SHLDQ - Sears Holdings Corp

[20ppy]

You won't like Eddie's Transformation plan if the following are all true:

 

1. Amazon and Walmart are the only retail game in town for now and the future

2. There aren't going to be any success stories in American malls

3. Customers are happy forever with Amazon and Walmart

 

Regardless, you probably won’t like his plan period.

 

I agree that WEB and CM won't probably do this kind of retail transformation. Eddie is young and he is carving out his own brilliance.

 

One golden principle remaining consistent is the following:

extraordinary returns come from massively adversary sentiment. The person with the right insight wins in the end. I don’t think 5-bagger potential will be enough to make Eddie do this.

 

With SHLD at this level with so much margin of safety, I would just hold my shares and relax and just be patient, anything else should be deemed “bad value investing” :)

 

 

 

 

[OracleofCarolina]

http://stevenpdennis.com

 

Ouch!

[moody202]

http://stevenpdennis.com

 

Ouch!

 

I agree with lot of observations in the article, and my assessment (for what it's worth) is also that Sears should liquidate ASAP.

 

There was a story in WSJ over the weekend that number of malls with Sears and JCP as anchor stores are struggling and as soon as one of them shuts down, the foot traffic goes down even further. Based on that, my sense is that Sears should beat JCP to the closures in these malls to maximize value. If JCP shuts down first or the mall continues to struggle, the value Sears can unlock from it's real estate will go down.....melting ice cube??

 

 

 

[Aberhound]

http://stevenpdennis.com

 

Ouch!

 

This article on the same site is worth reading.

 

"March 5, 2014

Shrinking to prosperity: The store closing delusion"

 

I agree that liquidation looks to be the best option in the face of Amazon and the damage to the brand caused by such bloodletting. In Vancouver I always thought that Woodwards, a local department store like Sears, could have saved themselves instead of descending into bankruptcy. They should have closed all their leased stores in the suburbs, sold their downtown stores and kept their best wholly owned store known as Oakridge in a rich west side neighbourhood in Vancouver. Then they should have focused on converting the Oakridge into a real estate investment. Instead somebody else made that money. First a mall was built then an office tower and now residential condos are going up.

 

[kasi]

http://www.cnbc.com/id/101671019?__source=yahoo%257cfinance%257cheadline%257cheadline%257cstory&par=yahoo&doc=101671019%257cSears+exploring+potential

[Sportgamma]

http://stevenpdennis.com

 

Ouch!

 

"The uncomfortable and sad reality is this: Sears has zero chance of transforming itself into a viable retail entity. Any further investment in this sinking ship is throwing good money after bad. Stripping out the idiosyncratic technical reasons for gyrations in the Sears stock, the underlying true company economic value declines each and every day. There is no plausible scenario where this trajectory will change.

 

Frankly, it’s been game over for some time now. It’s only Sears legacy equity and Lampert’s ability to pick at the carcass that has propped up the corpse."

 

http://www.bodylovewellness.com/wp-content/uploads/2013/03/well-thats-just-like-your-opinion-man-gif-the-dude-lebowski.gif

[Luke 532]

http://www.bodylovewellness.com/wp-content/uploads/2013/03/well-thats-just-like-your-opinion-man-gif-the-dude-lebowski.gif

 

Big Lebowski reference, love it! 

 

JANA Partners sells stake of 99,917 shares per 5-14-2014 filing: http://www.sec.gov/Archives/edgar/data/1159159/000090266414002463/xslForm13F_X01/infotable.xml

[moody202]

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.

 

Lot of grandiose plans but limited details and nothing convincing that makes me believe Eddie's got it together! Liquidation seems like the best strategy. Another strategy could be to go to a really small store count, turn those around and then expand!

 

 

[TwoCitiesCapital]

I haven't done much research on Sears. My only position is in options purchased a few months back that were speculation on a squeeze with continued sales announcements. My question would be how guys like Berkowitz could be so wrong about this. I understand they can be wrong and we should do our own research, but coming to a different outcome by magnitudes in value from someone who is very, very good at this makes me wonder what it is he is missing or what it is that he sees that we don't. I don't think I've heard him say anything about a turn around. He had always been there for the real estate and multiple brands/businesses (mini Berkshire) and not necessarily a retail turnaround.

[peridotcapital]

http://www.cnbc.com/id/101671019?__source=yahoo%257cfinance%257cheadline%257cheadline%257cstory&par=yahoo&doc=101671019%257cSears+exploring+potential

 

I think getting out of Canada makes sense. Turning Sears Domestic around is hard enough, why even have any distraction in another country? The problem is, who on earth is going to buy this? I doubt it would be a non-strategic buyer, given that the valuable urban leases have been sold, but another retailer would not likely be willing to pay all that much. Not sure how any material premium to the current price could be justified from a buyer's perspective.

