SHLDQ - Sears Holdings Corp

[thecynic]

The group at Sears running the SYW program understands math, and they are going to try using it to their advantage.  The SYW group is only going to allocate big rewards to people that shop a lot or have large transaction sizes when they do shop.  In my humble opinion they won't continue to give big points to someone that SHLD consistently doesn't make money on.

 

Not so sure. What I have read online is that if someone uses up all SYW reward points from a purchase and then returns the original item, his balance points become -ve (i.e. he owes Sears money). At this point the user can simply close that SYW account and start a new one, resulting in a loss to Sears.

 

I had quite a large position in SHLD but sold it into rise and bought LMCA instead. I sleep much better now :). Anyways the attempted Sears transformation is going to take some time. I hope to watch, learn and perhaps get a chance to reload at much lower prices.

[20ppy]

Blackstone joins the party.  Nice!

http://www.sec.gov/Archives/edgar/data/1393818/000095012314006214/xslForm13F_X01/form13fInfoTable.xml

 

1,518,102 common

1,320,000 calls

 

Really nice!K

 

 

+1

Of course, this receives no media attention, go figure.

[peridotcapital]

Chad - there is a membership model that does not spend much on advertising - Costco.

 

I am not saying SHLD is there. But, the use of SYW membership tells me that is the objective.

 

True, but everyone knows what Costco is, it has always had the same model, and they have much less competition in the warehouse/bulk business than a traditional retailer selling appliances. Since Sears is "transforming" into something totally new, they are going to have to tell people about it. The idea that a pillar of the transformation's road to success is lower advertising costs doesn't make a lot of sense to me. If anything, when you are changing your business model you need to advertise more (for awareness purposes) not less. Now, once they get to a critical mass can they cut back on advertising? Sure, but isn't that 3-5 years down the road, not this quarter or next? They are still losing customers every quarter so cutting back now would just exacerbate that problem.

[thecynic]

Blackstone joins the party.  Nice!

http://www.sec.gov/Archives/edgar/data/1393818/000095012314006214/xslForm13F_X01/form13fInfoTable.xml

 

1,518,102 common

1,320,000 calls

 

Really nice!K

 

 

+1

Of course, this receives no media attention, go figure.

 

The 140 million investment is not even 1% of their portfolio. There is no conviction. Blackstone probably thinks of this as an option.

[constructive]

The fact that without SYW costs, SHLD would have been almost break even, says a ton

 

Eddie is 100% committed to expanding SYW. So how is it useful to back out SYW costs?

 

On the other hand, he's never committed to SHLD investing in, or even owning, currently profitable lines of business - SHOS, LE, SC, SAC, etc. He's pulling the flowers and watering the weeds.

[krazeenyc]

I read message boards for shoppers (couponers, deal seekers, etc.) and they're loving the Shop Your Way points that Sears is giving them.

 

Extremely price sensitive customers are the ones you don't want.

 

As Sears "invests" more and more on promotional prices through Shop Your Way and less and less on store maintenance, they go further downmarket, lose brand value, and price becomes the only reason to buy from them.

 

It's insane to compete with Walmart, Costco and Amazon at delivering low prices.

 

Constructive, I would like to disagree with you on this issue -- specifically regarding store capex.

 

We've all seen the numbers showing how few capex $ Sears puts into store maintenance/repair -- this number is astoundingly low when you look at using a per square foot basis as Sears' footprint is so huge.  I think this is the right approach -- given their strategy to place an emphasis on online and integrated sales as well as rightsizing both their store count and average store size.  They are looking to have a much smaller (less revenues)  but more profitable retail business -- and hopefully a thriving REIT as well.  Given that the plan is likely to close a very large number of stores, why in the world would Sears put ANY capex into maintaining the store just to temporarily boost sales? If you notice when they carve out space for a Whole Foods, Nordstrom Rack, DSW, etc. they are not only putting in money to put in the new store, but they renovate their own store as well. 

