with SHLD or are most switching into SHLDV?  thus far, it seems like most are trading out and buying SHLDV.  To me, LE does seem richly priced, but SHLDV seems a bit illiquid when i checked this morning.

[bmichaud]

It's not a realistic proposition to switch out of SHLD and pocket the $9 or $10 LE value. Nobody of even reasonable size could do this profitably, let alone a fund like Fairholme.

[TheEnterprisingInvestor]

Is anyone planning on keeping LE?  This seems like it is a pretty decent business trading at about 10x EBITDA.  That's not cheap, nut not expensive either, other companies like COLM, VFC, and PVH trade with much higher multiples (13-17x).  LE seems quite similar to COLM (13x) in revenues, margins, etc.  It also looks to me like LE has been undermanaged within SHLD and could do well on its own.  They could open their own shops (they have a few small ones) or sell into other department stores oroutdoor stores.  I would also think this probably has pretty good appeal to a strategic buyer at some point, someone that could strip out overhead and get more distribution.  There also seems like there's a decent short covering dynamic that should go on.  LE isn't central to a SHLD short thesis and by my calculations there's about 8m of investable float and 5m of that is sold short.  That could play out in an interesting way. 

[ni-co]

I am pretty bullish on Lands End. I pretty much said if it traded at Peridot's valuation 700-800M EV I'd be buying it aggressively (even in addition to the many shares I would've owned through the SHLD spinoff).  I expected that it would easily fetch $1.2B +  EV from a VF Corp or some other company interested in retail.

 

Lands End is a classic brand that is not impacted much by current short term fashion trends, it has likely been mismanaged (underinvested in), and it has a very loyal following.  (Even if young value investors don't buy their clothes or think a brand like Eddie Bauer is more valuable)  Lands End barely has a bricks and mortar footprint and under the right management focused on the success of the brand it could do very very well.

 

That being said I sold SHLD aggressively to buy SHLDV today. At a $1.5B EV it's not the no brainer that it would've been at $700-800M EV.

 

I'm shocked at the $1.5B E/V and will be surprised if it stays there in the intermediate term. The idea that LE should trade at a large premium to the price JCrew sold for, and above practically every other apparel retailer out there makes no sense to me. I can buy EXPR or ANN (two of my favorite apparel stocks right now) at 4-5x cash flow, most of the peers fetch 6x, but LE trades at 10x? It's baffling (and will make for a nice paired trade potentially if it trades over 30 regular way).

 

I wouldn't be surprised at all if it stayed there (or moved higher). You can't compare an asset lite company like LE with J Crew, EXPR or ANN that operate hundreds of stores with thousands of employees. This is a completely different animal. 1$ of LE revenue is much more valuable than 1$ of revenue of a retailer heavily depending on offline sales, especially when you think about LE's loyal customer base and international appeal. I'm not going to sell a single share for at least a year or two when I will be able to see whether capitalism does its wonders at LE.

[alertmeipp]

A question for those keeping it,  do you think shldv more undervalued or ledlv?

[thepupil]

I can see Lands End being cheap if operations turn around, but that is uncertain, while it is certain that Land's End will now have

 

1) term loan interest of around $27MM (management estimate, could be more, depending on how the term loan does

 

2) sublease costs: The total annual rent (assuming no renewals) for the Lands’ End Shops at Sears locations (location counts noted are number of locations at the beginning of the year) shall be approximately $27 million in 2014 for 253 locations, approximately $25.4 million in 2015 for 239 locations, approximately $25 million in 2016 for 225 locations, approximately $24.9 million in 2017 for 216 locations, approximately $17.1 million in 2018 for 167 locations and approximately $10.9 million in 2019 for 102 locations.

 

3) operations agreement costs: We estimate total 2014 fees under the agreement to be approximately $33 to $36 million. Thereafter, based principally on the then-current store count, we anticipate that annual fees will be approximately as follows: $31 to $34 million in each of 2015, 2016 and 2017; $21 to $23 million in 2018; and $13 to $15 million in 2019. Lands’ End will continue to rely on our existing field management to oversee Lands’ End Shops at Sears and Lands’ End Inlet store operations.

