SHLDQ - Sears Holdings Corp

[Luke 532]

I don't think you can really extrapolate any kind of green shoots from 1 quarter.

 

Oh, I definitely agree.  Was just pointing out that domestic comps being up is interesting given heth247 and peridot's conversation, that's all.

[Uccmal]

This thread is starting to get ridiculous. Look up the posts from a few years ago. The same things were being said back then. Almost every detail is scrutinized and labeled as a positive sign*.

 

Many intelligent board members were attracted by the assets and track record of Lampert and were lured in by their own hopes of witnessing 'the second coming of Buffett'. Sadly the big turnaround/plan/catalyst hasn't occured yet and most of those board members went on their way, looking for other businesses that required less hope. It's human nature, people like stories. David vs Goliath is one of our favorites and sometimes it's hard to resist.

 

Buffett saw his mistake in buying Berkshire but I'm not sure Lampert ever saw his. He has bet heavily and will most likely try until he's left with an empty shell if he has to. No way back now!

 

 

 

*This post will be seen as another incredible bullish sign. The sentiment is extremely bearish and every analyst has a sell rating attached to this POS. Jaj! Great news right? Sadly, being contrarian doesn't automatically mean you are right, no matter how much fun it is to go against the crowd. Let's give Mr Market at least some respect and stay critical.

 

I held shares in SHLD, maybe 8-9 years ago.  ~ 70 - back then.  At the time Sears Canada was the crown jewel.  Lampert took over the majority, and ruined the company by cutting staff, training, and purchasing to a minimum.  In my estimate SCC is worth nothing - thats zero.  They have monetized everything that is worth anything now. 

 

One needs to understand the Peter Principle.  Lampert may be intelligent, analytical, careful, but that does not translate to being a capable retailer.  He is beyond inept at retailing.  Does anyone actually believe he will pull off a retailing  turnaround?  The odds are so deeply stacked against him that its ridiculous. 

 

He also has no coherent strategy.  He flip flops between putting money in, taking money out, selling real estate, etc.  Under his brilliant tutelage Sears Canada gave up every one of its best locations.

 

So that leaves whatever is left in the real estate portfolio right now.  And this is merely hoping that the real estate survives the constant cash drain - 29 quarters = 7 yrs. 

 

 

BTW: Peridotcapital - really enjoyed your post and thoughtful blog.  Thanks.

[peridotcapital]

Lampert never used the word 'acquisition' or 'acquire' on the Q4 2013 call, but mentioned this today.

 

"These initiatives, when coupled with executing on the profitability framework I just described, will position us to play offense, enable us to continue to seek opportunities to grow, and invest in our business through acquisitions and other strategic relationships.

 

As I indicated earlier, as changes occur in and around retail, we intend to be in the mix focused on investments and acquisitions that accelerate and improve our transformation. Again, we are focused on making a profit, and we expect to continue to focus on our strengths, including increased focused on our best members, best stores, and best categories."

 

Probably nothing, but it's interesting that the following link mentions Sears possibly buying Michaels.  The article is dated April 2014 so I'm not sure why 2006 is mentioned (perhaps a typo).

 

http://www.wwltv.com/news/Michaels-confirms-breach-of-as-many-as-26M-cards-255760281.html

MOUNT PROSPECT, IL - MARCH 22: A Michaels store logo is seen on a shopping-cart child's seat March 22, 2006 in Mount Prospect, Illinois. Reports state that arts and crafts retail giant, Michaels, is up for sale and Hoffman Estates, Illinois-based Sears Holding Corp. reportedly may be interested in buying them. Michaels has almost 900 stores located in 48 states and Canada. (Photo by Tim Boyle/Getty Images)

 

Michael's was up for sale in 2006. That is when the article was originally published. Definitely an interesting tidbit though. I hope he doesn't buy money-losing tech-related businesses though. :)

[krazeenyc]

This thread is starting to get ridiculous. Look up the posts from a few years ago. The same things were being said back then. Almost every detail is scrutinized and labeled as a positive sign*.

 

Many intelligent board members were attracted by the assets and track record of Lampert and were lured in by their own hopes of witnessing 'the second coming of Buffett'. Sadly the big turnaround/plan/catalyst hasn't occured yet and most of those board members went on their way, looking for other businesses that required less hope. It's human nature, people like stories. David vs Goliath is one of our favorites and sometimes it's hard to resist.