[tng]

Blackstone joins the party.  Nice!

http://www.sec.gov/Archives/edgar/data/1393818/000095012314006214/xslForm13F_X01/form13fInfoTable.xml

 

1,518,102 common

1,320,000 calls

 

Really nice!K

 

 

+1

Of course, this receives no media attention, go figure.

 

The 140 million investment is not even 1% of their portfolio. There is no conviction. Blackstone probably thinks of this as an option.

 

They are severely limited in how much they can buy. Most of the float is owned by Eddie and Bruce, and the price is probably pretty sensitive to buying pressure, which is why it flies up and down all the time. The price in Q1 was as low as the low 30s and as high as almost 50 (pre Lands End spin off). They key will be to see if they continue to accumulate.

[peridotcapital]

The fact that without SYW costs, SHLD would have been almost break even, says a ton

 

Eddie is 100% committed to expanding SYW. So how is it useful to back out SYW costs?

 

On the other hand, he's never committed to SHLD investing in, or even owning, currently profitable lines of business - SHOS, LE, SC, SAC, etc. He's pulling the flowers and watering the weeds.

 

Exactly. It's like when JCP said they were getting rid of the hundreds of promotions they were running every year. "Think of how much money we'll save," Ron Johnson said. Sure, that sounds great unless you actually think about it in terms of the business JCP is in. Then not so much... their customers stopped buying and they lost billions of dollars. If SHLD stopped giving out as many SYW points, shoppers would shop even less than they already are (if that's possible) and losses would grow, not shrink. Retail is a highly fixed cost business!

[BTShine]

It's likely that the SYW program has kept a lot of shoppers coming back more than they would have. 

 

Also, it's likely that the SYW program has turned off some shoppers from Sears.  So, I'm not certain that Sears financial performance would definitely be worse if they weren't handing out SYW points.

 

 

[constructive]

Constructive, I would like to disagree with you on this issue -- specifically regarding store capex.

 

We've all seen the numbers showing how few capex $ Sears puts into store maintenance/repair -- this number is astoundingly low when you look at using a per square foot basis as Sears' footprint is so huge.  I think this is the right approach -- given their strategy to place an emphasis on online and integrated sales as well as rightsizing both their store count and average store size.  They are looking to have a much smaller (less revenues)  but more profitable retail business -- and hopefully a thriving REIT as well.  Given that the plan is likely to close a very large number of stores, why in the world would Sears put ANY capex into maintaining the store just to temporarily boost sales? If you notice when they carve out space for a Whole Foods, Nordstrom Rack, DSW, etc. they are not only putting in money to put in the new store, but they renovate their own store as well.

 

Of course I agree if a store is going to be closed in a few years it's not worth capital spending. But the reverse is also true. If you stop spending on a store, its operating performance will go into terminal decline, so you might as well close it immediately and not wait several years.

[krazeenyc]

Constructive, I would like to disagree with you on this issue -- specifically regarding store capex.

 

We've all seen the numbers showing how few capex $ Sears puts into store maintenance/repair -- this number is astoundingly low when you look at using a per square foot basis as Sears' footprint is so huge.  I think this is the right approach -- given their strategy to place an emphasis on online and integrated sales as well as rightsizing both their store count and average store size.  They are looking to have a much smaller (less revenues)  but more profitable retail business -- and hopefully a thriving REIT as well.  Given that the plan is likely to close a very large number of stores, why in the world would Sears put ANY capex into maintaining the store just to temporarily boost sales? If you notice when they carve out space for a Whole Foods, Nordstrom Rack, DSW, etc. they are not only putting in money to put in the new store, but they renovate their own store as well.

 

Of course I agree if a store is going to be closed in a few years it's not worth capital spending. But the reverse is also true. If you stop spending on a store, its operating performance will go into terminal decline, so you might as well close it immediately and not wait several years.

