SHLDQ - Sears Holdings Corp

[Kuhndan]

<<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? >>

 

Eddie Lampert is a bankruptcy genius. He has a significant portion of his investable assets in Sears and he has structured the company to provide himself with protection in the likely case the retailer operations file. The non-guarantor subsidiaries are separate corporations. Even though they are owned by the same parent they have no obligation on any of the guarantor debt or liabilities. The stockholders of Sears own the non-guarantor subsidiaries. Lampert will talk a good game about Shop Your Way and his reinvention of Sears right up to the filing date (he would be crazy not to). At the end of the day, you don't own Sears hoping for a turnaround in the retailer operations.

[AZ_Value]

Back to the non-guarantor talk I see. You guys are gonna piss Kraven off again, then we'll all have to pay the price.

[Kraven]

Back to the non-guarantor talk I see. You guys are gonna piss Kraven off again, then we'll all have to pay the price.

 

You are correct. The pain I feel is almost incomprehensible. It's one thing to just not understand it, but it's another thing to say it hasn't been discussed. I am normally cheery and optimistic, but I am losing my faith in humanity.

[TwoCitiesCapital]

Back to the non-guarantor talk I see. You guys are gonna piss Kraven off again, then we'll all have to pay the price.

 

You are correct. The pain I feel is almost incomprehensible. It's one thing to just not understand it, but it's another thing to say it hasn't been discussed. I am normally cheery and optimistic, but I am losing my faith in humanity.

 

I'm sure it's been discussed but doing a search is very cumbersome on here and wasnt helpful using Google. Just trying to wrap my head around the end game. It seems obvious a retail turn around isn't in the cards. Other investors like Berkowitz haven't even mentioned that as a thesis. My concern is the erosion of value that is regularly occurring and what the worst case scenario is. The land is easy to understand; how that value gets passed along to shareholders while losing billions every year in an environment where even good retailers are struggling is the question. I'm thinking we must be overlooking something so I'm trying to get a better understanding of ask the possible theories thrown around.

 

Anyone care to answer the other questions?

[Luke 532]

I'm sure it's been discussed but doing a search is very cumbersome on here and wasnt helpful using Google.

 

Just scroll up to the top right of this page and type "non-guarantor" into the search.  You'll find everything you need.

 

It might be cumbersome to find everything you need but worthwhile investments usually take quite a bit of research and time to get to a point where you can make the decision whether to invest or not invest.

[paperwerks]

Luke, I respectfully disagree with you here. And this is the one of the big flaws in the SHLD long case imo.

 

You said <<Just scroll up to the top right of this page and type "non-guarantor" into the search.  You'll find everything you need.

 

It might be cumbersome to find everything you need but worthwhile investments usually take quite a bit of research and time to get to a point where you can make the decision whether to invest or not invest.>>

 

Seth Klarman says in Margin Of Safety that it rarely takes more than an hour or so to adequetly analyze a company and see if it is a buy or not, and any time beyond two hours spent researching is wasted time.

 

If you need to apply quantum mechanics, calculus and studying 536 pages of mind-numbing SHLD thread posts just to determine if the stock is a buy or not then I respectfully submit that the profit to be had if the deal works is way too miniscule and risk way too high.

 

FWIW, I have been long SRAC debt (which is effectively guaranteed by SHLD as SHLD unconditionally promises to keep SRAC solvent) since 2009 and lately have been lightening up as the situation keeps deteriorating. This is junior debt and SHLD common stockholders are below SRAC debt holders in a bankruptcy scenario.

 

The hypothetical situation where SHLD shareholders fantasize about SHLD filing bankruptcy and stiffing all the creditors and pensioners and walking away with the assets is beyond juvenile fantasy.

 

Eddie is spinning off what he can as fast as he can for a reason imo. And his spinoff days are going to fast come to an end as he is approaching possible fraudulent conveyance lawsuits by bondholders in the future imo.

[20ppy]

"Seth Klarman says in Margin Of Safety that it rarely takes more than an hour or so to adequetly analyze a company and see if it is a buy or not, and any time beyond two hours spent researching is wasted time."

 

One hour is good if you already know alot about a company. Otherwise, time is well spent researching anything.

 

 

[Uccmal]

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.

 

No kidding.  I still cant believe SHLD is still being followed on this board. 

 

Maybe Bruce B. was like the rest on this board.  He was betting on the Jockey and has discovered the Jockey is not competent at running an actual business. 