 

Buffett saw his mistake in buying Berkshire but I'm not sure Lampert ever saw his. He has bet heavily and will most likely try until he's left with an empty shell if he has to. No way back now!

 

 

 

*This post will be seen as another incredible bullish sign. The sentiment is extremely bearish and every analyst has a sell rating attached to this POS. Jaj! Great news right? Sadly, being contrarian doesn't automatically mean you are right, no matter how much fun it is to go against the crowd. Let's give Mr Market at least some respect and stay critical.

 

I held shares in SHLD, maybe 8-9 years ago.  ~ 70 - back then.  At the time Sears Canada was the crown jewel.  Lampert took over the majority, and ruined the company by cutting staff, training, and purchasing to a minimum.  In my estimate SCC is worth nothing - thats zero.  They have monetized everything that is worth anything now. 

 

One needs to understand the Peter Principle.  Lampert may be intelligent, analytical, careful, but that does not translate to being a capable retailer.  He is beyond inept at retailing.  Does anyone actually believe he will pull off a retailing  turnaround?  The odds are so deeply stacked against him that its ridiculous. 

 

He also has no coherent strategy.  He flip flops between putting money in, taking money out, selling real estate, etc.  Under his brilliant tutelage Sears Canada gave up every one of its best locations.

 

So that leaves whatever is left in the real estate portfolio right now.  And this is merely hoping that the real estate survives the constant cash drain - 29 quarters = 7 yrs. 

 

 

BTW: Peridotcapital - really enjoyed your post and thoughtful blog.  Thanks.

 

Since Sears Canada is worth 0 -- are you short SCC.TO in a big way?  My understanding is that there is a decent amount of real estate remaining as well as the potential of the Burnaby development.

[peridotcapital]

I'll throw in my two cents.

 

I was hoping for some surprises in the disclosures, but nothing jumps out to me all that much. Definitely an improvement though.

 

It looks like cash burn was about $600M for the quarter, a slight improvement year over year but still pretty dismal. I found it interesting that increases in SYW points only accounted for 11.6% of the gross margin decline (which overall was ~2% at both formats, an enormous drop), so traditional discounting to move product is not being alleviated yet, but is helping comp store sales (along with closing the worst stores).

 

On a cash basis (operating income ex-depreciation) margins went from -0.7% last year to -3.3% this year. That confirms my view that comp improvements could very well be attained but at higher loss rates, which might not be a good thing depending on your perspective. Once we see better comps and improving margins, then we can say things might be working (and then if we see that happen for a few quarters in a row, confidence would really increase). As we saw, a single month of positive comps at one format (February/likely Sears) did not predict the rest of the quarter (ended the quarter down 1% overall). I think it will be unwise to draw any conclusions without a string of 3-4 quarters where the trends look similar... lots of volatility with weather, store closings, and other factors.

[Uccmal]

Since Sears Canada is worth 0 -- are you short SCC.TO in a big way?  My understanding is that there is a decent amount of real estate remaining as well as the potential of the Burnaby development.

 

I have never shorted anything and dont plan on starting now.  Telling someone to short something shows how weak your thesis is.

 

Sears has given up all of their best Toronto locations:  for example:  Sherway Gardens - one of the pre eminent malls in Eastern Canada - now a Nordstrom; Eatons Center - downtown toronto; 

 

I will stick to my script, which if you follow back the Sears threads to 5 years reads the same.  Lampert is not capable of doing retail, for whatever reason.  He does not have the self knowledge to realize this.  He killed Sears Canada once he got control - absolutely slaughtered it. 

 

Krazeenyc... Lampert has no coherent, consistent strategy.  He may be great as a value investor, but he is out of his league in mass retailing.  I dont know how anyone can conclude otherwise. 

[merkhet]

I'll throw in my two cents.

 

I was hoping for some surprises in the disclosures, but nothing jumps out to me all that much. Definitely an improvement though.

 

It looks like cash burn was about $600M for the quarter, a slight improvement year over year but still pretty dismal. I found it interesting that increases in SYW points only accounted for 11.6% of the gross margin decline (which overall was ~2% at both formats, an enormous drop), so traditional discounting to move product is not being alleviated yet, but is helping comp store sales (along with closing the worst stores).