 

I think given his actions (as well as his words) -- ESL's view is that capex on the marginal stores would not have saved them. That it would be throwing good money after bad. I assume the decisions on when to close down these stores is highly dependent on how much they're being paid to leave, how much of a penalty they need to pay to leave, how poorly the store is doing etc.... I also think that after 08/09 lower/mid end customer that was part of the core of JCP and SHLD were hit harder than say the typical customer of Macys/Bloomingdales. Hey when it's all said and done I think Sears will be a very interesting case study.

 

 

 

[krazeenyc]

The fact that without SYW costs, SHLD would have been almost break even, says a ton

 

Eddie is 100% committed to expanding SYW. So how is it useful to back out SYW costs?

 

On the other hand, he's never committed to SHLD investing in, or even owning, currently profitable lines of business - SHOS, LE, SC, SAC, etc. He's pulling the flowers and watering the weeds.

 

Exactly. It's like when JCP said they were getting rid of the hundreds of promotions they were running every year. "Think of how much money we'll save," Ron Johnson said. Sure, that sounds great unless you actually think about it in terms of the business JCP is in. Then not so much... their customers stopped buying and they lost billions of dollars. If SHLD stopped giving out as many SYW points, shoppers would shop even less than they already are (if that's possible) and losses would grow, not shrink. Retail is a highly fixed cost business!

 

Actually what ESL is doing is basically the opposite of Ron Johnson's strategy. RJ's strategy was to eliminate promotions, ramp up advertising, and spend tons of money to beautify JCP -- and of course he was going to do all this essentially overnight.  He essentially was firing his coupon loving customer, build a whole new store (which cost too much) and bring in a whole new class of customers.  OOPS, he fired his customers too quickly and did not get the new class of customers fast enough. ESL has been pretty much doing the opposites. He's essentially losing the marginal/once in a while customer who is unaware and does not care about Sears and SYW, while trying to build a loyal base of SYW customers by being highly promotional with THEM.  I think that when SYW sales as a percentage of total sales grows high enough (right now it's at about 70%) they'll try to reduce and eventually eliminate most traditional advertising.  Whether he can succeed over the long run is unknown.  Retail has been traditionally been a high fixed cost business -- ESL is working on changing that -- reducing inventory needed, shrinking the store base and footprint, and bringing more sales online.

 

[peridotcapital]

The fact that without SYW costs, SHLD would have been almost break even, says a ton

 

Eddie is 100% committed to expanding SYW. So how is it useful to back out SYW costs?

 

On the other hand, he's never committed to SHLD investing in, or even owning, currently profitable lines of business - SHOS, LE, SC, SAC, etc. He's pulling the flowers and watering the weeds.

 

Exactly. It's like when JCP said they were getting rid of the hundreds of promotions they were running every year. "Think of how much money we'll save," Ron Johnson said. Sure, that sounds great unless you actually think about it in terms of the business JCP is in. Then not so much... their customers stopped buying and they lost billions of dollars. If SHLD stopped giving out as many SYW points, shoppers would shop even less than they already are (if that's possible) and losses would grow, not shrink. Retail is a highly fixed cost business!

 

Actually what ESL is doing is basically the opposite of Ron Johnson's strategy. RJ's strategy was to eliminate promotions, ramp up advertising, and spend tons of money to beautify JCP -- and of course he was going to do all this essentially overnight.  He essentially was firing his coupon loving customer, build a whole new store (which cost too much) and bring in a whole new class of customers.  OOPS, he fired his customers too quickly and did not get the new class of customers fast enough. ESL has been pretty much doing the opposites. He's essentially losing the marginal/once in a while customer who is unaware and does not care about Sears and SYW, while trying to build a loyal base of SYW customers by being highly promotional with THEM.  I think that when SYW sales as a percentage of total sales grows high enough (right now it's at about 70%) they'll try to reduce and eventually eliminate most traditional advertising.  Whether he can succeed over the long run is unknown.  Retail has been traditionally been a high fixed cost business -- ESL is working on changing that -- reducing inventory needed, shrinking the store base and footprint, and bringing more sales online.

