SHLDQ - Sears Holdings Corp

[ni-co]

The real estate that is supposedly the margin of safety would be sold at a discount to the bond holders.

 

I don't think so.

 

You may recall that the way that Lampert got involved in Sears to begin with was buying Kmart bonds at around 2/3 of face value and taking control of Kmart and its real estate and operations that way, after shareholders had been wiped out… this is typically how it works when retail chains go bankrupt.  If/when Radio Shack goes bankrupt, watch and see what happens to shareholders and debt holders.

 

The real estate is unencumbered – Lampert can sell it, he can mortgage it, he might even be able to spin it off into a REIT (at least this is my understanding). Neither bondholders nor pensioners have direct access to those assets. Creditors got credit card receivables and inventory as collateral. A lot has to happen before SHLDs' creditors get their hands on the real estate.

 

The danger lies in Lampert slowly selling off the real estate assets and "burning" proceeds in the operating business. At least as of today, I don't think we have to be afraid of SHLDs' creditors.

[peridotcapital]

 

$21 is his cost basis in kmart not shld. his cost basis in shld is way lower.

 

Incorrect. KMRT shares were converted into SHLD shares on a 1-for-1 basis when the merger closed.

[Guest wellmont]

 

$21 is his cost basis in kmart not shld. his cost basis in shld is way lower.

 

Incorrect. KMRT shares were converted into SHLD shares on a 1-for-1 basis when the merger closed.

 

while we all appreciate the effort you made trying to figure out his cost basis, your post as currently constructed is quite misleading. If you stand by the $21 figure, I think it could be clearer .

[wisdom]

Peridot picked a stock price that would support his position. I believe ESLs cost was in low to mid teens.

[Guest wellmont]

Peridot picked a stock price that would support his position. I believe ESLs cost was in low to mid teens.

 

that's what I remember too. I believe he got his bonds below the 60s.

[peridotcapital]

 

$21 is his cost basis in kmart not shld. his cost basis in shld is way lower.

 

Incorrect. KMRT shares were converted into SHLD shares on a 1-for-1 basis when the merger closed.

 

you should probably work on the post of yours above because it's quite misleading as it stands now. you say yourself his cost basis was $2.

I tried to clarify that in the bolded edit at the bottom of the post... he paid ~$21/share for kmart and thus far has received $19 in distributions and has a $38 stock, so $57 of total value.

[Guest wellmont]

 

$21 is his cost basis in kmart not shld. his cost basis in shld is way lower.

 

Incorrect. KMRT shares were converted into SHLD shares on a 1-for-1 basis when the merger closed.

 

you should probably work on the post of yours above because it's quite misleading as it stands now. you say yourself his cost basis was $2.

I tried to clarify that in the bolded edit at the bottom of the post... he paid ~$21/share for kmart and thus far has received $19 in distributions and has a $38 stock, so $57 of total value.

 

with all due respect, why is this statement still in the post? why not edit the post for clarity?

 

"Subtract the value of the SHLD spinoffs and dividends (about $19/share) and his adjusted cost basis in what is now trading as SHLD is an astounding $2/share. "

[peridotcapital]

 

with all due respect, why is this statement still in the post? why not edit the post for clarity?

 

"Subtract the value of the SHLD spinoffs and dividends (about $19/share) and his adjusted cost basis in what is now trading as SHLD is an astounding $2/share. "

 

Done.

[Guest wellmont]

this is what Third Avenue said about kmart deal. He says shares were issued at $10.

 

A: There was approximately $1 billion in Bank debt, $2.3 Billion in Bonds, $800M in preferred stock, and some amount of common which was essentially worthless. Also about $4 billion of trade creditors were outstanding. In contrast, in the quarter ended July 2003 (post reorganization), the company had $1.2

billion in cash. $50 million of mortgage debt and a $2.0 billion 3 year line of credit (not drawn) Also, post reorganization there were 90 million shares initially issued at around $10 per share but now trading at $27 or 28 per share for a nice gain.

Q#2 Is future profitability for KMART based on repositioning the entire strategy or just better operations?

[peridotcapital]

this is what Third Avenue said about kmart deal. He says shares were issued at $10.

 

A: There was approximately $1 billion in Bank debt, $2.3 Billion in Bonds, $800M in preferred stock, and some amount of common which was essentially worthless. Also about $4 billion of trade creditors were outstanding. In contrast, in the quarter ended July 2003 (post reorganization), the company had $1.2

billion in cash. $50 million of mortgage debt and a $2.0 billion 3 year line of credit (not drawn) Also, post reorganization there were 90 million shares initially issued at around $10 per share but now trading at $27 or 28 per share for a nice gain.

Q#2 Is future profitability for KMART based on repositioning the entire strategy or just better operations?