 

On a cash basis (operating income ex-depreciation) margins went from -0.7% last year to -3.3% this year. That confirms my view that comp improvements could very well be attained but at higher loss rates, which might not be a good thing depending on your perspective. Once we see better comps and improving margins, then we can say things might be working (and then if we see that happen for a few quarters in a row, confidence would really increase). As we saw, a single month of positive comps at one format (February/likely Sears) did not predict the rest of the quarter (ended the quarter down 1% overall). I think it will be unwise to draw any conclusions without a string of 3-4 quarters where the trends look similar... lots of volatility with weather, store closings, and other factors.

 

Chad, I like your posts as you seem to provide a fairly rational bearish perspective, and I find that I often agree with your facts even if I don't necessarily agree with your interpretation.

 

I'd like to note two things in your post and two things not in your post:

 

(1) Cash Burn - It's unclear how much of the cash burn is coming from "investments" that are flowing through the income statement rather than the cash flow from investments section -- there was a Sears Holdings blog post about this a while back -- but it's an improvement from last year.

 

(2) Positive Comps - I actually think you're wrong on this. Sears domestic had an entire quarter comp up at 0.2% and not just a single month of positive comp. It's Kmart domestic that had a 2.2% down comp that brought the overall comp to down 1%.

 

(3) Pension Funding - I was wondering whether anyone else caught this from the transcript. They've been using the revolver to fund their pension obligations. I found this incredibly interesting as they're using funds with a cost of capital of a a little more than 3% to fund an obligation that has an expected return on plan assets (according to the 2013 annual report) of about 7% and an actual return on plan assets of 10%. This seems like a pretty smart plan to deal with the pension -- additionally, given the delta on the expected and actual plan returns plus a possible rising interest rate environment, it's likely that they'll be closing the pension obligation faster than 2019.

 

(4) Potential Sales Proceeds - I'm going to sound like the boy who cried wolf here, but I would be highly surprised if they don't buy back some shares and/or debt in the next six months using sales proceeds from Sears Canada and/or Sears Auto. (Full Disclosure: I've been waiting for ESL to buy back shares since January of this year and it hasn't happened yet.) However, the following piece of the conference call seems to signal that they're looking into this as well:

 

Also note that, should we be successful in monetizing our 51% stake in Sears Canada, this would result in cash proceeds of approximately $730 million at current market values. As indicated on the slide, this affords us the option, should we decide to do so, to apply those proceeds to our domestic revolver. I would note that under the terms of our domestic revolver agreement, we have flexibility in how we use those proceeds. We are not required to apply these proceeds to the outstanding revolver balance. If we have received these proceeds and decided to apply them to the domestic revolver outstanding balance, then availability under our domestic revolver would have been $1.5 billion had the transaction taken place as of the end of our fiscal first quarter.

 

 

...

 

I would also note that we would continue to de-lever our balance sheet and increase our availability to the extent we are successful in monetizing our 51% stake in Sears Canada, which currently has a market value of about $730 million. As indicated on the slide, this affords us the option, should we decide to do so, to apply those proceeds to our domestic revolver. Had such a transaction taken place as of the end of our first fiscal quarter, and had we applied those proceeds to the outstanding domestic revolver balance, we would have had no net short-term debt. Actually, we would have been net cash positive.

 

I would also note that we currently have $500 million of authorization remaining for share repurchases, as well as $275 million of authorization remaining for repurchases of our debt. As we have commented, we believe that we have ample liquidity to run the business and also have the benefit of access to a rich portfolio of assets.

 

The fact that they referred to their flexibility with how they can use the proceeds and the mention of their share and debt buyback authorizations makes me think that they're very likely to buyback shares using the proceeds from Sears Canada and/or Sears Auto.

[peridotcapital]

"On slide 33, we show the difference in annual spend between an average engaged Shop Your Way member and a very engaged Shop Your Way member. The spend difference is significant, with our most actively engaged members spending 75% more than our average member."