 

I wasn't saying that ESL is mimicing RJ's strategy at all. I was equating speculation about future dialing back of SYW point giveaways to JCP cutting back on promotions. As many on this board have pointed out, consumers like getting deals. Cutting back SYW to boost gross margin will impact sales volumes negatively and the fixed cost deleveraging offsets the gross margin gain. If you maintain SYW points rewards (which makes the exercise of looking at margins ex-SYW expense meaningless) but cut back on traditional marketing dollars, you are going to lose sales from those not engaged heavily with SYW. Either way there is a direct correlation between sales volumes and promotional activity in retail. Always has been and always will be.

 

I can't wait to see next week's earnings release so we can talk about some new data points. Last year in Q1 SHLD burned through a staggering $773 million of cash. I wonder if they can make any year-over-year improvement on that front.

[merkhet]

Think about it this way:

 

(1) When you think about cutting back on SYW points, your hidden assumption is that there is a linear relationship with SYW points and spending. This is likely not true. The relationship between perception of fewer points and actual fewer points is non-linear. A large decrease in SYW points can likely be made without most people noticing that this has happened.

 

(2) Your assumption is that the cost-benefit analysis of traditional marketing spend to get non SYW members is positive. It's unclear that this is the case. Additionally, it might be good to look at this as a cap-ex expense. How good is your return on capital deployed in this manner?

[merkhet]

Think about (1) in the framework of dating. When you're first dating someone, you are likely taking them out a lot. As the relationship matures, this drops off a bit. So long as it doesn't entirely drop off a cliff, you're probably fine.

[Luke 532]

The relationship between perception of fewer points and actual fewer points is non-linear.

 

Also, frequency can often be more important than quantity due to perception.  Giving 100 free points per week vs 500 free points every fourth week... it sounds crazy but you'll likely get more consistent shoppers that get the weekly points even though the net is 100 less after 4 weeks.  It's the perception that you're getting more in quantity when in reality you're getting less quantity but more frequently.  And if they each expire one week after issued the average shopper will think "man, I'm wasting 100 points every single week.  I need to stop wasting free money."

[merkhet]

The more you buy, the more you save. Seriously, people think this way.

[wisdom]

http://www.theglobeandmail.com/report-on-business/sears-could-cash-in-on-private-label-brands/article18739132/

 

Write up on KCD.

[peridotcapital]

A recap of my trip to the annual meeting for my blog readers:

 

http://www.peridotcapital.com/2014/05/eddie-lamperts-plan-to-keep-more-kmart-and-sears-shoppers-help-them-find-out-what-appliances-their-friends-have.html

 

Not dramatically different from what I shared on this board, but there's the link in case you want to read it.

[BTShine]

Chad,

I enjoyed reading your thoughts.  Besides your belief that the retail operations will not work, do you take a position on whether the real estate and brands are valuable enough to pay off necessary debts and provide good return to shareholders in a shut down situation?

 

 

[cubsfan]

Nice work Chad - thanks for sharing the link.

[peridotcapital]

Chad,

I enjoyed reading your thoughts.  Besides your belief that the retail operations will not work, do you take a position on whether the real estate and brands are valuable enough to pay off necessary debts and provide good return to shareholders in a shut down situation?

 

Well, I don't share the Gary Balter view that in liquidation SHLD is only worth $20/share, so I'm bullish relative to that valuation. :) I think the margin of safety is there at the current $40 share price in terms of downside protection, but I care about upside too. I look at it from the standpoint of what I think NAV is and in what timeframe.

