SHLDQ - Sears Holdings Corp

[Luke 532]

Number of Employees

 

FY2014 226000

FY2013 246000

FY2012 264000

FY2011 312000

FY2010 290000

FY2009 291000

FY2008 302000

FY2007 352000

FY2006 355000

 

Using the recent run rate of what looks like 20K employee/yr attrition, the simple math is that it'd take 10 years to reduce headcount. I guess if you want to be aggressive, you could assume 5 years (AMZN has around 120K employees). This is unscientific ballpark-type analysis, but it's just pointing out that it's more likely than not that the liquidation story will take place over years, not months.

 

That assumes that a full liquidation is the plan.  It also indirectly implies that value won't be received until the liquidation is complete (if this was the course of action the value would be extracted over time, not suddenly realized at point X in the future).  It also doesn't factor in that SHLD has been hiring certain positions (technology) while eliminating others.

[heth247]

Using the recent run rate of what looks like 20K employee/yr attrition, the simple math is that it'd take 10 years to reduce headcount. I guess if you want to be aggressive, you could assume 5 years (AMZN has around 120K employees). This is unscientific ballpark-type analysis, but it's just pointing out that it's more likely than not that the liquidation story will take place over years, not months.

 

This run-rate of 20K/yr attrition is for the plan of "reducing/optimizing asset footprint + retail transformation", not for a full-liquidation.

 

[BTShine]

I am, in fact, saying that it's possible that cutting certain types of advertising spending might have absolutely no impact on sales volumes. As I said a little over a month ago:

 

I came across something interesting today in a Freakonomics podcast from May 14, 2014. (https://itunes.apple.com/us/podcast/freakonomics-radio/id354668519?mt=2&i=313081767)

 

Levitt talks about a consulting gig where he's studying advertising for a large company. The company was uncertain whether newspaper insert ads were adding value or not, and Levitt suggested that they hand over 40 markets to him so that he could run an experiment. He wanted to randomly assign 20 markets to a group with no newspaper inserts for three months and keep the other 20 markets the same. Sounds good, right?

 

The immediate response was "Are you crazy? We can't not advertise in 20 markets. We'll all get fired!" As luck would have it, it turns out that, the previous year, a summer intern screwed up a purchase order and accidentally forgot to order inserts for a big chunk of Pittsburgh for an entire summer. (Natural experiment!) So they had data on whether this had an effect -- so they studied the data and found that there was no impact whatsoever.

 

Levitt then said, that's great. So let's do a larger experiment and give me the 40 markets. Their response? "Are you crazy? We can't not advertise in 20 markets. The CEO will kill us!" And so despite having some insight that the newspaper inserts might not work, five years later, they're still spending close to a billion dollars putting inserts into newspapers.

 

My mind immediately snapped to Sears and how people seem to vilify ESL for experimentation when, in fact, not experimenting is significantly worse.

 

Go to the podcast from 19:20 to 24:45, and you'll hear the story.

 

Absolutely.  Don't disagree with that. It's logical that less advertising generally leads to lower sales.  But, it's probably not in all cases and it doesn't mean that reducing advertising is a bad thing. 

 

In some cases people might be annoyed with some advertising (too much, not attractive ads, not engaging ads, etc.) so I can see how it would have a negative, or non-existent, correlation.

[Luke 532]

If assets have to be sold quickly to fund losses, our equity value will suffer. If Eddy is able to stabilize sales, which he seems to be doing, we will be in great shape. If Eddy is able to demonstrate sustainable growth, we will have a home run.

 

This investment is not likely to work next week, next month, or even next year. But it will likely work eventually given that we aren't going to lose much if Eddy can't stabilize the ship. I like those odds.

 

A great bottom-line quick-and-dirty summary.  I would welcome more frequent posts from FocusInvestor.

[adesigar]

So I have been using the Shop You Way, Kmart, Sears sites after these initial purchases. I noted a few more things. Again this is anecdotal and the possibly biased view of a SHLD bull.

