SHLDQ - Sears Holdings Corp

[DTEJD1997]

From my experience, I don't think there is as much value as people think there is.

 

I've never really understood this strategy for investment analysis.  I know Lynch was a master at this stuff, but I just don't see how it is a prudent exercise to visit a few retail locations (which are expected to be crappy in areas like Detroit) and extrapolate that across the entire retail operation, much less the entirety of the holding company. 

 

I've found it's more useful to look to 3rd-party experiences.  For example, REIT executives like Sandeep Mathrani, Richard Sokolov, David Henry, Stephen Lebovitz, etc. have a much better perspective than I ever will.  Yes, one could argue they are biased because the better Sears' mall locations do, the better the malls do, but you get my point.  And those guys have claimed time and time again that we are currently in a period where "the demand is as good as it has ever been" (Sokolov, April 2013 Earnings Call).

 

Well, I'm sure those guys know more than I do...but I've travelled through several different states (MI, OH, TX, LA) and I can't ever recall seeing a good Kmart or Sears location (save one in Houston).  One that stands out as being valuable.  EVERY time I've seen them, they are in F, D or C grade locations.  They are always run down, and don't appear to be conducting much commerce.

 

I also think that in the years to come, commercial real estate in the USA will tend to lose value as more commerce moves online.

 

Perhaps SHLD owns lots of good locations in CA or NY...

[merkhet]

From my experience, I don't think there is as much value as people think there is.

 

I've never really understood this strategy for investment analysis.  I know Lynch was a master at this stuff, but I just don't see how it is a prudent exercise to visit a few retail locations (which are expected to be crappy in areas like Detroit) and extrapolate that across the entire retail operation, much less the entirety of the holding company. 

 

I've found it's more useful to look to 3rd-party experiences.  For example, REIT executives like Sandeep Mathrani, Richard Sokolov, David Henry, Stephen Lebovitz, etc. have a much better perspective than I ever will.  Yes, one could argue they are biased because the better Sears' mall locations do, the better the malls do, but you get my point.  And those guys have claimed time and time again that we are currently in a period where "the demand is as good as it has ever been" (Sokolov, April 2013 Earnings Call).

 

Well, I'm sure those guys know more than I do...but I've travelled through several different states (MI, OH, TX, LA) and I can't ever recall seeing a good Kmart or Sears location (save one in Houston).  One that stands out as being valuable.  EVERY time I've seen them, they are in F, D or C grade locations.  They are always run down, and don't appear to be conducting much commerce.

 

I also think that in the years to come, commercial real estate in the USA will tend to lose value as more commerce moves online.

 

Perhaps SHLD owns lots of good locations in CA or NY...

 

DTEJD1997, I had a few questions:

 

(1) Which one in Houston did you think was a good one?

(2) Do you remember if any of the crappier ones had wi-fi in the store?

[krazeenyc]

From my experience, I don't think there is as much value as people think there is.

 

I've never really understood this strategy for investment analysis.  I know Lynch was a master at this stuff, but I just don't see how it is a prudent exercise to visit a few retail locations (which are expected to be crappy in areas like Detroit) and extrapolate that across the entire retail operation, much less the entirety of the holding company. 

 

I've found it's more useful to look to 3rd-party experiences.  For example, REIT executives like Sandeep Mathrani, Richard Sokolov, David Henry, Stephen Lebovitz, etc. have a much better perspective than I ever will.  Yes, one could argue they are biased because the better Sears' mall locations do, the better the malls do, but you get my point.  And those guys have claimed time and time again that we are currently in a period where "the demand is as good as it has ever been" (Sokolov, April 2013 Earnings Call).

 

Well, I'm sure those guys know more than I do...but I've travelled through several different states (MI, OH, TX, LA) and I can't ever recall seeing a good Kmart or Sears location (save one in Houston).  One that stands out as being valuable.  EVERY time I've seen them, they are in F, D or C grade locations.  They are always run down, and don't appear to be conducting much commerce.

 

I also think that in the years to come, commercial real estate in the USA will tend to lose value as more commerce moves online.

 

Perhaps SHLD owns lots of good locations in CA or NY...

 

DT it's very easy to get a list of Sears' entire store/location list -- that gives you an idea of their higher value stores (hint look at their locations at A malls).    I personally attribute $0 value in all the C or worse locations in my investment thesis (knowing of course it's something greater than $0).  In the past 3 years Sears has sold 3 bottom end "A" mall stores -- these malls do appx $450 per sq ft inline sales -- one of the CBL malls did $530 or so.  They got about $350 per sq ft for the stores -- they even got that price for the leased location in Columbiana b/c their leases have economics like ownership.  In these cases they received top dollar since in each case the mall owner (CBLx2 and GGP x1) had something useful to do with the store immediately.  You can fairly easily get an estimate for just their A locations.  They have some incredible trophy properties in this list -- including for example 400,000 sq ft at South Coast Plaza which does $1K+ per sq ft in inline sales.