 

If you liquidate quickly you aren't going to get full value (which is why some pieces that they have gauged interest in --- Warranty, Auto Centers, and now Canada --- have yet to be sold). If you take more time and get more money for each piece of the pie, then your upside needs to be pretty high to justify the time it will take to get your money. When I take what I think the assets are worth, assign a number of years I think it would take to liquidate them, and discount that number back to present value (the exact same exercise Baker Street did, except they failed to mention the time element), I don't think it is an attractive investment at current prices relative to other options.

 

Now, I don't share the Bruce Berkowitz view that NAV is $150. If I did, and I thought SHLD would be liquidated in 5 years, then my expected annualized return would look pretty darn good. My number is even below the "low" case that Baker Street outlined in their presentation (which, if memory serves, was $92/share). And lastly (but not insignificant), is the fact that Eddie keeps telling us flat out that he is not liquidating, so if he finally gives up on the transformation 3 years from now your expected returns are even worse because the assets are likely worth less than they are today and you added 3 years to the process.

[Luke 532]

RBS Partners AutoNation shares 12.4M vs 15.8M last quarter: http://www.sec.gov/Archives/edgar/data/860585/000095012314006305/xslForm13F_X01/form13fInfoTable.xml

[heth247]

A recap of my trip to the annual meeting for my blog readers:

 

http://www.peridotcapital.com/2014/05/eddie-lamperts-plan-to-keep-more-kmart-and-sears-shoppers-help-them-find-out-what-appliances-their-friends-have.html

 

Not dramatically different from what I shared on this board, but there's the link in case you want to read it.

 

Thanks, Chad, a well reasoned article, I enjoyed reading it too.

 

One thing I want to point out/argue is that, I think the loyal customer base Eddie is trying to retain and entice will be centered around the KCD customers. And this group of customer is not consists of "older people". It will always remains young and middle aged. It is also likely that this group of people brings the most stable profit for Sears. 

 

Think about it, Amazon was originally a book store and then expanded its customer base to such a scale now. I think Eddie's strategy is the same, first try to retain the core customer base by building a relationship with them, and then try to expand it from there through the SYW social media platform. That's also explains why he used the "How great would it be if you could see what appliances your friends have" example.

 

Look forward to your next article about Bruce Berkowitz.

 

[peridotcapital]

A recap of my trip to the annual meeting for my blog readers:

 

http://www.peridotcapital.com/2014/05/eddie-lamperts-plan-to-keep-more-kmart-and-sears-shoppers-help-them-find-out-what-appliances-their-friends-have.html

 

Not dramatically different from what I shared on this board, but there's the link in case you want to read it.

 

Thanks, Chad, a well reasoned article, I enjoyed reading it too.

 

One thing I want to point out/argue is that, I think the loyal customer base Eddie is trying to retain and entice will be centered around the KCD customers. And this group of customer is not consists of "older people". It will always remains young and middle aged. It is also likely that this group of people brings the most stable profit for Sears. 

 

Think about it, Amazon was originally a book store and then expanded its customer base to such a scale now. I think Eddie's strategy is the same, first try to retain the core customer base by building a relationship with them, and then try to expand it from there through the SYW social media platform. That's also explains why he used the "How great would it be if you could see what appliances your friends have" example.

 

Look forward to your next article about Bruce Berkowitz.

 

It would be interesting to know what the demographic trends are behind various groupings of SHLD customers (KCD marks, SYW app downloads, avid SYW points redeemers, etc), but we'll never know. I can't add color there other than anecdotal evidence (my father-in-law is in his 60's and gives my wife and I Craftsman stuff every holiday season "because it's the best"). Generally speaking, it might very well be more balanced than I would guess (not skewed young though, I don't think).

 

Still, if KCD is only 20% of sales and falling just as fast as the rest of the business, there appear to be cracks there too. That said, if we start to see hardlines sales flatten out and inch higher, while softlines and food/drug decline, that would be a great signal for the strategy you outlined. The KCD sales weakness in recent years is really concerning to me, more so than the overall sales declines. If the bread and butter aren't working, to me that signals lack of relevancy, loyalty, and too much competition.