 

There were a lot of moving parts... debt swapped for equity, options were issued at a $13 strike price, convertibles were issued with a convert price of $10 (Third Avenue did buy those) etc. Both ESL and Third Avenue contributed additional cash as well, not just their debt, for all of these different securities. There's really not much point in arguing about this. I used 67 cents on the dollar for ESL's debt purchases because it was reported in multiple media reports (some said "less than a billion" while others said "800M" so I used the $800M figure) and I didn't find anything to refute it. If you know of other, more reliable sources, please do share. I doubt anyone knows the exact price anyway.

[Guest wellmont]

the bonds were trading in the teens and 20s. this is from 2003 third ave first quarter report.

 

370,000 Kmart Corp. 7.72%, due 06/25/02 (a)* 53,650

235,000 Kmart Corp. 7.76%, due 07/02/02 (a)* 34,075

495,000 Kmart Corp. 7.77%, due 07/02/02 (a)* 71,775

180,000 Kmart Corp. 7.72%, due 07/08/02 (a)* 26,100

200,000 Kmart Corp. 7.50%, due 07/16/02 (a)* 29,000

446,000 Kmart Corp. 7.33%, due 07/31/02 (a)* 64,670

250,000 Kmart Corp. 7.47%, due 07/31/02 (a)* 36,250

75,000 Kmart Corp. 8.18%, due 11/24/03 (a)* 10,875

539,000 Kmart Corp. 8.19%, due 11/24/03 (a)* 78,155

1,481,000 Kmart Corp. 8.20%, due 11/24/03 (a)* 214,745

1,250,000 Kmart Corp. 8.13%, due 12/16/03 (a)* 181,250

269,000 Kmart Corp. 7.55%, due 07/27/04 (a)* 39,005

1,500,000 Kmart Corp. 8.375%, due 12/01/04 (a) (b)* 262,500

3,675,000 Kmart Corp. 12.50%, due 03/01/05 (a) (b)* 643,125

43,725,000 Kmart Corp. 9.375%, due 02/01/06 (a) (b)* 7,870,500

2,385,000 Kmart Corp. 8.28%, due 11/15/06 (a)* 345,825

549,000 Kmart Corp. 8.25%, due 11/20/06 (a)* 79,605

81,000 Kmart Corp. 8.26%, due 11/20/06 (a)* 11,745

1,050,000 Kmart Corp. 8.125%, due 12/01/06 (a)* 183,750

17,500,000 Kmart Corp. 9.875%, due 06/15/08 (a) (b)* 3,062,500

 

[tombgrt]

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.

 

To quote myself.. Here we are, discussing at what exact price level Lampert got SHLD and Kmart over a decade ago so that we can restart another discussion on whether or not Lampert is aligned enough with other shareholders based on this entry price.

 

 

Carry on...

[hyten1]

anyone own one of this http://www.dji.com/product/phantom-2-vision-plus

[adesigar]

this is what Third Avenue said about kmart deal. He says shares were issued at $10.

 

A: There was approximately $1 billion in Bank debt, $2.3 Billion in Bonds, $800M in preferred stock, and some amount of common which was essentially worthless. Also about $4 billion of trade creditors were outstanding. In contrast, in the quarter ended July 2003 (post reorganization), the company had $1.2

billion in cash. $50 million of mortgage debt and a $2.0 billion 3 year line of credit (not drawn) Also, post reorganization there were 90 million shares initially issued at around $10 per share but now trading at $27 or 28 per share for a nice gain.

Q#2 Is future profitability for KMART based on repositioning the entire strategy or just better operations?

 

There were a lot of moving parts... debt swapped for equity, options were issued at a $13 strike price, convertibles were issued with a convert price of $10 (Third Avenue did buy those) etc. Both ESL and Third Avenue contributed additional cash as well, not just their debt, for all of these different securities. There's really not much point in arguing about this. I used 67 cents on the dollar for ESL's debt purchases because it was reported in multiple media reports (some said "less than a billion" while others said "800M" so I used the $800M figure) and I didn't find anything to refute it. If you know of other, more reliable sources, please do share. I doubt anyone knows the exact price anyway.

 

Even though ESL's cost basis does not matters in the least bit about the future of SHLD. Did you include the Sears shares in your calculations?

 

To arrive at the correct cost basis you also need to factor in that ESL/RBS held shares of Sears during the merger.  ESL held Kmart Shares but they also had about 25 million shares of Sears Roebuck which were swapped for Kmart shares.

[peridotcapital]

this is what Third Avenue said about kmart deal. He says shares were issued at $10.