 

4)Shop Your Way Costs

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.

 

5) standalone company costs

As a standalone company, we expect to incur incremental annual operating costs estimated to be approximately $8.0 million to $10.0 million to support our businesses, including management personnel, legal, finance, and human resources as well as certain costs associated with being a public company.

 

I see the Lands End spinoff as a way of offloading cost structure to one of the few currently profitable parts of SHLD. It derisked SHLD by getting increasing sublease income, injecting $500MM of cash, allowing small shareholders like me to own the same number of shares for $9.50 or $10.00 less. I may regret selling, but for me all the new costs are certain while the new benefits of being standalone are uncertain.

[thepupil]

Based on the language in the filing, I think only the shop your way stuff is pre existing. Everything else is "we intend to enter into xxxxx agreement with SHLD", so I interpret it to say that the rental costs and operations agreement costs are not in the historical financials. Anyone disagree?

 

Obviously the standalone company costs and interest costs are not in the historical financials.

 

So to me that looks like a whole lot of new costs (like at least $90mm buckaroos: rent +interest + operations + standalone), which eats up a whole lot of the run rate pretax income of the enterprise and makes the equity likely to be worth less than the current implied $1B and makes SHLD more likely to survive with the new cash infusion and this some of the cost structure offloaded to lands end.

[peridotcapital]

I am pretty bullish on Lands End. I pretty much said if it traded at Peridot's valuation 700-800M EV I'd be buying it aggressively (even in addition to the many shares I would've owned through the SHLD spinoff).  I expected that it would easily fetch $1.2B +  EV from a VF Corp or some other company interested in retail.

 

Lands End is a classic brand that is not impacted much by current short term fashion trends, it has likely been mismanaged (underinvested in), and it has a very loyal following.  (Even if young value investors don't buy their clothes or think a brand like Eddie Bauer is more valuable)  Lands End barely has a bricks and mortar footprint and under the right management focused on the success of the brand it could do very very well.

 

That being said I sold SHLD aggressively to buy SHLDV today. At a $1.5B EV it's not the no brainer that it would've been at $700-800M EV.

 

I'm shocked at the $1.5B E/V and will be surprised if it stays there in the intermediate term. The idea that LE should trade at a large premium to the price JCrew sold for, and above practically every other apparel retailer out there makes no sense to me. I can buy EXPR or ANN (two of my favorite apparel stocks right now) at 4-5x cash flow, most of the peers fetch 6x, but LE trades at 10x? It's baffling (and will make for a nice paired trade potentially if it trades over 30 regular way).

 

I wouldn't be surprised at all if it stayed there (or moved higher). You can't compare an asset-light company like LE with J Crew, EXPR or ANN that operate hundreds of stores with thousands of employees. This is a completely different animal. 1$ of LE revenue is much more valuable than 1$ of revenue of a retailer heavily depending on offline sales, especially when you think about LE's loyal customer base and international appeal. I'm not going to sell a single share for at least a year or two when I will be able to see whether capitalism does its wonders at LE.

 

Lands End does not have hundreds of stores and thousands of employees? That's news to me. In fact, Lands End has 5,800 employees and still needs to pay Sears to staff its 275 shops within Sears stores post-spin, which is pretty amazing to me. Express, by contrast, has 17,000 employees, but more than 14,000 of them work in the retail stores. Counting the Sears staff that LE will be paying for, it is entirely possible that LE has more employees on a per-store basis than Express does.

 

Furthermore, have you looked at the numbers or are you just assuming LE is "asset-light" vs a company like Express? Express has fewer total assets and lower working capital vs Lands End, despite having more than double the number of stores and 35% more in annual revenue.

[BTShine]

The Pupil,

 

I don't agree.

 

As for old costs vs. new costs.  The rent seems to be one uncertainty.  I will try to show what I've found.

 

 

Historical Rent, CAM and occupancy costs in the LE Filings: 

2012 --- $29.232 million

2011 --- $30.100 million

2010 --- $30,392 million

 

These historical costs are very similar to the future expected lease cost, so I think it's inaccurate to say that LE will have $25 or $30 million in additional costs related to subleasing space within Sears. 

