SHLDQ - Sears Holdings Corp

[bmichaud]

-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!

 

 

And the penny...drops. Was wondering when Sanjeev would be gone.

[BTShine]

Some thoughts --

 

Sears Domestic comp store sales were better than Kohl's, Walmart and Target. 

 

Didn't beat JCP, likely due to JCP SSS dropping by over 30% between 2011 and 2012 and JCP is now regaining some of that.  I find this interesting, but no one in the media wants to celebrate Sears' positive comps vs. negative at their competitors.

 

I know everyone is saying that Sears is buying sales...aka taking lower margin and lower price points on items just to get sales.  This is probably true.  But, isn't that what Amazon.com did for years before making profits from the relationships they created with their customers?  It's what Delta Airlines did when they offered you 20,000 free miles just for signing up for a credit card.  Or, free airline miles just for becoming a free Skymiles member.

 

Amazon and Costco have strong relationships with their members (Prime & Costco Membership).  Delta Airlines has a strong relationship with it's members (skymiles holders).    These three companies are very, very valuable.  Much of this is due to the strong relationships they have with customers.  (Service at Delta is not outstanding btw)  Two are very profitable (Costco & Delta) and the other is very valuable (AMZN) because it could be very profitable. 

 

Also, the 'Framework for Profit' laid out by SHLD  in their presentation seems reasonable.    I'm not sure if they will become wildly profitable, but it should allow them to stop the losses that they're experiencing and possibly get back to an annual EBITDA of around $500 million.  Currently their run rate is around negative $500 million Adj. EBITDA or worse.

 

 

 

 

 

[focusinvestor]

Some thoughts --

 

Sears Domestic comp store sales were better than Kohl's, Walmart and Target. 

 

Didn't beat JCP, likely due to JCP SSS dropping by over 30% between 2011 and 2012 and JCP is now regaining some of that.  I find this interesting, but no one in the media wants to celebrate Sears' positive comps vs. negative at their competitors.

 

I know everyone is saying that Sears is buying sales...aka taking lower margin and lower price points on items just to get sales.  This is probably true.  But, isn't that what Amazon.com did for years before making profits from the relationships they created with their customers?  It's what Delta Airlines did when they offered you 20,000 free miles just for signing up for a credit card.  Or, free airline miles just for becoming a free Skymiles member.

 

Amazon and Costco have strong relationships with their members (Prime & Costco Membership).  Delta Airlines has a strong relationship with it's members (skymiles holders).    These three companies are very, very valuable.  Much of this is due to the strong relationships they have with customers.  (Service at Delta is not outstanding btw)  Two are very profitable (Costco & Delta) and the other is very valuable (AMZN) because it could be very profitable. 

 

Also, the 'Framework for Profit' laid out by SHLD  in their presentation seems reasonable.    I'm not sure if they will become wildly profitable, but it should allow them to stop the losses that they're experiencing and possibly get back to an annual EBITDA of around $500 million.  Currently their run rate is around negative $500 million Adj. EBITDA or worse.

 

Amen.

[alertmeipp]

Something make sense for Amazon and Costco might not make sense for Sears.

 

I listened to their webcast. Everything he said make sense. Just the numbers still light.

 

 

 

[BTShine]

Something make sense for Amazon and Costco might not make sense for Sears.

 

I listened to their webcast. Everything he said make sense. Just the numbers still light.

 

Agree.  It might not makes sense.  But, it feels like lot of people are saying it will not make sense and I'm not convinced of that.  We really need to see how things play out. 

 

Full disclosure -- I thought this was a quarterly report that would show improvements, but I was wrong.

 

Question for the board, besides feeling horrible about firing poeple, is it making significant reductions in employees/payroll really a company killer?  Tons of companies had large payroll cuts during and after the recession, which improved profitability.  Isn't it possible for Sears to make some reduction in payroll? 

 

On the same topic, if SHLD cut 20,000 or 30,000 jobs over a 6 month period due to significant store closings, would that be a morally wrong thing?  What if they gave employees a three month notice?  I hear the argument that there's 250,000 employees standing between us and the value of the real estate, but is that 100% true?  I'm trying to test this theory. 

 

 

 

[merkhet]

I'm surprised at how fast people are at digesting the quarterly results. I must be significantly slower than the rest of y'all, but it usually takes me a bit more time to mull things over before I can comment (somewhat) intelligently.

 

In any case, this was a pretty bad quarter for many of the reasons already laid out here, and there are some interesting positive signs for many of the same reasons already laid out here -- but I figured I would throw out my two cents all the same.

 

--

 

Operating Results

 

The headline numbers are really much worse than I like. I'd much prefer that Sears had the 10% CAGR in revenues and/or the possibility of 40% EBITDA margins like Sirius XM, but they don't. I think someone else already pointed this out, but I think that the conference call transcript calls it out pretty well:

 

As you see in the box on the upper [corner], about 95% of the $858 million year-over-year decline was due to factors other than domestic comparable store sales performance.

 

That's slightly less terrible in my opinion when, as BTShine pointed out, other big-box retailers are having similar (or worse) problems. Of course, Chad is right to point out that it's possible to juice the sales by giving away margin via promotional markdowns and SYW points. (As an aside, I just bought my friend a bunch of golf items because I had a bunch of SYW points that I needed to use before they expired.)

 

I would expect that this would lead to terrible net income results, and I would not be wrong. When you compare the 26 weeks year-over-year, Sears went from ($419) million in net income to ($1,023) million in net income -- ugly and usually not a great sign.