 

A: There was approximately $1 billion in Bank debt, $2.3 Billion in Bonds, $800M in preferred stock, and some amount of common which was essentially worthless. Also about $4 billion of trade creditors were outstanding. In contrast, in the quarter ended July 2003 (post reorganization), the company had $1.2

billion in cash. $50 million of mortgage debt and a $2.0 billion 3 year line of credit (not drawn) Also, post reorganization there were 90 million shares initially issued at around $10 per share but now trading at $27 or 28 per share for a nice gain.

Q#2 Is future profitability for KMART based on repositioning the entire strategy or just better operations?

 

There were a lot of moving parts... debt swapped for equity, options were issued at a $13 strike price, convertibles were issued with a convert price of $10 (Third Avenue did buy those) etc. Both ESL and Third Avenue contributed additional cash as well, not just their debt, for all of these different securities. There's really not much point in arguing about this. I used 67 cents on the dollar for ESL's debt purchases because it was reported in multiple media reports (some said "less than a billion" while others said "800M" so I used the $800M figure) and I didn't find anything to refute it. If you know of other, more reliable sources, please do share. I doubt anyone knows the exact price anyway.

 

Even though ESL's cost basis does not matters in the least bit about the future of SHLD. Did you include the Sears shares in your calculations?

 

To arrive at the correct cost basis you also need to factor in that ESL/RBS held shares of Sears during the merger.  ESL held Kmart Shares but they also had about 25 million shares of Sears Roebuck which were swapped for Kmart shares.

 

You are correct, the more accurate number would include the 31.1M shares of Sears Roebuck he also held (converted into about 18M SHLD shares plus cash). Those shares were bought in 2002-2003 at prices that could have been anywhere from 20 to 60, so it would be hard to pinpoint exactly (and I didn't even try to do so). So the actual cost basis would be higher due to that fact, but by how much exactly it's hard to say... a few points probably...

[Luke 532]

FWIW, from SHCRealty.com (as of 2/3/14), a list of operating stores:

3 BigK

1108 Kmart

752 Sears

3 Sears Essentials

8 Sears Grand

4 Sears Hardlines

27 Super Kmart

370 Auto Center (attached to KMart)

467 Auto Center (attached to Sears)

34 Auto Center (detached from KMart)

293 Auto Center (detached from Sears)

7 Auto Center (freestanding)

 

from SHCRealty.com (as of 5/23/14), a list of operating stores:

3015 All

3 BigK

1075 Kmart

744 Sears

3 Sears Essentials

8 Sears Grand

4 Sears Hardlines

27 Super Kmart

361 Auto Center (attached to KMart)

462 Auto Center (attached to Sears)

32 Auto Center (detached from KMart)

289 Auto Center (detached from Sears)

7 Auto Center (freestanding)

 

[ni-co]

This a 5 min part of a discussion about global RE at the Milken Global conference from last year. I found it very interesting what Peter Lowy, CEO of Westfield Group (owner of 38 malls in the US), had to say regarding online retailing and shopping in their malls:

 

 

To my ears, Lowy sounds a lot like Lampert.

[peridotcapital]

Kraven, it's like they did this just for you... :)

 

Sears Celebrates Dad's Day with Search for Best 'Stache in America:

http://searsholdings.mediaroom.com/index.php?s=16310&item=137291

[Kraven]

Kraven, it's like they did this just for you... :)

 

Sears Celebrates Dad's Day with Search for Best 'Stache in America:

http://searsholdings.mediaroom.com/index.php?s=16310&item=137291

 

Thank you for posting.  This just proves what I've been saying all along.  Sears is attempting to become a power in the mustache retail niche.  While they don't specifically refer to fake mustaches it is clear that they are making a major push there.  I recently spoke to IR and spent a few minutes with a nice woman on the phone.  She confirmed that Eddie "personally" is scouring the world for the best fake mustaches on the market.  I quote:  "Eddie has been gone from the office for weeks now on what we refer to internally as 'Project Stache'.  He has exquisite taste and I am confident that the American consumer will applaud his efforts."

 

However, Sears Longs, I have a bit of a concern.  I looked on Shop Your Way and while there is a tremendous selection of fake mustaches, they are significantly more expensive than the same ones on Amazon.  I asked IR about this and was told that while they can't say anything right now, expect an announcement very soon about "personal fittings and selection by professional fitters".  Sounds intriguing! 

 

I did suggest that the fake beard market is wide open right now and very complementary to the fake mustache area.  According to IR, they are well aware of this and Project Stache isn't just "one dimensional".  Hmmm. 

[Luke 532]

This a 5 min part of a discussion about global RE at the Milken Global conference from last year. I found it very interesting what Peter Lowy, CEO of Westfield Group (owner of 38 malls in the US), had to say regarding online retailing and shopping in their malls:

 

 

To my ears, Lowy sounds a lot like Lampert.

 

Sure does.  Thanks for posting.