 

I think the relevant part of the disclosure is here (Note 11. pg. F-21 of the filing) --- "The Company and Sears Holdings or its subsidiaries have entered into various agreements to support the Lands’ End Shops at Sears; various general corporate services; and use of intellectual property or services. Unless indicated otherwise, the fees and expenses charged are included in Selling and administrative expenses in the Combined Statements of Comprehensive Operations. The costs and allocations charged to the Company by Sears Holdings do not necessarily reflect the costs of obtaining the services from unaffiliated third parties or of the Company providing the applicable services itself. Management believes such allocations are reasonable; however, the Combined Financial Statements contained herein may not be indicative of the Company’s financial position, operating results, and cash flows in the future, or what they would have been if it had been a standalone company during all periods presented."

 

It looks to me that the bold section is stating that all fees and expenses laid out in this filing are included in the S,G&A section of the Combined Statements of Comprehensive Operations (the historical financials).  So, bacically don't double count this stuff unless we've clearly stated these costs are additional due to the spin-off (e.g. public company costs, etc.)

 

Does anyone disagree?  Am I looking at this wrong?

[TheEnterprisingInvestor]

I am pretty bullish on Lands End. I pretty much said if it traded at Peridot's valuation 700-800M EV I'd be buying it aggressively (even in addition to the many shares I would've owned through the SHLD spinoff).  I expected that it would easily fetch $1.2B +  EV from a VF Corp or some other company interested in retail.

 

Lands End is a classic brand that is not impacted much by current short term fashion trends, it has likely been mismanaged (underinvested in), and it has a very loyal following.  (Even if young value investors don't buy their clothes or think a brand like Eddie Bauer is more valuable)  Lands End barely has a bricks and mortar footprint and under the right management focused on the success of the brand it could do very very well.

 

That being said I sold SHLD aggressively to buy SHLDV today. At a $1.5B EV it's not the no brainer that it would've been at $700-800M EV.

 

I'm shocked at the $1.5B E/V and will be surprised if it stays there in the intermediate term. The idea that LE should trade at a large premium to the price JCrew sold for, and above practically every other apparel retailer out there makes no sense to me. I can buy EXPR or ANN (two of my favorite apparel stocks right now) at 4-5x cash flow, most of the peers fetch 6x, but LE trades at 10x? It's baffling (and will make for a nice paired trade potentially if it trades over 30 regular way).

 

I wouldn't be surprised at all if it stayed there (or moved higher). You can't compare an asset-light company like LE with J Crew, EXPR or ANN that operate hundreds of stores with thousands of employees. This is a completely different animal. 1$ of LE revenue is much more valuable than 1$ of revenue of a retailer heavily depending on offline sales, especially when you think about LE's loyal customer base and international appeal. I'm not going to sell a single share for at least a year or two when I will be able to see whether capitalism does its wonders at LE.

 

Lands End does not have hundreds of stores and thousands of employees? That's news to me. In fact, Lands End has 5,800 employees and still needs to pay Sears to staff its 275 shops within Sears stores post-spin, which is pretty amazing to me. Express, by contrast, has 17,000 employees, but more than 14,000 of them work in the retail stores. Counting the Sears staff that LE will be paying for, it is entirely possible that LE has more employees on a per-store basis than Express does.

 

Furthermore, have you looked at the numbers or are you just assuming LE is "asset-light" vs a company like Express? Express has fewer total assets and lower working capital vs Lands End, despite having more than double the number of stores and 35% more in annual revenue.

 

Just curious if you consider their ability to sell other places, ie. outdoor stores or other dept stores.  It also looks like there could be a margin improvement story, ebitda was 200+m not long ago with similar sales numbers.  Also, 82% of sales are online/catalog, so I would think tighter expense and inventory control are entirely possible and wouldn't be difficult to achieve as a stand alone. 