 

When Eddie took over Sears Canada it was very profitable.  It was the star of SHLD.  He deliberately under invested, stopped training and investing in staff, and SC dropped the ball.  The retail business here was theirs to lose and they lost it under the supreme tutelage of Eddie Lampert. 

 

Lampert's foray into running a business is a case of the Peter Principle in action.

[Kraven]

Going into a Sears is great.  It's about as close to a real life Hot Tub Time Machine that someone is going to get.  You walk in and instantly you're transported back to the 80s.  You look one way and see the Kid N Play guy walking your way.  In another direction, a Pat Benatar lookalike is browsing through the My Little Pony and Strawberry Shortcake collection.  Close by a couple of guys who look exactly like Jeff Spicoli are arguing over a pair of Vans.  It's fun.

[krazeenyc]

Anyone who thinks bankruptcy is even remotely in the cards (any time soon) must not think very highly of Eddie Lampert's financial acumen.  I know cash is tight at SHLD, but he would have to be mad to spend billions of dollars to renovate real estate for lease/sublease as opposed to simply selling stores outright.  Why has he not mortgaged any properties?

 

I'm still of the view that given the right store count/avg store size that Sears can have a profitable retail operation -- even if revenues are only  50-60% of what they are today.  We've already seen in the NC Greensboro store  (as well as a couple of others) where Sears cut out 40,000 sq ft for Whole Foods and renovated their own store in the process -- that not only do they gain rental income from Whole Foods, reduce labor and occupancy costs, TOTAL sales in the store increased (not just per square foot) -- and this is in an environment where overall same store sales dropped severely.

 

I look at the Janss Marketplace location in Thousand Oaks, CA where they are likely getting about $30 p/sq/ft on a NNN basis (based on rents for other stores at that location) from Nordstrom Rack, DSW, and a yet undetermined 3rd retailer (unrented)  for 120,000 sq ft and keeping only 40,000 sq ft for themselves as a model (roughly) of what I expect these Sears owned locations to look like in a few years. I'd be surprised if these 40,000 sq ft Sears stores are not profitable.

 

There's no question that Sears has many problem (possibly worthless) locations in B/C/D/F malls.  But for those who think Sears has already harvested their best properties -- in 2007 Sears had stores in 63 of the top 150 malls in United States -- currently they have 61 stores in the top 150 malls. There are very few new A malls being developed, SPG, GGP, CBL, etc are all telling you both through their words and actions that they would love to buy these locations back and redevelop them themselves.

[ragu]

Maybe Bruce B. was like the rest on this board.  He was betting on the Jockey [...]

 

FWIW, I think this is pretty much it.

 

There is little doubt that he did his homework on the RE to get comfortable with the protection seemingly offered by those assets, but this was a bet on the jockey i.e. the next Berkshire. See his "a leopard doesn't change its spots" comments re. Lampert from a few years back.

 

Best,

Ragu

[krazeenyc]

Maybe Bruce B. was like the rest on this board.  He was betting on the Jockey [...]

 

FWIW, I think this is pretty much it.

 

There is little doubt that he did his homework on the RE to get comfortable with the protection seemingly offered by those assets, but this was a bet on the jockey i.e. the next Berkshire. See his "a leopard doesn't change its spots" comments re. Lampert from a few years back.

 

Best,

Ragu

 

It's interesting that he still believes in the jockey having gone from about 16 million shares 2 years ago to 24 million and change according to his last filing.

[Luke 532]

Maybe Bruce B. was like the rest on this board.  He was betting on the Jockey [...]

 

FWIW, I think this is pretty much it.

 

There is little doubt that he did his homework on the RE to get comfortable with the protection seemingly offered by those assets, but this was a bet on the jockey i.e. the next Berkshire. See his "a leopard doesn't change its spots" comments re. Lampert from a few years back.

 

Best,

Ragu

 

It was and still is* a bet on the jockey, as it should be (coupled with the MOS of the real estate making this a sound investment, in my opinion).

 

* Seems that Berkowitz still is betting on the jockey.  Certainly doesn't seem like Berkowitz's belief in Lampert/SHLD is weakening...

