peridotcapital Posted May 6, 2014 Share Posted May 6, 2014 Chad - I was there as well - and I think you provided an excellent summary. I'll just offer a couple comments: -- Meeting was less hostile than previous 2 I attended. Generally there is a heckler or two giving Eddie a hard time. My first meeting one guy would not sit down until Eddie answered his question "Eddie, where is that suit from, is that a Sears suit?" Finally Eddie told him it was not Sears, it was from Brooks Brothers. -- Meeting was about the right length, maybe 11:00 end time. -- Not as well attended with analysts, pretty clear to me people are losing interest. Last 2 years there were way more analysts - and always 2 microphones and 10 people in each line. Looks like people are giving up on Sears. -- I thought it was very interesting Eddie was NOT wearing a tie. The previous meetings, all the Sears execs are dressed to kill and uptight, and seem scared shitless of Eddie. I thought it was interesting that Eddie was so relaxed in dress and manner. (Eddie mentioned a few times about "changing the culture and moving out management who don't get it") -- Personally, I thought his presentation was good and cleared up some issues in my mind. I don't know SHLD or other retailers as well as Chad, but I thought his introductory comments about "we are performing major surgery" need to be understood by the majority of shareholders. It's a SLOW and PAINFUL transformation - with many fits and starts, but I guess I don't have any doubts about his conviction. We may have doubts about his competence, and I think Chad hit Eddie right between the eyes when he challenged him "many other retailers are doing the same thing Eddie, what make's you different?" I actually expected Eddie to get defensive, but he didn't and I almost think he appreciates being challenged. He's making it clear that this can take many years, and has changed course as the retail environment has changed course. He talked about 2005 where there was NO focus on Facebook or Amazon, just the effort to integrate K-Mart/Sears operations. -- I just come away thinking - there is total commitment to the retail transformation, and we should not get our hopes up about any grand liquidation plan. He is going to liquidate assets to fund the transformation with assets that are not productive AFTER giving them PLENTY of time to show they are not working. I am going to be very interested to see the "Profit Recovery Plan" that will be released with earnings at the end of the month. -- I thought his discussion of Apple, General Dynamics and Kodak where effective - without at all claiming victory. If you are a shareholder, it's a LT transformation, where it may get worse before it gets better. Anyway - Chad's summary is excellent and accurate in my opinion. Appreciate the comments. I agree very much with your overall takeaway (and it was what I had feared, and why I am not a big believer today at the current enterprise value). This is very much a retail transformation story. That is where the focus is and where the money will go. Will they take 120,000 sf boxes and lease 40,000 sf when they feel like they can do what they want to with 80,000? Absolutely. Will they let leases expire on stores that have lost money for 5+ years? Absolutely. Will they spin off or sell a business if the price is right relative to the value it brings to them keeping it in-house? Absolutely. But is SHLD going to be mostly a commercial real estate and brand licensing operation 3-5 years from now? I don't think so and I think this is pretty obvious at this point given everything that comes out of Eddie's mouth. And with $30B of U.S. retail sales, the retail operations (good or bad) will be the biggest driver of the financials (as we have seen). And you are also right about Eddie's demeanor. He was relaxed and not defensive about his strategy. Even though he doesn't disclose a lot of information under the surface, he is very honest about the big picture and was very reasonable in his response to my question (I tried to frame it as to not be even remotely combative in any way... I really just wanted to know what he thinks they can/will do better than the zillions of other retailers out there doing the same things in terms of omni-channel and social media engagement. He thinks he can build a better mousetrap by being laser focused on the integrated experience. I'm not sure he is giving enough credit to what other companies are doing, but he is clearly articulating exactly what the goal is here, which I can appreciate even if I don't think he has enough brand strength, a loyal enough customer base, and/or a material headstart on the competition to succeed in a material way. Link to comment Share on other sites More sharing options...
cubsfan Posted May 6, 2014 Share Posted May 6, 2014 Chad - you asked the best question of the day. Actually made me a little nervous. I didn't know who you were, and I was thinking "heckler". But it was well pointed and polite - and obvious you were not letting him off the hook after the wonderful video about integrated retailing. It was good to bring it all back to reality - so we're not all thinking flawless execution and other retailers are standing still. Like I said, I think Eddie appreciated being challenged, and acknowledged this transformation is difficult, but he is committed. Nice work - sorry we didn't meet - I had no idea who you were - and on my ride home I thought - that's the guy from Seattle, as you mentioned being from the Northwest! Link to comment Share on other sites More sharing options...
