SHLDQ - Sears Holdings Corp

[peridotcapital]

Should be an interesting earnings release tomorrow. I went back and looked to see what FCF (excluding pension contributions) was in Q2 2013 and it was positive $29 million. I hope for the bulls sake that we see some year-over-year improvement.

 

Second quarter FCF was negative $138 million (excluding the impact of pension contributions, which were an additional $103 million). Cash burn is getting worse, not better.

 

Not sure how people expected operations to improve vs last year given that Lands End was spun off. Expect operations to be terrible until the store base is much smaller, store size is much smaller, and the amount of subleased real estate is much larger.

 

Lands End barely generates any cash outside of the fourth quarter, so that had very little to do with SHLD's FCF falling $167 million year-over-year in Q2. What it reinforces is that SYW is not "making progress."

 

What I find interesting is that SHLD only has $240M available on their revolver heading into Q3 -- when they will typically burn through tons of cash for holiday inventory building. The Sears Canada proceeds become even more important now. I wonder if that will impact what they buy for Q4 inventory, which may in turn impact Q4 financial performance.

[peridotcapital]

Senior Secured Notes

 

At August 2, 2014, Mr. Lampert and ESL held an aggregate of $205 million of principal amount of the Company's 6 5/8% Senior Secured Notes due 2018 (the "6 5/8%" Notes") and $3 million of principal amount of unsecured notes issued by SRAC (the "Subsidiary Notes"). At August 3, 2013 and February 1, 2014, Mr. Lampert and ESL held an aggregate of $95 million of principal amount of 6 5/8% Notes and $3 million of principal amount of Subsidiary Notes.

 

ESL has more than doubled its position in SHLD debt this year.

[elevensecsrt4]

I added more today on the drop I'm comfortable with margin of safety at a $33.xx share price.

[alertmeipp]

Reality check. Anyone see sign that syw is working?

 

 

[ERICOPOLY]

And of course not to mention the whopping buyback program of a whole...zero dollars.

 

There is no "excess cash" to return to shareholders.  There won't be a buyback until there is.

[Guest wellmont]

Senior Secured Notes

 

At August 2, 2014, Mr. Lampert and ESL held an aggregate of $205 million of principal amount of the Company's 6 5/8% Senior Secured Notes due 2018 (the "6 5/8%" Notes") and $3 million of principal amount of unsecured notes issued by SRAC (the "Subsidiary Notes"). At August 3, 2013 and February 1, 2014, Mr. Lampert and ESL held an aggregate of $95 million of principal amount of 6 5/8% Notes and $3 million of principal amount of Subsidiary Notes.

 

ESL has more than doubled its position in SHLD debt this year.

 

not what bulls want to see. control shareholder accumulating the most senior securities.....and not the stock.

[abitofvalue]

I wouldn't get too excited by the improving SSS numbers at Sears. The 330 bps decline in gross margin at Sears indicates these guys are just giving stuff away ("SYW investments"). Buying sales at the expense of cash flow is going to make the problems at SHLD worse.  K-mart of course managed to experience a 250bps+ decline too.

 

Also - what the heck is with the comment re "ex electronics & consumables trends are good" - too bad that's most of your business.

 

The metric of percentage of sales to SYW members is terribly misleading - more valuable would be the trend of average sales per SYW member and number of SYW members. The sales to SYW members is meaningless and I hope that ESL has the sense to know better than to be using it. The constant references to tho metric do make me wonder if mgmt actually thinks its meaningful and shows progress towards being a "member focused" company.

 

As ESL said these results are not acceptable. More importantly for investors these numbers are simply not sustainable and the transformation continues to be far off.

 

We must accept that as brilliant / rational as Eddie may be - this could be a case of good manager meeting terrible business and the reputation of the business prevailing.

 

Otoh worsening of retail could be a good thing as it could speeden the move to monetizing real estate and abandoning this retail transformation plan that is going nowhere.

 

 

[ni-co]

Reality check. Anyone see sign that syw is working?