 

1. I bought a couple more things from Sears/Kmart. And will be ordering more. The constant rotating points basically make it such that when I factor in points the cost of items at Sears/Kmart is cheaper than other retailers.

 

2. Sears will sell products where the cost of the item is less than what you receive in SYW points. eg A $2-$7 item giving $10 in points or a $35 headphone giving $40 in points.

http://slickdeals.net/f/7086974-10-sears-sywr-points-w-purchase-of-select-products-from-2-free-store-pick-up

http://slickdeals.net/f/7074322-nakamichi-nc40-noise-cancelling-headphones-black-40-shop-your-way-points-35-free-store-pickup

 

3. Sears can price items at full retail and give points to make it appear cheaper than other retailers because of the points.

http://slickdeals.net/f/7090932-16gb-asus-memo-pad-7-android-tablet-various-colors-59-shop-your-way-points-149-free-shipping

http://slickdeals.net/f/7081800-sears-com-nakamichi-nc40-noise-cancelling-headphones-40-60-shop-your-way-points-for-60?v=1

 

4. It seemed to me that they rapidly chance promotions/pricing based on when points are given vs when they are expiring. Note the headphones linked in points 2 and 3 are the same but wildly different pricing/deals in a short period of time.

 

5. They seem to keep handing out small amount of points with short expiration durations, surprise points and deals to keep customers coming back. I guess its their version of Costco's treasure hunt.

 

One funny thing occoured to me. The earned points (not the free points) are basically like a small amount of float. Customers pay for it up front. If they redeem them its like insurance payout. If they don't redeem them its like underwriting profit. They are considered liablities but are in essence free money for Sears to use, as long as the amount of points earned is the same as the amount redeemed.

 

[ni-co]

One funny thing occoured to me. The earned points (not the free points) are basically like a small amount of float. Customers pay for it up front. If they redeem them its like insurance payout. If they don't redeem them its like underwriting profit. They are considered liablities but are in essence free money for Sears to use, as long as the amount of points earned is the same as the amount redeemed.

 

This is a great point – think: Blue Chip Stamps. And you can be sure that Lampert has been thinking exactly about this aspect of a reward program.

[FCharlie]

Open question to all:

 

If Sears Holdings were profitable as they were in 2008,2009,2010... earning about $100 million annually, and about $400 million FCF annually after adding back depreciation.... and they were still doing the real estate transformation as they are today... signing up tenants, subdividing space, etc... and they were still buying back stock the way they used to....

 

How much of your portfolio would you have invested in SHLD?

 

 

For me, considering the overall levels of the market today... if the scenario above were true, SHLD would be a 50%+ position.

 

 

[peridotcapital]

Open question to all:

 

If Sears Holdings were profitable as they were in 2008,2009,2010... earning about $100 million annually, and about $400 million FCF annually after adding back depreciation.... and they were still doing the real estate transformation as they are today... signing up tenants, subdividing space, etc... and they were still buying back stock the way they used to....

 

How much of your portfolio would you have invested in SHLD?

 

 

For me, considering the overall levels of the market today... if the scenario above were true, SHLD would be a 50%+ position.

 

Without telling us what price you assume SHLD would be trading at today in that scenario, there is no way to answer that question.

[heth247]

So I have been using the Shop You Way, Kmart, Sears sites after these initial purchases. I noted a few more things. Again this is anecdotal and the possibly biased view of a SHLD bull.

 

1. I bought a couple more things from Sears/Kmart. And will be ordering more. The constant rotating points basically make it such that when I factor in points the cost of items at Sears/Kmart is cheaper than other retailers.