peridotcapital Posted May 6, 2014 Share Posted May 6, 2014 Chad - you asked the best question of the day. Actually made me a little nervous. I didn't know who you were, and I was thinking "heckler". But it was well pointed and polite - and obvious you were not letting him off the hook after the wonderful video about integrated retailing. It was good to bring it all back to reality - so we're not all thinking flawless execution and other retailers are standing still. Like I said, I think Eddie appreciated being challenged, and acknowledged this transformation is difficult, but he is committed. Nice work - sorry we didn't meet - I had no idea who you were - and on my ride home I thought - that's the guy from Seattle, as you mentioned being from the Northwest! Indeed, if that video was shown 5 or 10 years ago I think everybody would have thought, wow, this company is really ahead of the curve! Don't worry about not realizing who I was... like I said, the guy who runs Force Capital sat down right next to me and I had no idea until he asked his question! Not only that, but a few minutes into the meeting I realized that Sardar Biglari (CEO of Biglari Holdings) was sitting three seats down from me. Ironically, I was at his annual meeting in NYC two weeks ago. Link to comment Share on other sites More sharing options...
Mephistopheles Posted May 6, 2014 Share Posted May 6, 2014 Thanks for the notes peridot! I'm glad they will disclose more about SYW next quarter. About the 2nd question you listed, they already disclose rental income unless I am misinterpreting. Note 14 in the 10-k shows that sublease income was $56 million last year, up from $47 and $30 in 2012 and 2011, respectively. http://www.sec.gov/Archives/edgar/data/1310067/000131006714000007/shld201310k.htm#sB15C350C81FDC5FB440A95CC8EAA824B Pg. 105 You are correct about the sublease income disclosure. The shareholder question was trying to find out how much rent they collect from leases on properties SHLD owns outright, since many of the mall locations are owned and not leased and they are dividing up some of these locations now. Unfortunately, they did not want to talk about it in any detail other than to state the obvious, that it's rising... Ah my mistake, I overlooked that obvious fact that about the income from owned properties as well. Link to comment Share on other sites More sharing options...
gr33ngi4nt Posted May 6, 2014 Share Posted May 6, 2014 http://www.chicagobusiness.com/article/20140506/NEWS07/140509868/at-sears-closing-stores-is-going-to-be-part-of-our-future# Very similar to the notes/comments by Chad and Cubsfan. Thanks guys for the detailed notes! Link to comment Share on other sites More sharing options...
txlaw Posted May 6, 2014 Share Posted May 6, 2014 Thanks for the notes, fellows. Link to comment Share on other sites More sharing options...
heth247 Posted May 6, 2014 Share Posted May 6, 2014 Thanks very much Chad! Very good questions, although I cannot say the same about their answers from Eddie... Link to comment Share on other sites More sharing options...
Luke 532 Posted May 7, 2014 Share Posted May 7, 2014 I am going to be very interested to see the "Profit Recovery Plan" that will be released with earnings at the end of the month. Cubsfan, thanks for your notes. Did Lampert elaborate on what will be included or discussed in the "Profit Recovery Plan"? Thanks. Link to comment Share on other sites More sharing options...
cubsfan Posted May 7, 2014 Share Posted May 7, 2014 I am going to be very interested to see the "Profit Recovery Plan" that will be released with earnings at the end of the month. Cubsfan, thanks for your notes. Did Lampert elaborate on what will be included or discussed in the "Profit Recovery Plan"? Thanks. Luke - I'd like to hear Chad's comments on this, but my interpretation: Since a quarterly report is due in a couple of weeks, there will also be a detailed plan discussing actions to reduce cash burn. He said several times financial performance is unacceptable. He didn't want to go into specific immediate actions, but they will be covered in the "Profit Recovery Plan". That was my take. Link to comment Share on other sites More sharing options...