 

This is the 64K question. It's difficult (impossible?) to judge from the outside as long as they don't reduce traditional promotions in a meaningful way. At least there is strong online sales growth, though. But we don't know how far SYW is responsible for it.

[Guest wellmont]

Reality check. Anyone see sign that syw is working?

 

"the magician" wants you to focus on the misdirection. but if you do you miss the main event. SHLD is an awful business.

[enoch01]

Reality check. Anyone see sign that syw is working?

 

No.  He's doing this to try and generate float.  The problem, I suspect, is that not enough are willing to pay up for these points.

[peridotcapital]

Slide 7 of the deck released today, 3rd section:

Plan To Take Actions To Enhance Our Financial Flexibility

 

*Inventory reductions of $1.7B over past 3 years via store closings and productivity will alter our reliance on inventory as the primary form of collateral in our capital structure

 

*In the next 6 – 12 months, we intend to work with our lenders and others to evaluate our capital structure with a goal of achieving more long-term flexibility and may act sooner if appropriate

 

*We have a large, valuable, diverse and unencumbered set of assets and businesses

 

Anybody else read this to mean that they know their revolver to be going away as more and more stores close, and therefore they are going to borrow against the real estate to fund the business? If that would not be a signal that Eddie is all-in on SYW, I'm not sure what would...

 

EDIT: Well, this is on slide 14:

 

"We have substantial unencumbered real estate portfolio and there are numerous forms of transactions that we believe we

could take advantage of to provide additional liquidity"

[bmichaud]

Slide 7 of the deck released today, 3rd section:

Plan To Take Actions To Enhance Our Financial Flexibility

 

*Inventory reductions of $1.7B over past 3 years via store closings and productivity will alter our reliance on inventory as the primary form of collateral in our capital structure

 

*In the next 6 – 12 months, we intend to work with our lenders and others to evaluate our capital structure with a goal of achieving more long-term flexibility and may act sooner if appropriate

 

*We have a large, valuable, diverse and unencumbered set of assets and businesses

 

Anybody else read this to mean that they know their revolver to be going away as more and more stores close, and therefore they are going to borrow against the real estate to fund the business? If that would not be a signal that Eddie is all-in on SYW, I'm not sure what would...

 

EDIT: Well, this is on slide 14:

 

"We have substantial unencumbered real estate portfolio and there are numerous forms of transactions that we believe we

could take advantage of to provide additional liquidity"

 

Loading LE with debt and going all-in on the SWY "transformation" at the annual meeting was the signal, IMO...as you pointed out back then, Chad.

[alertmeipp]

I dont see any sign that SYW is working and we wont until they shut off the traditional expenses so to speak.

 

Online is tough area to compete.

 

The thing is I dont sense any urgency from the release.

 

Still unacceptable still transforming but what he is doing to fix it.

 

The fact that he adds to debt is worrying.

 

I was thinking he will not kill the margin to get revenue which kills cash even faster.  But he did. Last push to syw or what.

 

 

 

[peridotcapital]

I dont see any sign that SYW is working and we wont until they shut off the traditional expenses so to speak.

 

Online is tough area to compete.

 

The thing is I dont sense any urgency from the release.

 

Still unacceptable still transforming but what he is doing to fix it.

 

The fact that he adds to debt is worrying.

 

I was thinking he will not kill the margin to get revenue which kills cash even faster.  But he did. Last push to syw or what.

 

Why make changes? We're going to keep doing the same thing because it's working! :)

[tng]

I dont see any sign that SYW is working and we wont until they shut off the traditional expenses so to speak.

 

Online is tough area to compete.

 

The thing is I dont sense any urgency from the release.

 

Still unacceptable still transforming but what he is doing to fix it.

 

The fact that he adds to debt is worrying.

 

I was thinking he will not kill the margin to get revenue which kills cash even faster.  But he did. Last push to syw or what.