 

As to asset light, i think 15m in capex over the last several years is pretty light (vs. EXPR which has been north of $70m).  They did something like $115in OCF last year and at 15m capex, we're looking at maybe 100m.  With maybe 36m in incremental costs for interest and standalone costs (21m after tax), it'd sit around 79m in FCF in the TTM.  At 975m in equity value we're looking at an 8% FCF yield, which should improve as the company delevers from the div and drives operational improvements it is incented to get as a standalone.  Not to mention the possibility they sell into other places.  I also think you need to take into account that most of the asset side of things is in intangibles and goodwill $650m, which would distort your evaluation of asset light.  I'm not an accountant, but I actually think those wound up on the balance sheet because of what SHLD paid to acquire the company.

 

My point is, I understand why its priced this way and with all the levers they could pull it seems to me that its fairly priced, it could actually work nicely here if they execute.  The best comp to me seems to be COLM, which trades 13+ times with a similar sales/margin profile.  Comparing it to ANN or EXPR which have huge fixed expenses and greater capex requirements probably isn't appropriate.  There's also probably pretty good private market value here to a VFC or a PVH. 

[thepupil]

The Pupil,

 

I don't agree.

 

As for old costs vs. new costs.  The rent seems to be one uncertainty.  I will try to show what I've found.

 

 

Historical Rent, CAM and occupancy costs in the LE Filings: 

2012 --- $29.232 million

2011 --- $30.100 million

2010 --- $30,392 million

 

These historical costs are very similar to the future expected lease cost, so I think it's inaccurate to say that LE will have $25 or $30 million in additional costs related to subleasing space within Sears. 

 

I think the relevant part of the disclosure is here (Note 11. pg. F-21 of the filing) --- "The Company and Sears Holdings or its subsidiaries have entered into various agreements to support the Lands’ End Shops at Sears; various general corporate services; and use of intellectual property or services. Unless indicated otherwise, the fees and expenses charged are included in Selling and administrative expenses in the Combined Statements of Comprehensive Operations. The costs and allocations charged to the Company by Sears Holdings do not necessarily reflect the costs of obtaining the services from unaffiliated third parties or of the Company providing the applicable services itself. Management believes such allocations are reasonable; however, the Combined Financial Statements contained herein may not be indicative of the Company’s financial position, operating results, and cash flows in the future, or what they would have been if it had been a standalone company during all periods presented.

 

It looks to me that the bold section is stating that all fees and expenses laid out in this filing are included in the S,G&A section of the Combined Statements of Comprehensive Operations (the historical financials).  So, bacically don't double count this stuff unless we've clearly stated these costs are additional due to the spin-off (e.g. public company costs, etc.)

 

Does anyone disagree?  Am I looking at this wrong?

 

BT, upon rereading I agree with you. I erred in thinking those were "new" expenses. So lands end should only have (interest + independent company costs) as new costs which amount to $35 ish million. That's still a big chunk. LE is doing $150mm of ebitda - 24mm d+a - 35mm new cost, so you could say LE is trading at 10 or 11x pretax income at a billion equity valuation. The retail segment doesn't appear to make money so there's opportunity there as those wind down over the next few years (they project a declining rent cost) along with whatever benefits lands end enjoys from being free.

[texual]

I plan on keeping Lands' End shares. I will not really even bother looking at them for a few months and if the prices are cheaper I may keep adding. I think its too strong a brand and has many more opportunities for the long term growth to ignore. Outside of SHLD it can grow. It is too bad ESL didn't just allow them to make Lands' End standalone stores to build recognition. It isn't worth keeping tied to SHLD locations.

[adesigar]

I think the decision for me to sell LE was simple. If I had cash to invest what would I buy? Would I buy LE at EV of 1.5 Billion? If the answer is yes then I will keep LE. If the answer is ill keep it as Cash or buy a different stock then I will sell Lands End. I sold Lands End in my IRA went from SHLD to SHLDV. In my normal account I have gains on SHLD that I do not want to pay tax on so I haven't gone from SHLD to SHLDV yet.