 

By the way A mall real estate is increasing in value right now and is at an all time high.

[Wilson-TPC]

Does Baker Street's position reduction concern any of you?

 

[Wilson-TPC]

I don't know if you guys followed Baker Street's position closely (I did), but he reduced his position from 9 million call option spreads of (originally 60 - 70 call spreads, now 50 - 60) down to 2 million call spreads...

 

He used to have a stock position, but his put option hedge took the shares away from him.

 

Expiration is January of 2015 fyi.

[alertmeipp]

How would the recent weakness in long term rate impact Shld?

 

I know an increase in rate will be a big plus for the pension short fall. So now the rate is decreasing,  will they have to put even more fund there?

[Aberhound]

This report of increased commercial real estate prices has to be good for the bull thesis. It is from Calculated Risk which I consider one of the more accurate and level headed of the macro economic data sites.

 

http://www.calculatedriskblog.com/2014/08/costar-commercial-real-estate-prices.html

 

On the recent comments on the Sears at the worse malls, why would Sears have any malls left at C and below? It is not like poor areas are getting richer, maps of income levels show the reverse. Blight spreads. Doesn't it harm the brand to keep lousy stores open? If they can't get out of the leases at least re-brand them as Kmart then drop prices so you have an excuse for deteriorating stores.

[Luke 532]

This report of increased commercial real estate prices has to be good for the bull thesis. It is from Calculated Risk which I consider one of the more accurate and level headed of the macro economic data sites.

 

http://www.calculatedriskblog.com/2014/08/costar-commercial-real-estate-prices.html

 

Thanks for posting the link.

 

On the recent comments on the Sears at the worse malls, why would Sears have any malls left at C and below? It is not like poor areas are getting richer, maps of income levels show the reverse. Blight spreads. Doesn't it harm the brand to keep lousy stores open? If they can't get out of the leases at least re-brand them as Kmart then drop prices so you have an excuse for deteriorating stores.

 

Check out this thread if you haven't already.  It shows progress of closing select locations: http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/shld-store-closures/

[peridotcapital]

On the recent comments on the Sears at the worse malls, why would Sears have any malls left at C and below? It is not like poor areas are getting richer, maps of income levels show the reverse. Blight spreads. Doesn't it harm the brand to keep lousy stores open? If they can't get out of the leases at least re-brand them as Kmart then drop prices so you have an excuse for deteriorating stores.

 

Most of the Sears stores are owned outright, so they are keeping them open because they don't pay rent and the property taxes are tax deductible (since Eddie is trying to turn this into a formidable retailer, he is keeping money-losing stores open). You are seeing most of the closings at Kmart because ~80% of those stores are leased, so they are simply letting the leases expire and vacating the properties. As for the brand image, the last 10 years tell us he really doesn't care about that (and oftentimes his musings indicate that he doesn't seem to understand that the Sears and Kmart brands are permanently impaired).

[alertmeipp]

I am just looking at JCP, up pretty nicely last few days as sss goes up. Still losing $$ etc..

 

Their short interest was 30 percent. Sky high but nothing compare to ours.

 

I am wondering how the market will react if we sss is actually up.

 

But for Sears, seems unlikely.

 

 

[Luke 532]

I am wondering how the market will react if we sss is actually up.

 

But for Sears, seems unlikely.

 

I think Sears domestic could follow-up last quarter with another positive comp, but I'd be surprised if Kmart started posting +SSS.

[alertmeipp]

I sure would hope so. JCP was considered to be going under last year. Now it is growing out of the issue,  trying to at least.

 

I hope we can have some positive operations to talk about rather than hoping for short squeeze here and there.

 

Hope the Syw will show us some efficiency this quarter.

[merkhet]

A few thoughts:

 

Not terribly worried about Baker Street lightening up. It looks like they picked up about $36 million in shares of Walter Investment Management this last quarter, so my guess is they sold down SHLD calls to buy WAC.

 

The weakness in interest rates is likely temporary. If memory serves, they're shooting for fully funded by 2019, and I think that before that's up, we'll likely have normalized interest rates.

 

I have no idea where SSS will be this quarter -- my best guess (and it's just a wild one) would be that we see some moderate improvement in SSS but we'll likely still see losses on a GAAP basis because I doubt ESL is done investing in SYW and the infrastructure. (Remember, some of that runs through the income statement as opposed to showing up as cap ex on the cash flow statement.)

 

If I were ESL, I would try to find ways not to show substantial improvement until I had negotiated a sale of Sears Canada, Sears Auto, Sears Home or all three -- so that I had substantial liquidity to take advantage of a depressed price.

[alertmeipp]

>>If I were ESL, I would try to find ways not to show substantial improvement until I had negotiated a sale of Sears Canada, Sears Auto, Sears Home or all three -- so that I had substantial liquidity to take advantage of a depressed price.

 

I was thinking he won't get a good price on those if people think he needed the money.