 

Here's more spin from Eddie. If you look at the footnotes they define an "engaged member" as one who makes at least 1 purchase a year from either Sears or Kmart. A "very engaged member" shops at both formats at least once a year. Are we supposed to be impressed that someone who shops at Kmart and Sears spends 75% more than a member who shops at only one of the formats? Would you not expect that number to be greater than 100% if SYW point awards were really positively impacting future transactions for your members? If anything, this tells me that "highly engaged" shoppers don't spend materially more money per transaction, or complete materially more transactions, than other members. I hope this is not the kind of data Eddie is citing when he says he sees signs that SYW is working.

 

 

[adesigar]

Since Sears Canada is worth 0 -- are you short SCC.TO in a big way?  My understanding is that there is a decent amount of real estate remaining as well as the potential of the Burnaby development.

 

I have never shorted anything and dont plan on starting now.  Telling someone to short something shows how weak your thesis is.

 

Sears has given up all of their best Toronto locations:  for example:  Sherway Gardens - one of the pre eminent malls in Eastern Canada - now a Nordstrom; Eatons Center - downtown toronto; 

 

I will stick to my script, which if you follow back the Sears threads to 5 years reads the same.  Lampert is not capable of doing retail, for whatever reason.  He does not have the self knowledge to realize this.  He killed Sears Canada once he got control - absolutely slaughtered it. 

 

Krazeenyc... Lampert has no coherent, consistent strategy.  He may be great as a value investor, but he is out of his league in mass retailing.  I dont know how anyone can conclude otherwise.

 

I believe it was you who said

 

"In my estimate SCC is worth nothing - thats zero.  They have monetized everything that is worth anything now. "

 

and

 

He killed Sears Canada once he got control - absolutely slaughtered it.

 

Krazeenyc's comment about whether you are short is absolutely spot on. His thesis isn't weak I believe your comments are weak and without any merit and he was calling you out for making a dumb statement since Sears Canada is trading at 1.4 Billion valuation and your thesis says it is worth zero.

[tiddman]

I am not a fan of either Sears or Lampert and while I find the Sears story interesting, I really just can't see the value.  It looks just like every other slow motion retail train wreck i.e. Radio Shack.  Retail sales are clearly never going to turn around due to lack of investment, and I am skeptical of the real estate / asset strategy.

 

The one thing that I think is potentially interesting is Lampert's attempts to make online sales more meaningful to Sears.  I think he is right that shopping habits are changing and have changed, perhaps permanently.  It is so easy for consumers to price-check and demand ever faster shipping and convenience without ever setting foot in your store.  Sears' brands are losing their luster but are not terrible and there can be value in those brands with online sales.

 

The problem with this is that Sears is up against Amazon and other online competitors and they are never going to win that battle. So they have to figure out a way to make their online strategy more compelling than Amazon which means competing based on something besides price and convenience.

 

There are glimmers of this in Sears' "shop your way" strategy, I am not sure what member-centric shopping is but there might be a niche that Sears could carve out in the online sales world.  Whether or not the bazillion tons of baggage from their failing brick and mortar business will prove too much is definitely a key question though.

[peridotcapital]

 

(1) Cash Burn - It's unclear how much of the cash burn is coming from "investments" that are flowing through the income statement rather than the cash flow from investments section -- there was a Sears Holdings blog post about this a while back -- but it's an improvement from last year.

 

(2) Positive Comps - I actually think you're wrong on this. Sears domestic had an entire quarter comp up at 0.2% and not just a single month of positive comp. It's Kmart domestic that had a 2.2% down comp that brought the overall comp to down 1%.

 

(3) Pension Funding - I was wondering whether anyone else caught this from the transcript. They've been using the revolver to fund their pension obligations. I found this incredibly interesting as they're using funds with a cost of capital of a a little more than 3% to fund an obligation that has an expected return on plan assets (according to the 2013 annual report) of about 7% and an actual return on plan assets of 10%. This seems like a pretty smart plan to deal with the pension -- additionally, given the delta on the expected and actual plan returns plus a possible rising interest rate environment, it's likely that they'll be closing the pension obligation faster than 2019.

 

(4) Potential Sales Proceeds - I'm going to sound like the boy who cried wolf here, but I would be highly surprised if they don't buy back some shares and/or debt in the next six months using sales proceeds from Sears Canada and/or Sears Auto. (Full Disclosure: I've been waiting for ESL to buy back shares since January of this year and it hasn't happened yet.)