 

2. Sears will sell products where the cost of the item is less than what you receive in SYW points. eg A $2-$7 item giving $10 in points or a $35 headphone giving $40 in points.

http://slickdeals.net/f/7086974-10-sears-sywr-points-w-purchase-of-select-products-from-2-free-store-pick-up

http://slickdeals.net/f/7074322-nakamichi-nc40-noise-cancelling-headphones-black-40-shop-your-way-points-35-free-store-pickup

 

3. Sears can price items at full retail and give points to make it appear cheaper than other retailers because of the points.

http://slickdeals.net/f/7090932-16gb-asus-memo-pad-7-android-tablet-various-colors-59-shop-your-way-points-149-free-shipping

http://slickdeals.net/f/7081800-sears-com-nakamichi-nc40-noise-cancelling-headphones-40-60-shop-your-way-points-for-60?v=1

 

4. It seemed to me that they rapidly chance promotions/pricing based on when points are given vs when they are expiring. Note the headphones linked in points 2 and 3 are the same but wildly different pricing/deals in a short period of time.

 

5. They seem to keep handing out small amount of points with short expiration durations, surprise points and deals to keep customers coming back. I guess its their version of Costco's treasure hunt.

 

One funny thing occoured to me. The earned points (not the free points) are basically like a small amount of float. Customers pay for it up front. If they redeem them its like insurance payout. If they don't redeem them its like underwriting profit. They are considered liablities but are in essence free money for Sears to use, as long as the amount of points earned is the same as the amount redeemed.

 

Thanks for sharing. I believe this shows what SYW is really about.  It is not your ordinary rewards program. It is about big-data analysis and real-time adaptive individual marketing/promotion.  I think that is what Eddie mean by "we can build a better mouse-trap".

[Scudbucket]

One funny thing occoured to me. The earned points (not the free points) are basically like a small amount of float. Customers pay for it up front. If they redeem them its like insurance payout. If they don't redeem them its like underwriting profit. They are considered liablities but are in essence free money for Sears to use, as long as the amount of points earned is the same as the amount redeemed.

 

This is a great point – think: Blue Chip Stamps. And you can be sure that Lampert has been thinking exactly about this aspect of a reward program.

 

Can you explain to me the thinking behind earned points are like insurance float?  I'm not quite following.  My understanding of how the point system could be wrong though and that might be the problem.  Here's an example we can use to illustrate: 

 

Item cost Sears $10.

Sears sells the item for $11.

Customer buys it for $11 and gets $1 in points.

$11 booked as revenue.

$10 COGS.

$1 Profit.

$1 point is booked as a liability.

Because there is no extra cash associated with the $1 point liability, how is it acting as float.  Unless you're saying the $1 profit is now the float?

 

Thanks.

[sampr01]

Bonus SYW points will expire in 2 weeks, if you don't use them. If not used, liability goes away in two weeks  ;)

[Scudbucket]

Ok, so the liability goes away.  Then the gross profit is as if there were no points to begin with.  Right?

[texual]

The point of Sears Holdings is to achieve permanent capital and ownership by a hedge fund in order to spin out components that can stand alone, or to buy other companies. So far that strategy did not work for Eddie Lampert since the real estate in the USA imploded and has yet to recover. He cannot sell products to a dying customer base, and he cannot sell hard goods in this environment as easily as before since the stores are not popular as they were decades ago. The only choice he has is to build something like SYW and try to put some gasoline on the dying fire.

 

And this is a dying fire. It has been for years but I didn't think anything would come of it. But you know, SYW might have some lasting power, or can be a viable online retailer that grows. Maybe on the end Amazon will look at SHLD as exactly the kind of retailer they would like to be - one that has brick and mortar presence and showrooms that allow it to just sell to more customers. Look for AMZN to begin something like that. Sears already has about 100 years on them when it comes to owning a retail network. If it doesn't work, the permanent capital vehicle is the only thing left to save us.

 

 

The Sears story continues.

[Luke 532]

But you know, SYW might have some lasting power, or can be a viable online retailer that grows. Maybe on the end Amazon will look at SHLD as exactly the kind of retailer they would like to be - one that has brick and mortar presence and showrooms that allow it to just sell to more customers. Look for AMZN to begin something like that. Sears already has about 100 years on them when it comes to owning a retail network. If it doesn't work, the permanent capital vehicle is the only thing left to save us.

