SHLDQ - Sears Holdings Corp

[Luke 532]

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.

 

Made me think of the quote below.

http://www.investmentnews.com/article/20120918/BLOG06/120919939

"One good deal may create more wealth than 10 years of brilliant operations." -Berkowitz

Feel free to snicker at the word 'brilliant'  :)

[TeddyLampert]

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.

 

It was a liquidation play before it became a SYW play. After dismal qty earnings report, it's back to being a liquidation play.  ;)

 

To the above, I would paraphrase myself a few weeks ago paraphrasing Pabrai, who said that sure, there's NAV there, but there's also 250,000 employees standing between you and liquidation. I guess that means we are back to SYW play...

 

[peridotcapital]

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.

 

Thanks for the comment. I hope I have succeeded in presenting a bearish case that is rooted in numbers and facts, so as to be both helpful and fair. I never did short the stock, unfortunately despite my negative articles, etc, so I am neither rooting for Eddie to fail nor wish any losses for those on this board. I just try to call it like I see it and I have been paying attention because I am always on the look out for investment opportunities. It just so happens in this case I decided to invest in the debt, not the equity, but that could certainly change at some point.

 

As for your question, I was long KMRT (and then SHLD post-merger) for about 4 years a long time ago under the assumption that the future of the company would not revolve around Sears and Kmart. To me it has been obvious all along that those brands are dead and will only deteriorate further over time (their core demographic from the hey days is only getting older). I assumed Eddie understood this and would diversify away from those brands. If it took a long time due to the size and scope of Sears/Kmart, so be it, but I was confident he would make SHLD a holding company for brands outside of the legacy Sears and Kmart businesses that have been there all along.

 

So what I would have liked for him to do/would still like him to do? Use free cash flow to buy/build other businesses that have a better chance of success. Back when SHLD was throwing off cash it was easier, granted, but he passed on buying Restoration Hardware (a great brand that is now thriving and worth more than 10x what he offered to pay for it before bowing out of the bidding). He also kicked the tires at JCrew multiple LBOs ago (that would have worked too). He could stay in retail if he wanted, but it should have been obvious that Sears and Kmart were dying and something was needed to offset them as they wind down. KCD is not enough because most of those sales come from the very stores that are being closed. So that's a long way of saying "acquisitions" outside of the legacy assets.

 

Now, you could also build upon the better assets that you have without abandoning them. Take Sears Home Services. As Sears shrinks so does that division, but it doesn't have to. Why not consolidate that very fragmented industry and possibly even drop the Sears name and use one of the brands that you combine with it? That way you can grow the business and gain scale. The same could have been done with Sears Auto Centers. Buy/merge with a well known competitor and rebrand all the free standing Sears Auto stores as that brand. That way if the Sears store goes away, you don't have any connection to it. Why not acquire other brands/IP and build KCD into a growing consumer IP company that is not just Kmart and Sears brands? Instead, all of these are slowly getting smaller, losing scale, and have less value than they should due to their connection with Sears and Kmart.

 

Instead, Eddie bought back stock and bought more shares of Sears Canada. Why are you paying attention to Canada when the US business is losing share and struggling so much already? Why buy back stock when your core retail brands are clearly in a secular decline? Now, is it harder to do these things now that cash burn is awful? Of course, but how much money has been put into SYW? Add in anything he can get for SAC and Canada and you are talking about what, a few billion dollars? I have no doubt he could have invested that capital and created more value by buying completely different businesses and/or growing the smaller, more successful ones outside of the Sears nameplate.

 

On the flip side, what do I like that he has done/is doing? Not much. The real estate leasing operation obviously makes a lot of sense when you own so many stores and have too many to start with. So I totally think a Seritage-type operation makes sense inside SHLD. The problem, of course, is that even as they have now rented out a couple million square feet, it does nothing to move the needle for a company this size that is burning so much cash. An extra $25M in rent coming in won't materially stem the losses everywhere else.

 

All in all, the idea that SYW is somehow over time going to be able to distance itself from Sears and Kmart and grow as those brands are put to death slowly seems highly unlikely to me. As long as that is what Eddie is focused on doing, I'm not going to be a fan. And even at today's prices SHLD has an enterprise value over $8 billion. As a value guy, price is most important to me, but that price doesn't entice in the least given the strategy. But I'm happy to be long the debt... have been for many years and on a risk-adjusted basis I think the returns are going to continue to be excellent.

[peridotcapital]

 

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...