 

 

Month       Shares   % Change

Feb-10       14,951,639

May-10       14,714,071   -1.6%

Aug-10       14,037,171   -4.6%

Nov-10       14,661,671   4.4%

Feb-11       14,917,873   1.7%

May-11      16,313,973   9.4%

Aug-11       16,380,680   0.4%

Nov-11       16,270,692   -0.7%

Feb-12       16,108,492   -1.0%

May-12       16,813,480   4.4%

Aug-12       16,829,880   0.1%

Nov-12       16,934,080   0.6%

Feb-13       18,146,573   7.2%

May-13       19,508,773   7.5%

Aug-13       20,393,000   4.5%

Nov-13          20,758,000   1.8%

Feb-14       24,226,073   16.7%

 

May 2011 is the only reporting period in the past 4 years in which the share count increase percentage was half or more of today's report.

 

Just speculating, but perhaps Berkowitz got confirmation that what he thought was going on behind the curtain is in reality taking place? After all, Cesar Alvarez was elected to the Board mid-December.  It wouldn't seem very logical for Berkowitz to increase his stake 16.7% (on a percentage basis more than twice of any other increase, other than May 2011, over the past 4 years) if things weren't progressing as he had hoped.

 

Alvarez to Board... http://searsholdings.mediaroom.com/index.php?s=16310&item=137259

 

[Luke 532]

It's interesting that he still believes in the jockey having gone from about 16 million shares 2 years ago to 24 million and change according to his last filing.

 

Hah!  I was posting mine at the same time you were posting yours, krazeenyc.  Took me a couple minutes to find the post showing the 16% bump in share count in his most recent filing.

[moody202]

 

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.

 

Curious to get your thoughts on what you believe are other/better options.

 

[peridotcapital]

Maybe Bruce B. was like the rest on this board.  He was betting on the Jockey [...]

 

FWIW, I think this is pretty much it.

 

There is little doubt that he did his homework on the RE to get comfortable with the protection seemingly offered by those assets, but this was a bet on the jockey i.e. the next Berkshire. See his "a leopard doesn't change its spots" comments re. Lampert from a few years back.

 

Best,

Ragu

 

It's interesting that he still believes in the jockey having gone from about 16 million shares 2 years ago to 24 million and change according to his last filing.

 

I'd be curious what that figure looks like expressed as a % of Fairholme's AUM. The total number of shares matters less than his allocation to the position. You can increase your shares by 50% and still potentially have less/the same exposure.

[krazeenyc]

Maybe Bruce B. was like the rest on this board.  He was betting on the Jockey [...]

 

FWIW, I think this is pretty much it.

 

There is little doubt that he did his homework on the RE to get comfortable with the protection seemingly offered by those assets, but this was a bet on the jockey i.e. the next Berkshire. See his "a leopard doesn't change its spots" comments re. Lampert from a few years back.

 

Best,

Ragu

 

It's interesting that he still believes in the jockey having gone from about 16 million shares 2 years ago to 24 million and change according to his last filing.

 

I'd be curious what that figure looks like expressed as a % of Fairholme's AUM. The total number of shares matters less than his allocation to the position. You can increase your shares by 50% and still potentially have less/the same exposure.

 

Well... let's see in early 2011 Fairholme owned 15 million or so shares of SHLD with an AUM of about $23 Billion.  Now he has an AUM of $10B or so with 24 million shares.  I think in early 2012 his aum was about 7-8 billion. Either way hard to portray Berkowitz as not bullish on SHLD NOW. Of course he might be wrong.

[ragu]

It's interesting that he still believes in the jockey having gone from about 16 million shares 2 years ago to 24 million and change according to his last filing.

 

Subject to peridotcapital's caveat re. this increase in ownership, I agree it's interesting.

 

Bruce B.'s thesis has been: Well, there's all of them RE assets that are worth at least $100/share and we have an extraordinarily talented capital allocator in charge. A retail turn-around isn't necessary for this to work out well.

 

Guess what? They need a transformation, not a turn-around. And that's much, much harder to pull off.

 

Bruce B. is an incredibly smart guy, but I think there is a non-trivial chance he is wrong about this. We'll see.

 

Best,

Ragu

[Mephistopheles]

I'm still of the view that given the right store count/avg store size that Sears can have a profitable retail operation -- even if revenues are only  50-60% of what they are today.  We've already seen in the NC Greensboro store  (as well as a couple of others) where Sears cut out 40,000 sq ft for Whole Foods and renovated their own store in the process -- that not only do they gain rental income from Whole Foods, reduce labor and occupancy costs, TOTAL sales in the store increased (not just per square foot) -- and this is in an environment where overall same store sales dropped severely.

 

Where did you get the sales information for that store specifically?