 

1) To me, cash burn is cash burn. It impacts my valuation of SHLD dramatically regardless of where it comes from.

 

2) I think there were some who thought that Q1 company-wide comps might very well be positive because they disclosed that February company-wide comps were positive. However, to get to a negative 1% comp for the quarter, after a positive February, it's likely that both March and April were negative. But yes, I mean on a company-wide basis only.

 

3) I think the whole "we're using the revolver mostly for the pension funding" is more spin. The operations are losing money, so the only way they could fund the pension is through the revolver. They have no other way of doing it. And besides, cash is fungible, right? Does it really mean anything to claim that they use the revolver for the pension, not the cash from asset sales or Canada dividends? The money all goes into the same pot, so you can't really say, we'll we used these dollars for this and these for this. It's all the same. Now, it does explain why they don't sell more debt to fund the pension (the interest rate would be higher), but I don't think they deserve a pat on the back for making a simply capital allocation decision like that.

 

4) Their convenants won't let them buy back stock. And even if they did, they need that money. Cash burn is hundreds of millions of dollars per quarter, and the pension funding is going to be nearly $500 million this year. Where does that money come from? Canada, Auto Centers, and the revolver... that's why they're sellign everything they can... they can't do this transformation if they don't...

 

[ni-co]

Garry Balter provides an update:

 

Some investors…believe that we are too negative on Sears Holdings’ outlook…So let’s accept their math and take the low end of their assumed improvements. Based on that, we would add $1 billion to EBITDA from initiatives, which adding to trailing twelve months would give them positive EBITDA (yes you read that right) of $300 million. Here is the problem. The bulls on Sears argue for the most part that the value is in the real estate and brand names. If Mr. Lampert is trying to make it as an operator we should value them as such, but that’s a bigger problem. Using a positive $300 million EBITDA, that would imply a multiple of 29.5x lets say in 2017 to give them time for the turnaround. That would place their multiple well above anything we cover, including our best growth names such as The Container Store (TCS), Tractor Supply (TSCO)…Lumber Liquidators (LL), and CarMax (KMX). So if one accepts the turnaround and we give them an eight multiple of EBITDA three years out, a somewhat generous multiple for a non-top-line grower, then the value of the equity would be negative. H’mmm. Maybe the company should explore the asset sale. Said another way, this remains a significantly overvalued stock and while we are not moving to a negative target price, we maintain our $20 price target.

 

http://blogs.barrons.com/stockstowatchtoday/2014/05/22/sears-significantly-overvalued-credit-suisse-says/

 

He means the same $20 price target he put on it last time? This is ridiculous. I don't know about you but I received $8 worth in LE since then. Valuing Sears only on this potential EBITDA multiple implies that Lampert needs all the assets to go on with his strategy. That's clearly not the case. The next spin-off we're going to get is Sears Auto. I don't think he's going to sell it because he stated in the call:

 

As we have previously disclosed, we are continuing to evaluate strategic alternatives for our Sears Auto Center business. We have had discussions with third parties regarding a variety of opportunities, including partnerships. We are focused on either receiving adequate value from a third party or otherwise positioning the business to allow Sears Holdings shareholders to participate in an improvement in the performance of this business.

 

[Luke 532]

The problem with this is that Sears is up against Amazon and other online competitors and they are never going to win that battle.

 

They don't have to win, they just need to be moderately profitable for this to be a 'grand slam home run' as Berkowitz calls it. 

 

Off-topic: The baseball fan in me hates the redundancy when people add 'home run' to the end of 'grand slam'... but that's probably just me being a curmudgeon.  :)

[heth247]

"...Finally, as we invest in our new program and platforms, we are continuing to bear the costs of two promotional models, which adversely impacts our margins."

 

Implications.....

[ni-co]

1) To me, cash burn is cash burn. It impacts my valuation of SHLD dramatically regardless of where it comes from.

 

Cash burn is hundreds of millions of dollars per quarter, and the pension funding is going to be nearly $500 million this year. Where does that money come from? Canada, Auto Centers, and the revolver... that's why they're sellign everything they can... they can't do this transformation if they don't...

 

Why is pension funding burning cash? It's the reduction of a liability and it's obvious that you're going to get your money back once interest rates are higher.