[Luke 532]

Short interest update for those interested...

Short (as of 5/15/2014): 15.108M

Lampert/Berkowitz/Tisch: 80.348M

Outstanding: 106.451M

Float: 26.103M

Short interest as % of float: 57.9% (assuming zero shares are long-term oriented other than Lampert, Berkowitz, and Tisch).

 

[moody202]

This a 5 min part of a discussion about global RE at the Milken Global conference from last year. I found it very interesting what Peter Lowy, CEO of Westfield Group (owner of 38 malls in the US), had to say regarding online retailing and shopping in their malls:

 

 

To my ears, Lowy sounds a lot like Lampert.

 

Sure does.  Thanks for posting.

 

Thanks for posting. I just don't know if the model really applies to Sears as their stores are not where teenage girls would like to hang out!

[BTShine]

Question for the board. 

 

On page 32 of the 'Framework For Profit' SHLD posted last Thursday (http://searsholdings.com/invest/docs/Q1_2014_Webcast.pdf), it shows how some changes in the stores, such as the use of RFID in the apparel department and use of digital displays in the home appliances department, improved store sales by 5.8% and 5.6% respectively and margins improved by 5.9% and 3.6% respectively. 

 

So, here's my question:  If margins improved by 5.9% in apparel, and let's assume the apparel margins were 25% before the addition of RFID, do you infer that the new margin is approx. 26.5% or 31.9%?

 

25% * 1.059 = ~26.5%

 

or

 

25% + 5.9% = 30.9%

(Note - corrected my original post for this #)

 

As you know, the two numbers are VERY different when it comes to margins!  I have my belief as to what the right # is, but wanted to ask the board before giving my thoughts as I think it might bring out a better discussion.

 

 

[peridotcapital]

Question for the board. 

 

On page 32 of the 'Framework For Profit' SHLD posted last Thursday (http://searsholdings.com/invest/docs/Q1_2014_Webcast.pdf), it shows how some changes in the stores, such as the use of RFID in the apparel department and use of digital displays in the home appliances department, improved store sales by 5.8% and 5.6% respectively and margins improved by 5.9% and 3.6% respectively. 

 

So, here's my question:  If margins improved by 5.9% in apparel, and let's assume the apparel margins were 25% before the addition of RFID, do you infer that the new margin is approx. 26.5% or 31.9%?

 

25% * 1.059 = ~26.5%

 

or

 

25% + 5.9% = 30.9%

(Note - corrected my original post for this #)

 

As you know, the two numbers are VERY different when it comes to margins!  I have my belief as to what the right # is, but wanted to ask the board before giving my thoughts as I think it might bring out a better discussion.

 

It's the former. They are measuring revenue and gross profit dollars, not percentages. I would also question how they are attributing the entire delta to that one single factor (they better be using some sophisticated statistics software), especially given that neither digital signs nor rfid actually changes their wholesale cost of the product. They appear to be betting that better sales velocity is reducing the need to discount as many items by as much later on.

[BTShine]

Question for the board. 

 

On page 32 of the 'Framework For Profit' SHLD posted last Thursday (http://searsholdings.com/invest/docs/Q1_2014_Webcast.pdf), it shows how some changes in the stores, such as the use of RFID in the apparel department and use of digital displays in the home appliances department, improved store sales by 5.8% and 5.6% respectively and margins improved by 5.9% and 3.6% respectively. 

 

So, here's my question:  If margins improved by 5.9% in apparel, and let's assume the apparel margins were 25% before the addition of RFID, do you infer that the new margin is approx. 26.5% or 31.9%?

 

25% * 1.059 = ~26.5%

 

or

 

25% + 5.9% = 30.9%

(Note - corrected my original post for this #)

 

As you know, the two numbers are VERY different when it comes to margins!  I have my belief as to what the right # is, but wanted to ask the board before giving my thoughts as I think it might bring out a better discussion.

 

It's the former. They are measuring revenue and gross profit dollars, not percentages. I would also question how they are attributing the entire delta to that one single factor (they better be using some sophisticated statistics software), especially given that neither digital signs nor rfid actually changes their wholesale cost of the product. They appear to be betting that better sales velocity is reducing the need to discount as many items by as much later on.

 

Agreed. 

 

Clearly everything is an estimate and almost nothing is analyzed in a vacuum.  I agree with your assessment of the margin increase being the former, but I wouldn't be so skeptical on their internal analysis of stores with RFID vs not, and stores with digital displays vs. not.  It's not difficult for a company to analyze this stuff when they have a huge portfolio of stores. 

 

This is a small improvement that might have significant margin implications. A margin % increase by 1% or 2%  over a $20 Billion revenue base at Sears can equate to hundreds of millions improvement in EBITDA. 

 

Not a game changer, but a help.