[Luke 532]

FWIW, I sold 2/3 of my SHLD and used those proceeds to buy SHLDV.  The reason is that I'm interested in the real estate of Sears Holdings and Lampert's ability to extract value from it.  Also, I've stated before that I want to accumulate as many shares of SHLD as I can and the moves last week (if I eventually trade in all shares and not just 2/3) would allow me to increase my share count in SHLD by roughly 23%... same dollar/market value in my brokerage account but many more shares.  With plans on holding for decades that's a great opportunity, in my opinion.

[FCharlie]

Anyone want to take a guess as to how quickly Eddie distributes LE shares to his redeeming partners?

[heth247]

I think the decision for me to sell LE was simple. If I had cash to invest what would I buy? Would I buy LE at EV of 1.5 Billion? If the answer is yes then I will keep LE. If the answer is ill keep it as Cash or buy a different stock then I will sell Lands End. I sold Lands End in my IRA went from SHLD to SHLDV. In my normal account I have gains on SHLD that I do not want to pay tax on so I haven't gone from SHLD to SHLDV yet.

 

Same here, except that I sold out 100% of my SHLD position and bought back 120% SHLDV, even I have to pay tax for capital gain.

[ni-co]

I am pretty bullish on Lands End. I pretty much said if it traded at Peridot's valuation 700-800M EV I'd be buying it aggressively (even in addition to the many shares I would've owned through the SHLD spinoff).  I expected that it would easily fetch $1.2B +  EV from a VF Corp or some other company interested in retail.

 

Lands End is a classic brand that is not impacted much by current short term fashion trends, it has likely been mismanaged (underinvested in), and it has a very loyal following.  (Even if young value investors don't buy their clothes or think a brand like Eddie Bauer is more valuable)  Lands End barely has a bricks and mortar footprint and under the right management focused on the success of the brand it could do very very well.

 

That being said I sold SHLD aggressively to buy SHLDV today. At a $1.5B EV it's not the no brainer that it would've been at $700-800M EV.

 

I'm shocked at the $1.5B E/V and will be surprised if it stays there in the intermediate term. The idea that LE should trade at a large premium to the price JCrew sold for, and above practically every other apparel retailer out there makes no sense to me. I can buy EXPR or ANN (two of my favorite apparel stocks right now) at 4-5x cash flow, most of the peers fetch 6x, but LE trades at 10x? It's baffling (and will make for a nice paired trade potentially if it trades over 30 regular way).

 

I wouldn't be surprised at all if it stayed there (or moved higher). You can't compare an asset-light company like LE with J Crew, EXPR or ANN that operate hundreds of stores with thousands of employees. This is a completely different animal. 1$ of LE revenue is much more valuable than 1$ of revenue of a retailer heavily depending on offline sales, especially when you think about LE's loyal customer base and international appeal. I'm not going to sell a single share for at least a year or two when I will be able to see whether capitalism does its wonders at LE.

 

Lands End does not have hundreds of stores and thousands of employees? That's news to me. In fact, Lands End has 5,800 employees and still needs to pay Sears to staff its 275 shops within Sears stores post-spin, which is pretty amazing to me. Express, by contrast, has 17,000 employees, but more than 14,000 of them work in the retail stores. Counting the Sears staff that LE will be paying for, it is entirely possible that LE has more employees on a per-store basis than Express does.

 

Furthermore, have you looked at the numbers or are you just assuming LE is "asset-light" vs a company like Express? Express has fewer total assets and lower working capital vs Lands End, despite having more than double the number of stores and 35% more in annual revenue.

 

Yes. I have looked at the numbers. However, in this case it's pretty obvious without even looking at them. LE derives 85% of its business from catalogue and online sales. It's pretty clear that these businesses don't bind as much capital as a retail chain does.

 

What I meant is employees in retail stores. How many do you need to staff 275 sales points in Sears stores vs. 14,000 employees in stores at Express? If LE decided to leave the brick and mortar retail business, they'd only lose 15% of their revenues. Could EXPR even do that? Have you taken the EXPR lease obligations into account when counting their assets/liabilities and the fact that LE has 600m of goodwill on their balance sheets (which I don't count as assets)?

 

As I said, LE is a completely different animal. You cannot compare retail chains with nearly pure play online retailers just because they sell similar products.