[krazeenyc]

I'm still of the view that given the right store count/avg store size that Sears can have a profitable retail operation -- even if revenues are only  50-60% of what they are today.  We've already seen in the NC Greensboro store  (as well as a couple of others) where Sears cut out 40,000 sq ft for Whole Foods and renovated their own store in the process -- that not only do they gain rental income from Whole Foods, reduce labor and occupancy costs, TOTAL sales in the store increased (not just per square foot) -- and this is in an environment where overall same store sales dropped severely.

 

Where did you get the sales information for that store specifically?

 

 

 

CBL.

[tiddman]

Remember that Eddie has owned Sears since 2003-2005 and reportedly has a cost basis of around $16/sh. I am not sure how the spin-offs are accounted for in there or if that accurately reflects his basis in the debt.  So he may still be doing well.

 

I've seen reports that Fairholme first bought Sears in 2005.  Here is a Fairholme 13-F filing from 9/30/2005 showing Sears:

 

https://www.sec.gov/Archives/edgar/data/1056831/000105683105000004/submission.txt

 

I have not tracked the holding over the years.  You'd have to look at the buys and sells, and what he did with the spin-offs (did he sell them and when), etc.  It is possible he's done well with the investment despite the recent turmoil.

 

I absolutely don't agree with the long/bullish thesis on Sears today, I think it is just a slow motion train wreck and the only possible outcome is bankruptcy.  Eddie will continue to dismantle and sell the company while under-investing in it and will probably eventually do ok given his basis in ~2005 but I don't think those buying today will be ok.

 

Berkowitz recently said he thought it was worth $150/share, which seems absolutely ludicrous.  I've never seen any quantitative backing for that.

[Mephistopheles]

I'm still of the view that given the right store count/avg store size that Sears can have a profitable retail operation -- even if revenues are only  50-60% of what they are today.  We've already seen in the NC Greensboro store  (as well as a couple of others) where Sears cut out 40,000 sq ft for Whole Foods and renovated their own store in the process -- that not only do they gain rental income from Whole Foods, reduce labor and occupancy costs, TOTAL sales in the store increased (not just per square foot) -- and this is in an environment where overall same store sales dropped severely.

 

Where did you get the sales information for that store specifically?

 

 

 

CBL.

 

Thanks. I found the sales/sq foot for the entire mall in the 10-k, but nothing specific about the Sears store. Can you point to where on the site or filings it breaks this down?

[krazeenyc]

I'm still of the view that given the right store count/avg store size that Sears can have a profitable retail operation -- even if revenues are only  50-60% of what they are today.  We've already seen in the NC Greensboro store  (as well as a couple of others) where Sears cut out 40,000 sq ft for Whole Foods and renovated their own store in the process -- that not only do they gain rental income from Whole Foods, reduce labor and occupancy costs, TOTAL sales in the store increased (not just per square foot) -- and this is in an environment where overall same store sales dropped severely.

 

Where did you get the sales information for that store specifically?

 

 

 

CBL.

 

Thanks. I found the sales/sq foot for the entire mall in the 10-k, but nothing specific about the Sears store. Can you point to where on the site or filings it breaks this down?

 

So this particular information was in a quarterly call (CBL). FWIW, I keep in touch with GGP, SPG, and CBL investor relations and often ask and discuss SHLD activity (sublease/sale) with them -- after the fact of course. 

[Mephistopheles]

I'm still of the view that given the right store count/avg store size that Sears can have a profitable retail operation -- even if revenues are only  50-60% of what they are today.  We've already seen in the NC Greensboro store  (as well as a couple of others) where Sears cut out 40,000 sq ft for Whole Foods and renovated their own store in the process -- that not only do they gain rental income from Whole Foods, reduce labor and occupancy costs, TOTAL sales in the store increased (not just per square foot) -- and this is in an environment where overall same store sales dropped severely.

 

Where did you get the sales information for that store specifically?

 

 

 

CBL.

 

Thanks. I found the sales/sq foot for the entire mall in the 10-k, but nothing specific about the Sears store. Can you point to where on the site or filings it breaks this down?

 

So this particular information was in a quarterly call (CBL). FWIW, I keep in touch with GGP, SPG, and CBL investor relations and often ask and discuss SHLD activity (sublease/sale) with them -- after the fact of course. 

 

Great, thank you!

[merkhet]

 

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.

 

Curious to get your thoughts on what you believe are other/better options.

 

Clearly, another option is transformation. I don't see the transformation being as risky as everyone else thinks it is. In fact, it's probably riskier to not do the transformation. This is probably just a matter of whether you're looking at short-term risks or long-term risks.