 

 

I would suggest looking at comps and margins togethe, not just comps when comparing SHLD with other retailers. Sales are directly correlated with prices. If you are cutting prices more than others, your comps are going to have the potential to be better too. But profit dollars is what matters. What good are web sales up 20% if you are losing money on each one? Imagine how good your sales would be if you started selling dollar bills for 90 cents. Comps would be great! Cash flow not so much. If comps and margins are rising, that would be evidence that SYW is gaining traction.

 

 

[alertmeipp]

For those who think Sears is going to go downhill no matter what need to look at home depot,  best buy and even jcp.

 

Some retails are doing well and see their stocks going up multiple time.

 

Liquidation play, alright if it is but all signs tell u he is seriously trying to turn this around. Yes he does not  invest in store but he is throwing money into syw.

 

I am buyer today tho, this thing usually trades up after sucking release. . Probably because shorts take profit and longs think mega deal is just around the corner.

[krazeenyc]

Peridot,

 

I think you're incorrect regarding the significance of a few million square feet of leases.  Let's assume they spin off a REIT (like seritage). Let's assume that while it does not include trophy properties (like South Coast Plaza, Washington Square Mall, etc) it includes a bunch of good locations (clearwater, greensboro, janss marketpalce, oakbrook, other A or top B locations etc.) .  Let's say they have 3 million square feet leased out at triple net $25 per sq ft and the other 17 million leased out to Sears temporarily at $2 NNN.  At a 5% cap rate that's a $2.18B value.  The value would grow as Sears became a smaller and smaller percentage of the leased space.

 

Alertmeipp,

 

FYI I know it looks like Gross Margins are down huge vs last year but if you add back Lands Ends you're sitting at 25.4% gross margins vs 25.9% -- also remember you've sold off 3 fairly good Sears stores for about $135M that were closed during the quarter this year). 

 

 

[DCG]

Just the usual quarterly reminder that Eddie Lampert is one of the country's worst CEO's.

[peridotcapital]

Peridot,

 

I think you're incorrect regarding the significance of a few million square feet of leases.  Let's assume they spin off a REIT (like seritage). Let's assume that while it does not include trophy properties (like South Coast Plaza, Washington Square Mall, etc) it includes a bunch of good locations (clearwater, greensboro, janss marketpalce, oakbrook, other A or top B locations etc.) .  Let's say they have 3 million square feet leased out at triple net $25 per sq ft and the other 17 million leased out to Sears temporarily at $2 NNN.  At a 5% cap rate that's a $2.18B value.

 

 

I am looking at it from a cash flow perspective as a way to offset the SYW investment/cash burn, not in terms of a real estate liquidation scenario. Even if they lease out 3 million sf at $25/sf what is that extra $75 million going to do for them? Nothing really in the grand scheme of things, with a company this large. It covers 6 months of interest on their debt, for example.

 

Now, in a REIT scenario I don't disagree with your numbers ($109/sf property value in the example you gave). But when you are burning cash I don't think you're going to purposely start to pay rent on Sears stores you currently own and spin out the rental income you are generating from third parties. Maybe 3-5 years from now when SYW is generating some cash and growing you will. Furthermore, I don't think Seritage would be able to get away with charging Sears anything but market rents ($2/sf is pretty low), which would make the retail losses even worse. Lastly, if your revolver capacity is heading towards zero due to dwindling inventory and you spin off your owned real estate, what collateral are you going to use to finance your business?

 

I just think that whole scenario is too far off in the future.

[alertmeipp]

Just the usual quarterly reminder that Eddie Lampert is one of the country's worst CEO's.

 

Not sure if he is the worst but i am sure he will get booted long ago if he doesnt own a big chunk of the company.

 

Thanks Krazeenyc. About 40 percent of the ytd is real tho based on the cc.

 

Short Your Way... seems going hand in hand with Shop your way. :'(

[krazeenyc]

Peridot,

 

I think you're incorrect regarding the significance of a few million square feet of leases.  Let's assume they spin off a REIT (like seritage). Let's assume that while it does not include trophy properties (like South Coast Plaza, Washington Square Mall, etc) it includes a bunch of good locations (clearwater, greensboro, janss marketpalce, oakbrook, other A or top B locations etc.) .  Let's say they have 3 million square feet leased out at triple net $25 per sq ft and the other 17 million leased out to Sears temporarily at $2 NNN.  At a 5% cap rate that's a $2.18B value.

 

 

I am looking at it from a cash flow perspective as a way to offset the SYW investment/cash burn, not in terms of a real estate liquidation scenario. Even if they lease out 3 million sf at $25/sf what is that extra $75 million going to do for them? Nothing really in the grand scheme of things, with a company this large. It covers 6 months of interest on their debt, for example.