 

SYW or bust?  Maybe on the retail side of the holdings company that argument could be made... but certainly not on the entirety of SHLD.  If that were to be the case you'd have to argue the real estate, brands, inventory net of payables, etc. cumulatively have $0 in value.

[Mephistopheles]

"SYW or bust?  Maybe on the retail side of the holdings company that argument could be made... but certainly not on the entirety of SHLD.  If that were to be the case you'd have to argue the real estate, brands, inventory net of payables, etc. cumulatively have $0 in value."

 

You're right, it's not $0 in value. The problem is that the retail side continues to burn a sizeable hole in the valuable parts quarter after quarter in both direct ways (store closing and real estate sales used to fund SYW), and indirectly (KCD brand value being eroded as less and less people shop at Sears).

 

Ps does anyone know how to quote messages on the mobile site?

[ni-co]

One funny thing occoured to me. The earned points (not the free points) are basically like a small amount of float. Customers pay for it up front. If they redeem them its like insurance payout. If they don't redeem them its like underwriting profit. They are considered liablities but are in essence free money for Sears to use, as long as the amount of points earned is the same as the amount redeemed.

 

This is a great point – think: Blue Chip Stamps. And you can be sure that Lampert has been thinking exactly about this aspect of a reward program.

 

Can you explain to me the thinking behind earned points are like insurance float?  I'm not quite following.  My understanding of how the point system could be wrong though and that might be the problem.  Here's an example we can use to illustrate: 

 

Item cost Sears $10.

Sears sells the item for $11.

Customer buys it for $11 and gets $1 in points.

$11 booked as revenue.

$10 COGS.

$1 Profit.

$1 point is booked as a liability.

Because there is no extra cash associated with the $1 point liability, how is it acting as float.  Unless you're saying the $1 profit is now the float?

 

Thanks.

 

You're correct, it is a liability. Yet, so is float. This has nothing to do with points expiring or not. The whole point of float is that it's cash paid to you upfront that you might (or even will) have to pay back later. It's borrowing from your customers "for free".

 

You can easily see this in your example, in which SHLD wouldn't make a profit on the sale itself, but could turn it into a profitable sale nonetheless by investing the money it gets paid upfront. So even if you assume that SYW points didn't expire, SHLD gets to use $1 ($11-$10) in the time between the customer's payment and the redemption of the points. This is $1 for SHLD to invest in the meantime.

 

Most customers are going to think that they get the product without SHLD turning a profit but forget that a part of the money they paid to SHLD is "trapped". This adds up if you're doing $36bn in revenue. Extrapolating from your example, SHLD would always have more than $3bn of free float – and in this respect it works just like an insurance company.

[ZenaidaMacroura]

Vampire squid's take on walmart:

 

http://finance.yahoo.com/news/goldman-sachs-predicts-slow-decline-155938906.html

 

I thought it was interesting since we touched on walmart comps vs sears.  Also mentions walmart looking at ways to redress the decline such as online and omni channel...

[heth247]

For those who can read French, here's a good summary of the bull thesis on SHLD by a top notch value investor from France:

 

http://club.berichcorp.com/wp-content/uploads/2014/05/Apart%C3%A9-de-lIF-Juin-2014.pdf

 

Thanks for sharing this wonderful reading. My favorite part is the following (per Google translation):

 

"I see. In this regard, we often read that Eddie Lampert would be the new Warren Buffett ... We read it before it arrives at Sears. Today, it is often bad is that Lampert is a moron and a incapable. And if you really wanted Lampert compare with someone, for me it would be with John Malone. Both derive from the same way: a lot of spin-offs, the

releveraging, tax optimization and a permanent arbitration to Activities stronger ROI. Its debt spin-offs to the neck to raise liquidity at the holding company level, it is Malone method ... This is what he always at Liberty. It is also that Lampert made ​​Sears. Before

sell Lands' End, the debt the entity up to $ 500 million ... Then he uses the cash received for other investments in There holding ... It represents more than one tenth of the capitalization when same! If that, it is not called to create value..."