[Luke 532]

"...Finally, as we invest in our new program and platforms, we are continuing to bear the costs of two promotional models, which adversely impacts our margins."

 

Implications.....

 

When I read that this morning I thought "at what % of members using SYW will allow Lampert to significantly cut into the traditional promos."  SYW member penetration at 74%.

[Luke 532]

Garry Balter provides an update:

 

we maintain our $20 price target.

 

http://blogs.barrons.com/stockstowatchtoday/2014/05/22/sears-significantly-overvalued-credit-suisse-says/

 

He means the same $20 price target he put on it last time? This is ridiculous. I don't know about you but I received $8 worth in LE since then.

 

That's funny... Balter effectively raised his price target by 40%.  :)

[Guest wellmont]

1) To me, cash burn is cash burn. It impacts my valuation of SHLD dramatically regardless of where it comes from.

 

Cash burn is hundreds of millions of dollars per quarter, and the pension funding is going to be nearly $500 million this year. Where does that money come from? Canada, Auto Centers, and the revolver... that's why they're sellign everything they can... they can't do this transformation if they don't...

 

Why is pension funding burning cash? It's the reduction of a liability and it's obvious that you're going to get your money back once interest rates are higher.

 

how do shareholders "get their money back" when interest rates go higher? and yes pension funding is cash burn.

[ni-co]

1) To me, cash burn is cash burn. It impacts my valuation of SHLD dramatically regardless of where it comes from.

 

Cash burn is hundreds of millions of dollars per quarter, and the pension funding is going to be nearly $500 million this year. Where does that money come from? Canada, Auto Centers, and the revolver... that's why they're sellign everything they can... they can't do this transformation if they don't...

 

Why is pension funding burning cash? It's the reduction of a liability and it's obvious that you're going to get your money back once interest rates are higher.

 

how do shareholders "get their money back" when interest rates go higher? and yes pension funding is cash burn.

 

Because then an underfunded pension fund can turn into an overfunded pension fund. Then you could cash out your employees and keep the rest. It's not easy but it's possible. And that's why it is the reduction of a liability and not burning cash.

[Guest wellmont]

I'll throw in my two cents.

 

I was hoping for some surprises in the disclosures, but nothing jumps out to me all that much. Definitely an improvement though.

 

It looks like cash burn was about $600M for the quarter, a slight improvement year over year but still pretty dismal. I found it interesting that increases in SYW points only accounted for 11.6% of the gross margin decline (which overall was ~2% at both formats, an enormous drop), so traditional discounting to move product is not being alleviated yet, but is helping comp store sales (along with closing the worst stores).

 

On a cash basis (operating income ex-depreciation) margins went from -0.7% last year to -3.3% this year. That confirms my view that comp improvements could very well be attained but at higher loss rates, which might not be a good thing depending on your perspective. Once we see better comps and improving margins, then we can say things might be working (and then if we see that happen for a few quarters in a row, confidence would really increase). As we saw, a single month of positive comps at one format (February/likely Sears) did not predict the rest of the quarter (ended the quarter down 1% overall). I think it will be unwise to draw any conclusions without a string of 3-4 quarters where the trends look similar... lots of volatility with weather, store closings, and other factors.

 

Chad, I like your posts as you seem to provide a fairly rational bearish perspective, and I find that I often agree with your facts even if I don't necessarily agree with your interpretation.

 

I'd like to note two things in your post and two things not in your post:

 

(1) Cash Burn - It's unclear how much of the cash burn is coming from "investments" that are flowing through the income statement rather than the cash flow from investments section -- there was a Sears Holdings blog post about this a while back -- but it's an improvement from last year.

 

(2) Positive Comps - I actually think you're wrong on this. Sears domestic had an entire quarter comp up at 0.2% and not just a single month of positive comp. It's Kmart domestic that had a 2.2% down comp that brought the overall comp to down 1%.

 

(3) Pension Funding - I was wondering whether anyone else caught this from the transcript. They've been using the revolver to fund their pension obligations. I found this incredibly interesting as they're using funds with a cost of capital of a a little more than 3% to fund an obligation that has an expected return on plan assets (according to the 2013 annual report) of about 7% and an actual return on plan assets of 10%. This seems like a pretty smart plan to deal with the pension -- additionally, given the delta on the expected and actual plan returns plus a possible rising interest rate environment, it's likely that they'll be closing the pension obligation faster than 2019.