 

A lot of people don't seem to understand that this is a dying business. Eddie is doing the right things, but no matter who you have at the helm of the buggy-whip business, it is going away after the automobile was invented. Eddie cannot just fire 250k people and shut the doors overnight. It's analogous to when Buffett brought Berkshire Hathaway, he was stuck running a textile mill (a dying business) for a long time. He can't just liquidate it overnight. Eddie brought some cheap real estate in Sears, but now he is stuck running Sears for a long time. I think at this price, there is profit to be made in the long run, but that profit isn't coming any time soon. It cannot be fixed. All of these "middle-man" retailers are getting squeezed. The only retailers are are succeeding are companies like Apple where the store is mainly a service center and they are selling a brand. All the retailers that are middle-men in transactions, where they buy stuff from a manufacturer and they try to sell it at a mark up, are getting squeezed to death because people are buying it online now. Amazon has made the storefront obsolete, the only guys that are not dying are the ones that create their own product to put in the stores. If the store serves as a middle man, Amazon does it more efficiently and at near zero margin.

 

Shutting everything down right now is not an option. SHLD has to limp around as it slowly unwinds. That's just the way it is. But money can be made if the price is cheap enough.

[TeddyLampert]

Slide 7 of the deck released today, 3rd section:

Plan To Take Actions To Enhance Our Financial Flexibility

 

*Inventory reductions of $1.7B over past 3 years via store closings and productivity will alter our reliance on inventory as the primary form of collateral in our capital structure

 

*In the next 6 – 12 months, we intend to work with our lenders and others to evaluate our capital structure with a goal of achieving more long-term flexibility and may act sooner if appropriate

 

*We have a large, valuable, diverse and unencumbered set of assets and businesses

 

Anybody else read this to mean that they know their revolver to be going away as more and more stores close, and therefore they are going to borrow against the real estate to fund the business? If that would not be a signal that Eddie is all-in on SYW, I'm not sure what would...

 

EDIT: Well, this is on slide 14:

 

"We have substantial unencumbered real estate portfolio and there are numerous forms of transactions that we believe we

could take advantage of to provide additional liquidity"

 

Loading LE with debt and going all-in on the SWY "transformation" at the annual meeting was the signal, IMO...as you pointed out back then, Chad.

 

Attending the annual meeting (refer to my notes from May) and getting the sense that he was going whole hog into the transformation was the signal for me to exit... that and a few other things that really bothered me.* I thought Sears in 2014/15 would be the golden age of Eddie Lampert the Special Situation Magician (who would finally start to unlock the NAV), and when I realized that it was not, I decided that it was better to sit on the sidelines and observe than to participate in his retail experimentation.

 

*

-the fact that Eddie admitted to a questioner that he does not spend all his time as CEO of SHLD as he's also running ESL and god knows what other billionaire pet projects

-the fact that they showed a video of some stores and showed some basic retail technology that's probably been around for ages (scanning radio frequency tags to manage inventory) and heralded this as if it were some major improvement

-the fact that I sat next to a director of SHOS (a friend of a friend), who served as Eddie's analyst back in the days of ESL, and just got a really really creepy sense that SHLD is being run by a bunch of ivy-league Manhattanite braniacs who are great stock analysts and believe in social media, big data analytics, etc. but are not great business operators. This one was a bit of a personal bias and has nothing to do with SHLD's fundamentals I readily admit. You just have to be there to feel that it was midtown manhattan parachuting into Hoffman estates for a day to know what I'm talking about

-the fact that Eddie said anytime you conduct radical surgery, you're going to feel pain (to me this seemed like he was telling all of us that tings were going to get worse before getting better... in fact he might have used these words)

-the fact that he has not articulated what SHLD's competitive advantage is or will be

-the fact that the guy from Force Capital asked the CFO a question about reducing the store network and the CFO did a "whoa, that's not what I said!" routine

-the fact that I have read over and over that retail is a hard business run by smart people who have to be smart every day (cf. Buffett, Pabrai, Big Name Investor 3, Big Name Investor 4, etc...)