 

Now, in a REIT scenario I don't disagree with your numbers ($109/sf property value in the example you gave). But when you are burning cash I don't think you're going to purposely start to pay rent on Sears stores you currently own and spin out the rental income you are generating from third parties. Maybe 3-5 years from now when SYW is generating some cash and growing you will. Furthermore, I don't think Seritage would be able to get away with charging Sears anything but market rents ($2/sf is pretty low), which would make the retail losses even worse. Lastly, if your revolver capacity is heading towards zero due to dwindling inventory and you spin off your owned real estate, what collateral are you going to use to finance your business?

 

I just think that whole scenario is too far off in the future.

 

I think if you judge Sears on a cash flow basis and do not separate out the parts -- of course, there is nothing to like.  I'm expecting that Sears can spinoff seritage (or some other REIT entity) outside of a liquidation scenario.  Even spinning off a small portion of the real estate and the KCD brands you should get an equity value that exceeds the market cap today (outside of the retail business).  In the beginning of the year Sears was even cheaper when it was trading at these prices and Lands End was still part of the pie.

 

Spinning off 20 million square feet would still leave Sears plenty of valuable real estate to sell/borrow against.

 

Alertmeipp.. Thanks Krazeenyc. About 40 percent of the ytd is real tho based on the cc. -- What do you mean by this?

[Parsad]

-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.

 

If you look at the balance sheet, I see no excess cash, so I don't know where this is going to come from...sale of Sears Canada, the Auto Centers or Inventory perhaps?  But there is a shitload of liabilities that are also on that balance sheet. 

 

Sears has been a slow burn of shareholder capital...it's an 8-foot hurdle with little upside...but because Eddie is there and Berkowitz is there, no one can see that it is an 8-foot hurdle with little upside.  We got out a while ago at slightly above our cost...I couldn't be happier!  Will never touch this thing again...and I think we may be seeing the end of Sears approaching quickly.  Cheers!

[alertmeipp]

I mean about 40 percent of the margin drop is because of real deterioration not one time factor.

 

Lets hope that lower inventory and the so called transform will bring it up.

 

 

[krazeenyc]

I mean about 40 percent of the margin drop is because of real deterioration not one time factor.

 

Lets hope that lower inventory and the so called transform will bring it up.

 

right... that 40% margin drop is all at Kmart. (I agree Kmart is dead).

[Luke 532]

Sears has been a slow burn of shareholder capital...it's an 8-foot hurdle with little upside...but because Eddie is there and Berkowitz is there, no one can see that it is an 8-foot hurdle with little upside.  We got out a while ago at slightly above our cost...I couldn't be happier!  Will never touch this thing again...and I think we may be seeing the end of Sears approaching quickly.  Cheers!

 

Sanjeev, have you adjusted your value of the real estate?  10 months ago you estimated it as follows...

Assume that their real estate portfolio is worth $10B conservatively if sold as is...but 10% of those properties are worth 5-6 times what they are worth in redevelopment...you are now talking about real estate worth $15B conservatively if developed.

 

and...

Will never touch this thing again...and I think we may be seeing the end of Sears approaching quickly.

 

I'm a little surprised by this comment coming from somebody I hold in high regard (especially given the real estate estimate quoted above).  Do you mean bankruptcy?  If so, how did you come to that conclusion? I think that is a highly remote possibility to happen anytime soon.

[alertmeipp]

I mean about 40 percent of the margin drop is because of real deterioration not one time factor.

 

Lets hope that lower inventory and the so called transform will bring it up.

 

right... that 40% margin drop is all at Kmart. (I agree Kmart is dead).

 

Right

 

I hope they just sold Kmart to Amazon and in addition, they form an alliance with Amazon on syw.

[Parsad]

The real estate has value, but they are just burning through cash.  They aren't exploiting the value of the real estate fast enough...thus no buybacks...no excess cash for other investments.  They whittle off enough real estate or other assets to plug holes.

 

The one thing that changed my mind about the company was finally the management.  Eddie has been moving way too slow for years, and  I thought they were going to move faster in the last year from things they were saying and doing, but I was wrong.  They spun off a couple of things, sold some real estate and that was it.

 

You look at what Nordstrom's is doing with the same property in downtown Vancouver that was previously occupied by Sears, and you will understand that Eddie does not understand retail at all.  Nordstrom's and Cadillac Fairview have totally transformed the same property...it's gorgeous and will be a shopping centerpiece attached to Pacific Center mall.  Nordstrom's will occupy three floors, while another three floors are already 92% leased out to Microsoft, Sony and a top Canadian law firm.  Why couldn't Sears do this...it cost about $150M...that's it!  Cadillac Fairview would have eaten half the cost, while Sears could have subleased half its space and reinvented itself...which is what retail is all about. 