[Mephistopheles]

^ The problem is that the "other investments" is a retailer trying to compete with Amazon and Wal-Mart. Maybe it'll work, maybe not. It would be different if he took the $500 million and invested it in some good stocks.

[texual]

Can you see a time in the future when Sears just becomes Shop Your Way?

 

I mean the Kmart in-store-pick-up just added thousands of stores to the network. Also you can return items between both stores... in many ways both store brands are just becoming a hybrid. And maybe ShopYourWay is just the direction both stores will eventually become. Eventually? 

 

Also can anyone actually understand what the translation of that document means? It is pretty cryptic using google translator. I was pretty upset when I just couldn't figure out what exactly he was suggesting. Where is Bruce Berkowitz when you need one of those simple and elegant explanations about Sears... he has been awfully quiet as of late.

 

 

[Luke 532]

Where is Bruce Berkowitz when you need one of those simple and elegant explanations about Sears... he has been awfully quiet as of late.

 

6 months ago: "Fairholme research estimates that the fair value of Sears’ net assets exceeds $150 per share. If our research is accurate, we expect Sears’ market price of $38 to increase to this value over time."

[Scudbucket]

One funny thing occoured to me. The earned points (not the free points) are basically like a small amount of float. Customers pay for it up front. If they redeem them its like insurance payout. If they don't redeem them its like underwriting profit. They are considered liablities but are in essence free money for Sears to use, as long as the amount of points earned is the same as the amount redeemed.

 

This is a great point – think: Blue Chip Stamps. And you can be sure that Lampert has been thinking exactly about this aspect of a reward program.

 

Can you explain to me the thinking behind earned points are like insurance float?  I'm not quite following.  My understanding of how the point system could be wrong though and that might be the problem.  Here's an example we can use to illustrate: 

 

Item cost Sears $10.

Sears sells the item for $11.

Customer buys it for $11 and gets $1 in points.

$11 booked as revenue.

$10 COGS.

$1 Profit.

$1 point is booked as a liability.

Because there is no extra cash associated with the $1 point liability, how is it acting as float.  Unless you're saying the $1 profit is now the float?

 

Thanks.

 

You're correct, it is a liability. Yet, so is float. This has nothing to do with points expiring or not. The whole point of float is that it's cash paid to you upfront that you might (or even will) have to pay back later. It's borrowing from your customers "for free".

 

You can easily see this in your example, in which SHLD wouldn't make a profit on the sale itself, but could turn it into a profitable sale nonetheless by investing the money it gets paid upfront. So even if you assume that SYW points didn't expire, SHLD gets to use $1 ($11-$10) in the time between the customer's payment and the redemption of the points. This is $1 for SHLD to invest in the meantime.

 

Most customers are going to think that they get the product without SHLD turning a profit but forget that a part of the money they paid to SHLD is "trapped". This adds up if you're doing $36bn in revenue. Extrapolating from your example, SHLD would always have more than $3bn of free float – and in this respect it works just like an insurance company.

 

Suppose there is another company selling an item that cost $10 for $11.  There are no expiring points involved.  Do you consider that $1 float as well?

 

To me, I don't consider it float because there isn't any extra cash flow associated with the sale above the normal margin.  If customers paid to buy points independently of an item, then yes, I would consider it float because the company would receive cash in exchange for a liability, like a gift card.  With Sears, the points act as an enticement that can potentially eat up margin later on, but since Sears doesn't receive any extra cash at the time of the sale, it isn't float.

 

Does that make any sense or am I alone in my thinking?

[ZenaidaMacroura]

One funny thing occoured to me. The earned points (not the free points) are basically like a small amount of float. Customers pay for it up front. If they redeem them its like insurance payout. If they don't redeem them its like underwriting profit. They are considered liablities but are in essence free money for Sears to use, as long as the amount of points earned is the same as the amount redeemed.