Luke 532 Posted May 7, 2014 Share Posted May 7, 2014 I am going to be very interested to see the "Profit Recovery Plan" that will be released with earnings at the end of the month. Cubsfan, thanks for your notes. Did Lampert elaborate on what will be included or discussed in the "Profit Recovery Plan"? Thanks. Luke - I'd like to hear Chad's comments on this, but my interpretation: Since a quarterly report is due in a couple of weeks, there will also be a detailed plan discussing actions to reduce cash burn. He said several times financial performance is unacceptable. He didn't want to go into specific immediate actions, but they will be covered in the "Profit Recovery Plan". That was my take. A detailed plan discussing how they plan on reducing cash burn? Wow, that would be very interesting to read. Thanks again for your input. Link to comment Share on other sites More sharing options...
peridotcapital Posted May 7, 2014 Share Posted May 7, 2014 Luke - I'd like to hear Chad's comments on this, but my interpretation: Since a quarterly report is due in a couple of weeks, there will also be a detailed plan discussing actions to reduce cash burn. He said several times financial performance is unacceptable. He didn't want to go into specific immediate actions, but they will be covered in the "Profit Recovery Plan". That was my take. I actually had a different take on the "profit recovery plan" comment. He clearly stated before making that comment that the next earnings report will include more disclosures about the financial results and how they are being impacted by the transformation investments they are making. We can only guess what kinds of things they might break out for us in that regard (SYW points investment, more details on store closures and their impact on results, possibly more metrics on SYW member activity, etc). However, I did not interpret this expansion of disclosure as being related to a specific "profit recovery plan" that has been formulated and/or that will be announced along with the quarterly financials. I thought he was merely referring to the transformation currently being undertaken as the general "profit recovery plan" for the company. Essentially, I simply took it to be another way of reiterating his belief that "we don't have a sales problem, we have a profit problem." It's certainly possible I misread the comment, and fortunately we will find out in a few weeks. Link to comment Share on other sites More sharing options...
Luke 532 Posted May 7, 2014 Share Posted May 7, 2014 Luke - I'd like to hear Chad's comments on this, but my interpretation: Since a quarterly report is due in a couple of weeks, there will also be a detailed plan discussing actions to reduce cash burn. He said several times financial performance is unacceptable. He didn't want to go into specific immediate actions, but they will be covered in the "Profit Recovery Plan". That was my take. I actually had a different take on the "profit recovery plan" comment. He clearly stated before making that comment that the next earnings report will include more disclosures about the financial results and how they are being impacted by the transformation investments they are making. We can only guess what kinds of things they might break out for us in that regard (SYW points investment, more details on store closures and their impact on results, possibly more metrics on SYW member activity, etc). However, I did not interpret this expansion of disclosure as being related to a specific "profit recovery plan" that has been formulated and/or that will be announced along with the quarterly financials. I thought he was merely referring to the transformation currently being undertaken as the general "profit recovery plan" for the company. Essentially, I simply took it to be another way of reiterating his belief that "we don't have sales problem, we have a profit problem." It's certainly possible I misread the comment, and fortunately we will find out in a few weeks. Thanks for the input, Chad. Link to comment Share on other sites More sharing options...
cubsfan Posted May 7, 2014 Share Posted May 7, 2014 Take Chad's word for it - I obviously wasn't listening too well! I got excited about the title. "Profit Recovery Plan" My apology Luke. Link to comment Share on other sites More sharing options...
elevensecsrt4 Posted May 7, 2014 Share Posted May 7, 2014 Thanks Chad and cubsfan for the input and notes on the meeting I too look forward to the breakdown of the SYW program. Link to comment Share on other sites More sharing options...
fareastwarriors Posted May 7, 2014 Share Posted May 7, 2014 Sears cutting back on its softer side http://www.cnbc.com/id/101651541 Link to comment Share on other sites More sharing options...
BTShine Posted May 7, 2014 Share Posted May 7, 2014 Sears sells another lease. This one in Laguna Hills Mall (California). http://www.ocregister.com/articles/laguna-612692-mall-hills.html Link to comment Share on other sites More sharing options...