 

Eddie is running Sears like the dying vehicle that it is...don't spend a dime on stores...and reroute excess cash.  But there is no excess cash to reroute from the stores...in fact they are consuming huge amounts of capital.  The excess cash is tied up in real estate that isn't being exploited.  So you have this blackhole retail business sucking any excess value out of the system!  Cheers! 

[Liberty]

http://www.peridotcapital.com/2014/08/sears-shop-your-way-not-a-better-mouse-trap.html

 

(sorry if this has already been posted, I couldn't find it, and I know Peridot might hesitate to self-link)

[Parsad]

I'm a little surprised by this comment coming from somebody I hold in high regard (especially given the real estate estimate quoted above).  Do you mean bankruptcy?  If so, how did you come to that conclusion? I think that is a highly remote possibility to happen anytime soon.

 

No, not bankruptcy.  Relevancy. 

 

Sears is very quickly going to become irrelevant even in markets where it currently is the main storefront.  If you aren't getting shoppers in, then they will go somewhere where the selection, prices and experience is better.  Sears management is killing off it's own stores...and this process is speeding up.  Cheers!

[Luke 532]

No, not bankruptcy.  Relevancy. 

 

Thanks for the clarification.

[Mephistopheles]

Sears has been a slow burn of shareholder capital...it's an 8-foot hurdle with little upside...but because Eddie is there and Berkowitz is there, no one can see that it is an 8-foot hurdle with little upside.  We got out a while ago at slightly above our cost...I couldn't be happier!  Will never touch this thing again...and I think we may be seeing the end of Sears approaching quickly.  Cheers!

 

Sanjeev, have you adjusted your value of the real estate?  10 months ago you estimated it as follows...

Assume that their real estate portfolio is worth $10B conservatively if sold as is...but 10% of those properties are worth 5-6 times what they are worth in redevelopment...you are now talking about real estate worth $15B conservatively if developed.

 

and...

Will never touch this thing again...and I think we may be seeing the end of Sears approaching quickly.

 

I'm a little surprised by this comment coming from somebody I hold in high regard (especially given the real estate estimate quoted above).  Do you mean bankruptcy?  If so, how did you come to that conclusion? I think that is a highly remote possibility to happen anytime soon.

 

Though I don't claim to know what exactly Parsad's thesis in selling was, I think we can all agree that the real estate value is certainly there. The problem is that there is that a) when are we going to realize that value, and b) even though Eddie is closings stores/selling real estate, he continues to invest in a startup retail strategy that may or may not work. So in that case, is the RE really worth that much to shareholders?

 

I sold out a while ago too, luckily with a nice profit. Having said all of this, I'd be happy to get in at the right price again.

 

Edit: Didn't see Parsad's posts before I replied.

[SmallCap]

Just checking out the options on SHLD for Jan 2016 and noticed that there are two call options at each price and one is nearly twice what the other is priced at and I don't know the difference between these options. can someone clarify this?

 

http://finance.yahoo.com/q/op?s=SHLD&m=2016-01

[Mephistopheles]

Just checking out the options on SHLD for Jan 2016 and noticed that there are two call options at each price and one is nearly twice what the other is priced at and I don't know the difference between these options. can someone clarify this?

 

http://finance.yahoo.com/q/op?s=SHLD&m=2016-01

 

The more expensive one is pre-LE spinoff.

[Luke 532]

Just checking out the options on SHLD for Jan 2016 and noticed that there are two call options at each price and one is nearly twice what the other is priced at and I don't know the difference between these options. can someone clarify this?

 

http://finance.yahoo.com/q/op?s=SHLD&m=2016-01

 

The more expensive one is pre-LE spinoff.

 

SHLD1 is based on underlying SHLD + (LE*0.3)

SHLD is based on underlying SHLD only

 

By the way, SHLD1 positions can only be closed (no new positions can be opened).

[Mephistopheles]

Just checking out the options on SHLD for Jan 2016 and noticed that there are two call options at each price and one is nearly twice what the other is priced at and I don't know the difference between these options. can someone clarify this?

 

http://finance.yahoo.com/q/op?s=SHLD&m=2016-01

 

The more expensive one is pre-LE spinoff.

 

SHLD1 is based on underlying SHLD + (LE*0.3)

SHLD is based on underlying SHLD only

 

By the way, SHLD1 positions can only be closed (no new positions can be opened).

 

Yea that's correct, I didn't clarify.

[SmallCap]

Thanks for the clarification on the options, that makes perfect sense.