 

This is a great point – think: Blue Chip Stamps. And you can be sure that Lampert has been thinking exactly about this aspect of a reward program.

 

Can you explain to me the thinking behind earned points are like insurance float?  I'm not quite following.  My understanding of how the point system could be wrong though and that might be the problem.  Here's an example we can use to illustrate: 

 

Item cost Sears $10.

Sears sells the item for $11.

Customer buys it for $11 and gets $1 in points.

$11 booked as revenue.

$10 COGS.

$1 Profit.

$1 point is booked as a liability.

Because there is no extra cash associated with the $1 point liability, how is it acting as float.  Unless you're saying the $1 profit is now the float?

 

Thanks.

 

You're correct, it is a liability. Yet, so is float. This has nothing to do with points expiring or not. The whole point of float is that it's cash paid to you upfront that you might (or even will) have to pay back later. It's borrowing from your customers "for free".

 

You can easily see this in your example, in which SHLD wouldn't make a profit on the sale itself, but could turn it into a profitable sale nonetheless by investing the money it gets paid upfront. So even if you assume that SYW points didn't expire, SHLD gets to use $1 ($11-$10) in the time between the customer's payment and the redemption of the points. This is $1 for SHLD to invest in the meantime.

 

Most customers are going to think that they get the product without SHLD turning a profit but forget that a part of the money they paid to SHLD is "trapped". This adds up if you're doing $36bn in revenue. Extrapolating from your example, SHLD would always have more than $3bn of free float – and in this respect it works just like an insurance company.

 

Suppose there is another company selling an item that cost $10 for $11.  There are no expiring points involved.  Do you consider that $1 float as well?

 

To me, I don't consider it float because there isn't any extra cash flow associated with the sale above the normal margin.  If customers paid to buy points independently of an item, then yes, I would consider it float because the company would receive cash in exchange for a liability, like a gift card.  With Sears, the points act as an enticement that can potentially eat up margin later on, but since Sears doesn't receive any extra cash at the time of the sale, it isn't float.

 

Does that make any sense or am I alone in my thinking?

I know what you're getting at but I think you're arriving at your conclusion because of the specifics you chose for your example.

 

Suppose for example SHLD is selling an item that cost $10 for $12 but offering $1 in SYW points which is comparable to another company selling an item that cost $10 for $12 (but running a $1 discount promotion).  The float is more apparent now - no?

 

 

[TeddyLampert]

 

To me, I don't consider it float because there isn't any extra cash flow associated with the sale above the normal margin.  If customers paid to buy points independently of an item, then yes, I would consider it float because the company would receive cash in exchange for a liability, like a gift card.  With Sears, the points act as an enticement that can potentially eat up margin later on, but since Sears doesn't receive any extra cash at the time of the sale, it isn't float.

 

Does that make any sense or am I alone in my thinking?

 

It's up for debate whether SYW earned points is some kind of float. There are some superficial similarities that have been mentioned (e.g. it sits as a liability on the B/S just like float and it is a loyalty program like Blue Chip Stamps), but when it boils down to WEB's important questions about float (that 1, it is close to cost-less, and 2, it is enduring), these SYW points don't seem to be a valuable form of float (if it even is float).

 

There is a large cost to that float, namely the reduced margins the business can currently earn. The enduring nature of this supposed float is theoretically related to the longer term competitive advantage of the retail business, which so far seems absent to me.

 

Lastly, the arguments in favor of this being float seem circular to me. The points are meant to encourage more shopping in the future, but float proponents are also suggesting that they would rather not see these points to be used, forgotten in the back of a drawer like a booklet of Blue Chip stamps.   

 

[heth247]

There is a large cost to that float, namely the reduced margins the business can currently earn. The enduring nature of this supposed float is theoretically related to the longer term competitive advantage of the retail business, which so far seems absent to me.

 

In the French value investor's words, he called it "voluntary cash burn".