DTEJD1997 Posted May 9, 2014 Share Posted May 9, 2014 Hey all: I've been to two Kmart "Supercenters" in the Detroit metro area and observed the following: A). SHLD has to be BLEEDING cash on these places. There were only a few more customers than employees. B). Prices are "wacky". A lot of regular stuff is priced way too high. Then they have some sale items which are VERY good deals. This leads to... C). The only customers are there to use coupons & "your way points". Dude in front of me has literally 20 packages of chicken. He gets into heated discussion with cashier and winds up buying a few candy bars. Presumably he has to hit a dollar amount to trigger something...He had a wad of coupons when he was paying. D). Woman has a can of coffee & two cookie bags. She breaks the transaction into can of coffee THEN the cookies. She did this for the coupons.... E). These places are in SO-SO locations...not actually in Detroit of course, but in nearby suburbs. There is NO shortage of competition (Meijer, Kroger, Wal-Mart, Costco). There is also no shortage of real estate, especially busted big box. I am sure the real estate has value...but I don't think it is any "goldmine". So the few customers that they have are strictly there for the deals & the coupons. I wouldn't be surprised if SHLD had NEGATIVE margins on those transactions. I've only been twice, but if this is a representative sampling of what is going on...SHLD is pretty far gone. Link to comment Share on other sites More sharing options...
Luke 532 Posted May 9, 2014 Share Posted May 9, 2014 Hey all: I've been to two Kmart "Supercenters" in the Detroit metro area and observed the following: You're probably not looking for a valuation, but here's a quick-and-dirty based on SHLD's portfolio assuming ALL properties have Detroit valuations (obviously they don't)... Here’s another way to look at the value of the real estate. It's a quick-and-dirty valuation. Take it for what it’s worth… Market cap: 4.256B (at $40/share) Liabilities: 16.454B $16.454 liab + $4.256 market cap = $20.71B – $3.75B inventory – $4B brands = $12.96B / 241M sq ft = $53.77/sq ft. What’s the most comparable city in America where retail real estate is selling for $50-$55/sq ft? Detroit ($100+ average in America… $250 in very high-end areas like Northern Virginia and Northern California). At $40/share, the stock market is assuming a 50% haircut on liquidating all inventory*, selling the brands for just $4B, and all of SHLD’s real estate is located in Detroit. Clearly it’s not all in Detroit or in locations like Detroit… a dozen properties in Northern California, bunch of stores where I live in Northern Virginia, and they received $287M in proceeds on $46M book value year-to-date (a 6-bagger on book), sold the 11 properties to GGP in 2012 for $270M (270M / 1.8M sq feet = $150/sq ft), etc. The market is offering you SHLD’s real estate portfolio at Detroit real estate prices. *inventory when closing a store, “always able to sell it at more than they pay for it” (Lou D’Ambrosio). Link to comment Share on other sites More sharing options...
Luke 532 Posted May 9, 2014 Share Posted May 9, 2014 New blog post from Lampert... http://eddielampert.com/2014/05/09/turnarounds-and-transformations/ Link to comment Share on other sites More sharing options...
peridotcapital Posted May 9, 2014 Share Posted May 9, 2014 New blog post from Lampert... http://eddielampert.com/2014/05/09/turnarounds-and-transformations/ Exactly what he talked about at the meeting. It's interesting, the Sears/Kmart merger was about bringing the Sears brands off-mall. Now, he is essentially doing the exact opposite; closing down money-losing Kmarts (which obviously can't compete with WMT and TGT), and revamping/upgrading the best in-mall Sears locations he has. No wonder the merger has been so awful for shareholders over the last decade... Link to comment Share on other sites More sharing options...