-the fact that the author of the page-turning Baker St. power-point deck bailed out in a too-clever-by-half way playing an options hedged game

-the fact that no Sears Canada and Sears Auto transaction has been forthcoming

-the fact that Eddie couldn't answer a straight question about stock buy backs at the annual meeting when asked directly (saying to the questioner, "we have to satisfy x, y, z conditions, so with those clues, you figure it out")

-etc. etc. 

 

 

[jeffmori7]

Hey Chad, I really appreciate your critical view of Sears. Thanks for your contribution on this threat, it is really appreciated.

 

Long question for you: what would you do if you were Lampert right now? What would be your moves, how would you act differently? Or let's rephrase it..what do you like that he does and what you don't like? Thanks.

[focusinvestor]

I think the question that every Sears shareholder needs to consider the following?

 

1) Given that every other major retailer has had difficult comparable sales numbers, how is a supposedly "near-death" retailer issuing flat comps?

 

My view is that the transformation is working. Look at web sales... up in the mid twenties...

 

2) Everyone is probably familiar with the Amazon story of marketshare first, margins second. Eddie has telegraphed numerous times that margin improvement is around the corner but SYW investment (and marketshare) is critical at this juncture.

 

My view is that eventually the market will give SHLD the same hall pass that Amazon got in the last 10 years if growth gets positive and sustainable.

 

3) Why is a "historically brilliant" capital allocator burning the furniture in order to save the ship?

 

My view is that he strongly believes the upside is greater as a retailer than strictly a real estate/asset play. And he is getting proof daily that it is working. My view is that he is not stubborn... he is using the company's performance data to reassure him that this is working.

[ERICOPOLY]

-the fact that Eddie couldn't answer a straight question about stock buy backs at the annual meeting when asked directly (saying to the questioner, "we have to satisfy x, y, z conditions, so with those clues, you figure it out")

-etc. etc.

 

Why is anyone expecting them to return excess cash to shareholders?  How much excess cash is there to return?

 

Excess cash doesn't really seem to be piling up, yet people still seem to expect it to be paid out.  I don't get it.

[TwoCitiesCapital]

Any underlying value decreases with each quarter or losses. We're in the 9th quarter and won't last many more quarters of $5 per share losses. It won't be long before they lose more than the entire current market cap

 

And yet....I feel like there has to be something to it. We all know it's a bad and declining business. It's obvious. We know it can't effectively compete with Amazon and that it's a long shot to compete with other retailers. It's obvious. That's why I'm so confused that people like Berkowitz keep buying. Obviously value investors make mistakes, but it's not often that they make the same mistake over and over and bigger and bigger.

 

What does he see that we don't. Shutting doen stores, selling leases, liquidating inventory creates cash. Sears then burbs that cash on remaining operations and SYW. These GAAP losses every quarter arent just GAAP losses - they definitely reflect an ongoing deterioration of value that erodes the long term value. I wouldn't expect Berkowitz to dump after a single year of underperformance but it's been several AND he's been adding. What does he see that I don't? Is the real estate value of $130 still his only thesis when it will be years until it's unlocked and we burn $20 per share a year on the way there?

[Guest wellmont]

I think the question that every Sears shareholder needs to consider the following?

 

1) Given that every other major retailer has had difficult comparable sales numbers, how is a supposedly "near-death" retailer issuing flat comps?

 

My view is that the transformation is working. Look at web sales... up in the mid twenties...

 

2) Everyone is probably familiar with the Amazon story of marketshare first, margins second. Eddie has telegraphed numerous times that margin improvement is around the corner but SYW investment (and marketshare) is critical at this juncture.

 

My view is that eventually the market will give SHLD the same hall pass that Amazon got in the last 10 years if growth gets positive and sustainable.

 

3) Why is a "historically brilliant" capital allocator burning the furniture in order to save the ship?