[merkhet]

>>If I were ESL, I would try to find ways not to show substantial improvement until I had negotiated a sale of Sears Canada, Sears Auto, Sears Home or all three -- so that I had substantial liquidity to take advantage of a depressed price.

 

I was thinking he won't get a good price on those if people think he needed the money.

 

I suspect it's a fine line to walk between keeping the share price depressed and getting the money to buy back shares -- I was thinking about Sears Canada recently, and I realized that a buyer would have to offer something above market price since half of it is publicly traded -- so that part is unlikely to go for a song.

 

EDIT: I suppose it's possible that a buyer could try to strike a deal for SHLD's share of SCC at lower than market if they didn't wish to take over all of it, but I doubt ESL would go for that.

[ERICOPOLY]

Does Baker Street's position reduction concern any of you?

 

I still don't really even know who that is.  It is like a Charlie Munger or someone of similar caliber?

[BTShine]

I doubt ESL is trying to keep the share price depressed.  I'd guess he'd rather have Sears Holdings be profitable and a higher stock price vs. unprofitable and a lower stock price IMO.

[tombgrt]

Does Baker Street's position reduction concern any of you?

 

I still don't really even know who that is.  It is like a Charlie Munger or someone of similar caliber?

 

No but it is a great song.

 

 

That has to count for something right?

[merkhet]

I doubt ESL is trying to keep the share price depressed.  I'd guess her rather have Sears Holdings be profitable and a higher stock price vs. unprofitable and a lower stock price IMO.

 

I disagree.

 

Perhaps I've been spending too much time looking over the Liberty entities that Malone controls, but I suspect that ESL is pretty similar to Malone when it comes to his preference on stock price.

[peridotcapital]

The Sears Canada earnings report this morning makes SHLD look like Wal-Mart. Absolutely dreadful. I don't see how anyone would offer a premium for that company. If Eddie could get immediate liquidity at market price he should take it. Given that first round bids were made in June and the second round was in July, maybe we'll get an announcement tomorrow with the SHLD earnings release.

[alertmeipp]

If you think esl will purposely depressed the price. Why buy now

[merkhet]

If you think esl will purposely depressed the price. Why buy now

 

For the same reason that I buy anything. It's at a discount to what I perceive as its intrinsic value.

 

My guess is you mean why not (1) figure out when he's going to stop and (2) buy before that. The answer is that I'm no good at (1), but I can still do (2).

[BTShine]

I doubt ESL is trying to keep the share price depressed.  I'd guess her rather have Sears Holdings be profitable and a higher stock price vs. unprofitable and a lower stock price IMO.

 

I disagree.

 

Perhaps I've been spending too much time looking over the Liberty entities that Malone controls, but I suspect that ESL is pretty similar to Malone when it comes to his preference on stock price.

 

Ok, you've got a great point.  He's fine with a lower share price in the short term (1-3 years) as it will allow us to buy back more shares.  My one thought is that he would overall prefer SHLD to be performing well (serving customers, making profitable sales, etc etc etc) and bringing in cash, even if that means a higher stock price, instead of draining cash and losing money.

[merkhet]

I doubt ESL is trying to keep the share price depressed.  I'd guess her rather have Sears Holdings be profitable and a higher stock price vs. unprofitable and a lower stock price IMO.

 

I disagree.

 

Perhaps I've been spending too much time looking over the Liberty entities that Malone controls, but I suspect that ESL is pretty similar to Malone when it comes to his preference on stock price.

 

Ok, you've got a great point.  He's fine with a lower share price in the short term (1-3 years) as it will allow us to buy back more shares.  My one thought is that he would overall prefer SHLD to be performing well (serving customers, making profitable sales, etc etc etc) and bringing in cash, even if that means a higher stock price, instead of draining cash and losing money.

 

I agree. We were just talking past one another.

 

You think he wants the company to be running well operationally. I agree.

I think he wants the share price to be below intrinsic value so he can buy back shares at some point.

 

The two statements above might not be mutually exclusive.

[BTShine]

I doubt ESL is trying to keep the share price depressed.  I'd guess her rather have Sears Holdings be profitable and a higher stock price vs. unprofitable and a lower stock price IMO.

 

I disagree.

 

Perhaps I've been spending too much time looking over the Liberty entities that Malone controls, but I suspect that ESL is pretty similar to Malone when it comes to his preference on stock price.

 

Ok, you've got a great point.  He's fine with a lower share price in the short term (1-3 years) as it will allow us to buy back more shares.  My one thought is that he would overall prefer SHLD to be performing well (serving customers, making profitable sales, etc etc etc) and bringing in cash, even if that means a higher stock price, instead of draining cash and losing money.

 

I agree. We were just talking past one another.

 

You think he wants the company to be running well operationally. I agree.

I think he wants the share price to be below intrinsic value so he can buy back shares at some point.

 

The two statements above might not be mutually exclusive.

Exactly.  Well said.