TeddyLampert Posted May 9, 2014 Share Posted May 9, 2014 Sorry, I only have a chance now to give my thoughts on the AGM. It's been a busy past few days. First of all, a big thank you to Chad for his factually correct and objective summary of the meeting. I'll dispense with my own write up since Chad has already provided one. I'll just add any details from my notes and flag and takeaways I had. I thought the three case studies (which are now in the blog post) was one of the most interesting parts of the meeting. It's great that Eddie blogged about that because I thought it gave a good window into how he was thinking about Sears. He wrote in the blog how he does not think Gen Dynamics was put into liquidation. That's a really interesting point. I think it puts all the speculation that has existed so far about whether the SYW and integrated retail is just a cover for a slow liquidation to rest. I left the meeting with a clear understanding that this transformation is being taken very seriously by Eddie and that anyone who's hoping for a quick spin off and distribution of the company's assets is going to be disappointed. If you're long the stock, I think you have to buy into the the transformation story and expect that the ride will be lumpy if they should succeed. At one point Eddie mentioned that retail has undergone a lot of change factors in the last 10 years. He asked rhetorically how companies transform. Some do it through M&A he said, others might spin off companies. Is SHLD different from other transformations he asked rhetorically. That's when he presented the three case studies. He asked, is it better to invest more or less? It's all circumstantial (blah answer). He said there are is a certain discipline all good companies take. "SHLD is very focused on the future, not the past". He said a number of times that there is a disconnect between the transformation (progress being made) and the financial results. I was bummed he didn't drill into this in more quantifiable detail. On the "profit plan", my sense was that this was an actual plan to be presented along with 1Q financials. I don't know what degree of detail it will contain and how convincing it will be, but I thought Eddie was teeing up the group to expect more clarity on how they will get back to profitability from the $1bn loss last year. RE: Q&A session Someone asked about stock buybacks -- there are 3-4 tests that have to be satisfied. Basically told the questioner to figure it out for himself. Did not give any affirmative reply. It will be compared with other uses of capital. Standard corporate talk. A CPA asked about the promotional mark downs-- is it $1bn yet? Eddie said this is a category that is hard to classify. He implied that they are still trying to get it right and there are all sorts of mistakes being made, which is probably what's being highlighted on this board. Somewhere along the way, Eddie talked about the challenge being changing shopper habit. This might have been in response to the question about what Sears's competitive advantage will be after the transformation. He talked about Netflix and how that company uses customer information differently. Other companies might copy Sears (using RFID, points, etc) but Eddie says SHLD is committed to using that information to create value. A bit of a vague answer that didn't put meat on the bones. Eddie talked about how it's very hard to cut jobs. It's not something he would like to do. This might have been contributing to the slow store closures in the past. He mentioned how 3G Capital is doing BRK's dirty work in cutting costs because BRK also hates to fire people. One thing he did say that was heartening was "We can't afford to wait any longer to close close stores" and mentioned this will be part of the "profit plan". Stonehouse Capital guy asked: when is a $1 bn year loss no longer the right answer? Eddie: it's never the right answer. It forces a reexamination. We have changed a lot of the people in mgmt, and now they embrace feedback. Service related issues mean they have to improve their processes. Overall, I don't think this meeting provided any stunning insights into an investment in this business. I think I appreciated the "transformation" angle more i that I've heard it from the horse's mouth and it seems to be a very real thing that's not going away soon. This begs the question, will SHLD start to disclose more key metrics about the retail transformation? If so, I'm open to examining them with a fresh pair of eyes. If not, then I think I'm less excited by the speculative nature of the transformation. Link to comment Share on other sites More sharing options...
abitofvalue Posted May 9, 2014 Share Posted May 9, 2014 The market is offering you SHLD’s real estate portfolio at Detroit real estate prices. The problem is Eddie has made clear you aren't going to get the real estate portfolio. He is going to spend any proceeds that are generated in an effort to transform the retail business. For all his talk about integrated retail - as has been pointed out above - all he is doing is what every other retailer is doing. Do you really believe that after years of ineptitude Sears is suddenly going to be better than everyone else at integrated retail? The most frustrating part of his post is "Few in retail were trying to integrate their store and online channels before we did." and yet, Sears / KMart are far behind most other retailers when it comes to multi-channel / integrated retail. Even when they correctly saw the future they just couldn't execute. Link to comment Share on other sites More sharing options...
thinkpad Posted May 9, 2014 Share Posted May 9, 2014 For all his talk about integrated retail - as has been pointed out above - all he is doing is what every other retailer is doing. Do you really believe that after years of ineptitude Sears is suddenly going to be better than everyone else at integrated retail? We don't care if Sears become the best retailer. We just want they start to make some profits. That's all. If Lampert fails to transform Sears and go bankrupt, we will still earn money at this price. Link to comment Share on other sites More sharing options...
kasi Posted May 10, 2014 Share Posted May 10, 2014 Latest from Eddie: http://eddielampert.com/2014/05/09/turnarounds-and-transformations/ Link to comment Share on other sites More sharing options...
jeffmori7 Posted May 10, 2014 Share Posted May 10, 2014 Latest from Eddie: http://eddielampert.com/2014/05/09/turnarounds-and-transformations/ Oh...come on, at least have a look 5 posts before! Link to comment Share on other sites More sharing options...
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