 

My view is that he strongly believes the upside is greater as a retailer than strictly a real estate/asset play. And he is getting proof daily that it is working. My view is that he is not stubborn... he is using the company's performance data to reassure him that this is working.

his messaging needs to be better because investors have the stock down 7% today. I take a simpler view. "this suckers going down".

[ERICOPOLY]

What does he see that I don't? Is the real estate value of $130 still his only thesis when it will be years until it's unlocked and we burn $20 per share a year on the way there?

 

Perhaps he's expecting a bulk transaction where the premium real estate properties all go to the mall operators in a mega-deal.  They can then redevelop that space and make their malls more attractive to shoppers.

 

It's not that many store closings compared to their current pace of closings.

 

It would be handy to move Lands End out of the way first... things like that.  Perhaps try to build an online brand by signing up the loyal shoppers before the stores close.

 

[ni-co]

Any underlying value decreases with each quarter or losses. We're in the 9th quarter and won't last many more quarters of $5 per share losses. It won't be long before they lose more than the entire current market cap

 

And yet....I feel like there has to be something to it. We all know it's a bad and declining business. It's obvious. We know it can't effectively compete with Amazon and that it's a long shot to compete with other retailers. It's obvious. That's why I'm so confused that people like Berkowitz keep buying. Obviously value investors make mistakes, but it's not often that they make the same mistake over and over and bigger and bigger.

 

What does he see that we don't. Shutting doen stores, selling leases, liquidating inventory creates cash. Sears then burbs that cash on remaining operations and SYW. These GAAP losses every quarter arent just GAAP losses - they definitely reflect an ongoing deterioration of value that erodes the long term value. I wouldn't expect Berkowitz to dump after a single year of underperformance but it's been several AND he's been adding. What does he see that I don't? Is the real estate value of $130 still his only thesis when it will be years until it's unlocked and we burn $20 per share a year on the way there?

 

The simple answer is that the margin of safety is so huge that $150m of cash burn per quarter is nothing against it. People panic all the time but SHLD is literally years from being bankrupt – and in this timeframe a lot can happen. Maybe the horse will talk.

[Eye4Valu]

Isn't SHLD just a liquidation play? Hasn't it always been? Why even bother with an analysis of retail trends? We always knew they were going straight down. I agree with the contributor who states that Eddie is forced to unwind this dinosaur slowly but surely. Bruce Berkowitz pegs tangible value of net assets at $100+.  Is he a fool for thinking net assets exceed $100.00?  I would prefer to see more analysis regarding the liquidation value of SHLD, despite commentary that liquidation may be a long way off. Instead we get just "noise" one way or the other. I'm going to follow Bruce's advice and "ignore the crowd," and follow his credo that "patience will pay." His track record and net worth tend to suggest that he may know a thing or two about investing. 

[TeddyLampert]

What does he see that I don't? Is the real estate value of $130 still his only thesis when it will be years until it's unlocked and we burn $20 per share a year on the way there?

 

Perhaps he's expecting a bulk transaction where the premium real estate properties all go to the mall operators in a mega-deal.  They can then redevelop that space and make their malls more attractive to shoppers.

 

It's not that many store closings compared to their current pace of closings.

 

It would be handy to move Lands End out of the way first... things like that.  Perhaps try to build an online brand by signing up the loyal shoppers before the stores close.

 

 

RE: what does Berkowitz know that investment mortals don't

 

Rather than look at the superinvestors who are in the stock (Eddie, Berkowitz, [?], arguably that's it), why not ask how come more superinvestors aren't? Ted, Todd, Klarman, Price, Simpson, etc?

 

Early this year, I re-read all the annual letters of BRK. Some people say that when they read the Bible, they will encounter rhema words that speak to them as if God were shouting in your face. When I read the BRK letter, something similar jumped out at me about Sears: WEB said that the cause of an irrational stock price are irrational investors. SHLD, with its longer term downtrend punctuated by the glorious short squeeze, fits this description. As a regular reader of this thread, I've noticed that the conversation often veers towards speculation, which is an alarming signal.