[Guest 50centdollars]

Maybe Target will buy them lol. Put in even more stores that Canadians dont want.

I think maybe HBC will buy them. They need new stores for Saks.

[adesigar]

http://www.cnbc.com/id/101671019?__source=yahoo%257cfinance%257cheadline%257cheadline%257cstory&par=yahoo&doc=101671019%257cSears+exploring+potential

 

I think getting out of Canada makes sense. Turning Sears Domestic around is hard enough, why even have any distraction in another country? The problem is, who on earth is going to buy this? I doubt it would be a non-strategic buyer, given that the valuable urban leases have been sold, but another retailer would not likely be willing to pay all that much. Not sure how any material premium to the current price could be justified from a buyer's perspective.

 

It could be anyone, a different company or Private Equity that thinks they can run it better or a billionaire who wants his own retail chain. Sears Mexico is owned by Carlos Slim, Kmart Australia is owned by some other company.

[ragu]

I don’t think 5-bagger potential will be enough to make Eddie do this.

 

Agreed. The real chance of a permanent loss of capital probably does.

 

With SHLD at this level with so much margin of safety

 

IMO, there is very little chance of Lampert effectively betting the farm on a transformation if there was a real margin of safety with the assets.

 

The transformation isn't one of a few options for SHLD, it's looking like it's the only one.

 

Best,

Ragu

[Luke 532]

The transformation isn't one of a few options for SHLD, it's looking like it's the only one.

 

Best,

Ragu

 

Respectfully, I couldn't disagree more.  One of the primary reasons that SHLD is such a large holding for me is that Lampert has many levers to pull.  Optionality is key.  ThePupil said it well...

 

- I get short squeeze optionality, turnaround optionality, some other billionaire just bought 20% of the company optionality, Eddie rolls his holdings into SHLD and buys an operating business to offset the depleting operating losses and utilize tax asset optionality, just paid off the pension by selling a few trophy malls optionality, all kind of optionality.

[heth247]

Agreed. The real chance of a permanent loss of capital probably does.

 

IMO, there is very little chance of Lampert effectively betting the farm on a transformation if there was a real margin of safety with the assets.

 

The transformation isn't one of a few options for SHLD, it's looking like it's the only one.

 

Best,

Ragu

 

Maybe it is because I am not a native English speaker, but what exact point are you trying to make here, Ragu?  SHLD has a margin of safety or not?

 

 

[ragu]

[...]but what exact point are you trying to make here, Ragu?  SHLD has a margin of safety or not?

 

That the margin of safety implied by the asset valuation is likely not real, because the brilliant capital allocator who holds those assets seems hell-bent on using them for operations and executing a transformation.

 

If this is the option Lampert chooses to exercise, then it's not much of an option IMO.

 

Why? Because it's the most risky.

 

One of the greatest value investors of our generation doesn't choose the riskiest option of all. Not unless it's the only one.

 

Best,

Ragu

 

 

[heth247]

That the margin of safety implied by the asset valuation is likely not real, because the brilliant capital allocator who holds those assets seems hell-bent on using them for operations and executing a transformation.

 

If this is the option Lampert chooses to exercise, then it's not much of an option IMO.

 

Why? Because it's the most risky.

 

One of the greatest value investors of our generation doesn't choose the riskiest option of all. Not unless it's the only one.

 

Best,

Ragu

 

Well, I don't see the Transformation as the ONLY option, but the option that will achieve the most upside. 

 

The question is how much more downside the transformation approach adds, compared to other options? I think that is Eddie's job to manage and I can do nothing about it other than trust him that he is taking a rational approach and will preserve shareholder's value. The great assets certainly buys Eddie lots of time, but still execution is the key.

 

[moody202]

I haven't done much research on Sears. My only position is in options purchased a few months back that were speculation on a squeeze with continued sales announcements. My question would be how guys like Berkowitz could be so wrong about this. I understand they can be wrong and we should do our own research, but coming to a different outcome by magnitudes in value from someone who is very, very good at this makes me wonder what it is he is missing or what it is that he sees that we don't. I don't think I've heard him say anything about a turn around. He had always been there for the real estate and multiple brands/businesses (mini Berkshire) and not necessarily a retail turnaround.

 

I am not implying that Berkowitz is wrong. All I am saying is that I believe fast liquidation of the business/stores will create the most value for shareholders. As the  blog pointed out, the value of Sears is going down everyday. Eddie has been at it a few years trying to turn around Sears and it just feels like he doesn't really know how to do it. I think assets in Sears have afforded him that luxury but a faster liquidation is a better option to me than continuing to try and liquidate eventually!