 

(4) Potential Sales Proceeds - I'm going to sound like the boy who cried wolf here, but I would be highly surprised if they don't buy back some shares and/or debt in the next six months using sales proceeds from Sears Canada and/or Sears Auto. (Full Disclosure: I've been waiting for ESL to buy back shares since January of this year and it hasn't happened yet.) However, the following piece of the conference call seems to signal that they're looking into this as well:

 

Also note that, should we be successful in monetizing our 51% stake in Sears Canada, this would result in cash proceeds of approximately $730 million at current market values. As indicated on the slide, this affords us the option, should we decide to do so, to apply those proceeds to our domestic revolver. I would note that under the terms of our domestic revolver agreement, we have flexibility in how we use those proceeds. We are not required to apply these proceeds to the outstanding revolver balance. If we have received these proceeds and decided to apply them to the domestic revolver outstanding balance, then availability under our domestic revolver would have been $1.5 billion had the transaction taken place as of the end of our fiscal first quarter.

 

 

...

 

I would also note that we would continue to de-lever our balance sheet and increase our availability to the extent we are successful in monetizing our 51% stake in Sears Canada, which currently has a market value of about $730 million. As indicated on the slide, this affords us the option, should we decide to do so, to apply those proceeds to our domestic revolver. Had such a transaction taken place as of the end of our first fiscal quarter, and had we applied those proceeds to the outstanding domestic revolver balance, we would have had no net short-term debt. Actually, we would have been net cash positive.

 

I would also note that we currently have $500 million of authorization remaining for share repurchases, as well as $275 million of authorization remaining for repurchases of our debt. As we have commented, we believe that we have ample liquidity to run the business and also have the benefit of access to a rich portfolio of assets.

 

The fact that they referred to their flexibility with how they can use the proceeds and the mention of their share and debt buyback authorizations makes me think that they're very likely to buyback shares using the proceeds from Sears Canada and/or Sears Auto.

 

money is fungible. funding from the revolver simply means they don't produce discretionary free cash flow and have to borrow to fund their business. You're not really investing above the cost of capital because those payments aren't to the benefit of the shareholder. they benefit the pensioner. On the surface it sounds very "EVAish". But the reality is that this is simply an acknowledgement that he needs to borrow to fund all his expenses.

 

I seriously doubt a company that incinerates capital month after month from it's operations is going to be buying back shares with the proceeds of asset sales.

[Guest wellmont]

1) To me, cash burn is cash burn. It impacts my valuation of SHLD dramatically regardless of where it comes from.

 

Cash burn is hundreds of millions of dollars per quarter, and the pension funding is going to be nearly $500 million this year. Where does that money come from? Canada, Auto Centers, and the revolver... that's why they're sellign everything they can... they can't do this transformation if they don't...

 

Why is pension funding burning cash? It's the reduction of a liability and it's obvious that you're going to get your money back once interest rates are higher.

 

how do shareholders "get their money back" when interest rates go higher? and yes pension funding is cash burn.

 

Because then an underfunded pension fund can turn into an overfunded pension fund. Then you could cash out your employees and keep the rest. It's not easy but it's possible. And that's why it is the reduction of a liability and not burning cash.

 

WPO/GHC has had an over funded plan for decades and not one penny has gone back to shareholders. The plan simply remains over funded. My understanding is that in a liquidation the shareholders could recapture some of that over funding. It will be years before shld plan gets to be over funded, if ever. And even if it gets there, there is no foreseeable scenario where shareholders get paid back any of the money they have spent funding it. lots is going to happen between now and then. till then cash goes out the door for the next several years.

[heth247]

"...Finally, as we invest in our new program and platforms, we are continuing to bear the costs of two promotional models, which adversely impacts our margins."

 

Implications.....

 

When I read that this morning I thought "at what % of members using SYW will allow Lampert to significantly cut into the traditional promos."  SYW member penetration at 74%.

 

It likely that a single percentage number will not be enough (e.g. should also include what % of them have converted to a regular/repetitive shoppers at Sears etc.)... and Eddie will cut the traditional promos gradually.