 

[merkhet]

[...]but what exact point are you trying to make here, Ragu?  SHLD has a margin of safety or not?

 

That the margin of safety implied by the asset valuation is likely not real, because the brilliant capital allocator who holds those assets seems hell-bent on using them for operations and executing a transformation.

 

If this is the option Lampert chooses to exercise, then it's not much of an option IMO.

 

Why? Because it's the most risky.

 

One of the greatest value investors of our generation doesn't choose the riskiest option of all. Not unless it's the only one.

 

Best,

Ragu

 

I haven't done much research on Sears. My only position is in options purchased a few months back that were speculation on a squeeze with continued sales announcements. My question would be how guys like Berkowitz could be so wrong about this. I understand they can be wrong and we should do our own research, but coming to a different outcome by magnitudes in value from someone who is very, very good at this makes me wonder what it is he is missing or what it is that he sees that we don't. I don't think I've heard him say anything about a turn around. He had always been there for the real estate and multiple brands/businesses (mini Berkshire) and not necessarily a retail turnaround.

 

I am not implying that Berkowitz is wrong. All I am saying is that I believe fast liquidation of the business/stores will create the most value for shareholders. As the  blog pointed out, the value of Sears is going down everyday. Eddie has been at it a few years trying to turn around Sears and it just feels like he doesn't really know how to do it. I think assets in Sears have afforded him that luxury but a faster liquidation is a better option to me than continuing to try and liquidate eventually!

 

 

I think both of you are implying that (1) the liquidation play is the safest and/or (2) the liquidation play is the best risk/reward. Neither of those things is necessarily true.

[JSArbitrage]

I haven't done much research on Sears. My only position is in options purchased a few months back that were speculation on a squeeze with continued sales announcements. My question would be how guys like Berkowitz could be so wrong about this. I understand they can be wrong and we should do our own research, but coming to a different outcome by magnitudes in value from someone who is very, very good at this makes me wonder what it is he is missing or what it is that he sees that we don't. I don't think I've heard him say anything about a turn around. He had always been there for the real estate and multiple brands/businesses (mini Berkshire) and not necessarily a retail turnaround.

 

Because some people are doing what Buffett says you can't do here:

https://www.youtube.com/watch?v=Kq_JApaNam0&t=3m55s

 

 

[gr33ngi4nt]

Always exciting with SHLD.

 

http://washpost.bloomberg.com/Story?docId=1376-N5HAAN6JTSEH01-1RKLS9HP393SUOG50M6C7OC1HD

 

"Insurers such as Coface SA and American International Group Inc. have reduced the size of so-called trade credit policies for existing Sears vendors or declined to provide protection for new suppliers... AIG has cut the size of some new policies by as much as 50 percent"

[Luke 532]

Moody's says Sears Holdings exploration of strategic alternatives for its interest in Sears Canada is a credit positive, no immediate rating impact.

 

https://www.moodys.com/research/Moodys-says-Sears-Holdings-exploration-of-strategic-alternatives-for-its--PR_299426?WT.mc_id=NLTITLE_YYYYMMDD_PR_299426

[hardincap]

Lampert bought a chunk of Sears Canada from Ackman for 30 cad in 2010. It's now about half the price. Not an example of great capital allocation.

[thepupil]

think you're missing some special dividends. not saying it was a good purchase but "half the price" doesn't tell the full story.

 

Date Div*

12/09/13 5.000

11/28/13 5.000

12/20/12 1.000

09/20/10 3.500

05/27/10 3.500

[TwoCitiesCapital]

I'm sure it's been discussed, but I couldn't find the answer in here or online.

 

If Sears holdings declares bankruptcy, who ends up with the non-guarantor subsidiaries that house most of the valtble assets? They would still go to debt holders, correct?

 

If not, a retail turnaround isn't the way to play this - we could just sign 0 value to retail and estimate value of the assets held at the non guarantor subsidiaries.

 

Also, while I'm beginning my delve into this, I have other questions:

1) is there anywhere to find details on these securitization (what capitalization rate was used, how much income is generated). I know that there have been ways discussed to determine these using inductive reasoning but I wasn't sure that got us much anywhere.

 

2) anybody familiar with the accounting for securitized assets? I noticed that the net book value of the securitized mbs (now at SRe) has been falling for years. Is this a product of mark to market valuations or principal amortization? Just strange not to see the save thing occur with KCD securitization do my assumption is that it had to do with amortizing mortgages.

 

3) Is there any information available on underwriting performance for insurance subsidiary? Trying th determine how much it's retained in earnings over last 10 years. Best guess is that it is close to, or exceeds, the 700M in book value that was considered excess capital and divested to SRe.

 

4) anybody know if SRe is a non-guarantor entity?