 

[ni-co]

1) To me, cash burn is cash burn. It impacts my valuation of SHLD dramatically regardless of where it comes from.

 

Cash burn is hundreds of millions of dollars per quarter, and the pension funding is going to be nearly $500 million this year. Where does that money come from? Canada, Auto Centers, and the revolver... that's why they're sellign everything they can... they can't do this transformation if they don't...

 

Why is pension funding burning cash? It's the reduction of a liability and it's obvious that you're going to get your money back once interest rates are higher.

 

how do shareholders "get their money back" when interest rates go higher? and yes pension funding is cash burn.

 

Because then an underfunded pension fund can turn into an overfunded pension fund. Then you could cash out your employees and keep the rest. It's not easy but it's possible. And that's why it is the reduction of a liability and not burning cash.

 

WPO/GHC has had an over funded plan for decades and not one penny has gone back to shareholders. The plan simply remains over funded. My understanding is that in a liquidation the shareholders could recapture some of that over funding. It will be years before shld plan gets to be over funded, if ever. And even if it gets there, there is no foreseeable scenario where shareholders get paid back any of the money they have spent funding it. lots is going to happen between now and then. till then cash goes out the door for the next several years.

 

My understanding is that it's largely a tax problem for the company cashing its employees out (you don't need to liquidate the whole company). They changed this in the 80s or early 90s in reaction to corporate raiders reaping the pension surpluses.

[Uccmal]

Since Sears Canada is worth 0 -- are you short SCC.TO in a big way?  My understanding is that there is a decent amount of real estate remaining as well as the potential of the Burnaby development.

 

I have never shorted anything and dont plan on starting now.  Telling someone to short something shows how weak your thesis is.

 

Sears has given up all of their best Toronto locations:  for example:  Sherway Gardens - one of the pre eminent malls in Eastern Canada - now a Nordstrom; Eatons Center - downtown toronto; 

 

I will stick to my script, which if you follow back the Sears threads to 5 years reads the same.  Lampert is not capable of doing retail, for whatever reason.  He does not have the self knowledge to realize this.  He killed Sears Canada once he got control - absolutely slaughtered it. 

 

Krazeenyc... Lampert has no coherent, consistent strategy.  He may be great as a value investor, but he is out of his league in mass retailing.  I dont know how anyone can conclude otherwise.

 

I believe it was you who said

 

"In my estimate SCC is worth nothing - thats zero.  They have monetized everything that is worth anything now. "

 

and

 

He killed Sears Canada once he got control - absolutely slaughtered it.

 

Krazeenyc's comment about whether you are short is absolutely spot on. His thesis isn't weak I believe your comments are weak and without any merit and he was calling you out for making a dumb statement since Sears Canada is trading at 1.4 Billion valuation and your thesis says it is worth zero.

 

adesigar,

 

I dont think it is a dumb statement at all. 

 

Lets walk through it:

1). Monetize the real estate.  The best ones in Ontario are gone... The special dividend ate that cash.  I cant speak to elsewhere. 

2) SCC lost money on operations.  So, who is Eddie going to sell to?  Target? Walmart? The Bay? Amazon, Nordstron? Ikea?  Canadian Tire? Loblaws? No one?  There are no likely buyers and the operations lose money, therefore the value of SCC is zero.  That will become clear if he tries to sell the entire operation.  1.4 b will evaporate.  SHLd is the only reason the stock isn't zero right now.

 

I dont know if you noticed but target just sacked their Canadian CEO for allegedly screwing up the expansion.  Maybe, just maybe, his task was impossible in a landscape where the largest retailers already have a lock up: Re: Amazon, Home Depot, Lowes, Walmart, cdn. tire. 

[constructive]

2) SCC lost money on operations.  So, who is Eddie going to sell to?  Target? Walmart? The Bay? Amazon, Nordstron? Ikea?  Canadian Tire? Loblaws? No one?  There are no likely buyers and the operations lose money, therefore the value of SCC is zero.  That will become clear if he tries to sell the entire operation.  1.4 b will evaporate.  SHLd is the only reason the stock isn't zero right now.

 

I am as bearish on SHLD as anyone (and obsessed with positive earnings/cash flow), but it is kind of simplistic or naive to say that currently unprofitable companies are worthless.