 

Curiously, though, the net cash used in operating activities is not significantly different year-over-year at ($715) million in 2013 versus ($747) million especially in light of the fact that $1.4 billion+ of revenues just up and vanished. [EDITED: Originally it said $858 million, but since I'm using 26 week numbers, I should use 26 week revenues as well]

 

--

 

Investment in Stores

 

So the funny thing is that I keep hearing ESL say that he's investing in SYW and investing in this transformation, and yet the year-over-year cap ex on the cash flow statement remains roughly the same @ $116 million in 2013 versus $126 million in 2014 -- though I suppose that this is on a smaller base of stores than last year so maybe there was an increase in that way.

 

But that's not really the type of serious capital investment that I think would go along with what he's been saying, and so I'm wondering how much of that investment he references is coming through the income statement as opposed to the cash flow statement.

 

--

 

Funding Gap

 

In 2013, Sears showed a $62 million increase in cash versus a ($199) decrease in cash resulting in a $261 million swing. Of course, you can easily see that this is because of a differential in both the proceeds from selling property (a delta of $123 million) and total financial funding (a delta of $115 million) which all but accounts for the difference.

 

--

 

Buybacks

 

I think I have to take the blame for this one. I believe I was the one who first noticed how many times they mentioned the buyback authorization in conjunction with the sale of Sears Canada -- and, it will remain to be seen whether they need to apply the sale of Sears Canada to fund any developing cash needs or not.

[peridotcapital]

Closing stores more quickly will not help solve the problem. As we have seen, the store closings are accelerating but the company's margins are not improving. This is because the "bad" stores aren't losing much more money than the "good" stores. So you can close the store, but the expense "savings" really isn't going to help you because you are not gaining more efficiency. In fact, it is the opposite because you are losing operational efficiency through expense de-leveraging of a high fixed cost business. There is really no way to reduce expenses faster than sales losses via store closings. Since they know their business model doesn't require 1,800+ stores they are simply letting most of the leases lapse. They are likely on their way to 700 stores --- the owned locations ---  plus a handful of high quality leased stores, less a handful of owned properties that they get good offers for.

 

As a result, I don't think the real estate value is trapped due to the employees. More concerning is that the real estate value they are unlocking through early lease buyouts and property sales will not flow to the equity holders as long as SHLD is burning cash. Instead the proceeds are going to the creditors (interest), former employees (pension contributions), and suboptimal capital investments (SYW points, digital signs, RFID chips, etc). So when you say the real estate is worth "X" in your sum of the parts valuation, it's really worth X-Y because a portion of that value will never make it to the pockets of the equity holders (case in point: the ~$160M of store proceeds realized so far this year).

[txlaw]

It's been a while since I've posted on this thread. 

 

Bottom line: I don't see how one can look at what's been going on for the last several quarters and not be negative about how run-off value is being affected by the decisions that ESL is making. 

 

----------

 

Pretty much any investor who is long SHLD has determined that there is substantial value in the various assets that SHC currently controls -- real estate, brands, Sears Canada, appliance market share and resulting sourcing advantage, etc.  And assets that have been spun off were presumably taken into account for any original SHLD investment thesis (if you're not counting those, you're being willfully ignorant). 

 

But here are the questions we have to ask ourselves:

 

- What is SHLD's run-off value if things continue as they are or even get marginally better? 

- What about if things get materially worse?  (Can they get worse?)

- How long will it take for run-off value stabilization?  (This matters a lot, given the opportunity costs involved.)

- To what extent is ESL making decisions that are burning IV or have the potential to burn IV?

 

I've always considered SHLD a run-off situation, and I was never one of those people who thought ESL was acting too slowly.  There's no way he could get things over with any quicker -- that is wishful thinking.  However, I have also always thought there was a right way to run off and a wrong way.  And from what I've seen so far, ESL has been doing this the wrong way.

 

I continue to think that Kmart shouldn't exist and that SYW and Sears Online are not very good offerings.  I think that ESL's focus on SYW has been very detrimental to shareholders.  SYW sucks, and Sears' retail technologies suck.  The Member-centric model only works over the long run if you have something really great to offer your members, like AMZN does.  I'm skeptical that SYW can retain long-term members in the face of fierce competition from real retailers (like AMZN, Costco, Kohl's, Target, Walmart, etc.).  I would not be surprised if a huge percentage of SYW accounts are deadbeat accounts that exist only because the employees were incentivized to sign customers up for SYW accounts (multiple times with different email addresses, probably). 

 

I always thought the Sears brand was far from dead and that it was, in fact, very salvagable.  I have argued time and again that ESL should be focusing on making SHLD all about hardline goods that fit with the image of Sears that has not become tarnished in the minds of most consumers (e.g, appliances and tools).  Then, Sears would just shift everything over to smaller format stores (think SHOS) and become a pre-eminent appliance and tools specialty retailer (competing with HD, LOW, ACE, True Value, etc.) that is perfectly positioned for the showrooming effect and the shift to online purchasing.

 

But, instead, SHLD remains a hybrid monster that is killing its own brands and competitive advantages.  KCD becomes less and less valuable with each passing quarter.  And because the shopping experience is so horrible at SHLD stores, they seem to only be able to hold appliance market share by sharply discounting their goods.  Does it really make sense to hold onto Kmart and Sears softline in order to shift customers to SYW when it diminishes the assets you already have?  Not to mention the actual cash burn?

 

I just don't know what ESL is doing with this "better mouse trap" business.  They don't seem to be actually building a better mouse trap.  It's almost as though ESL has gotten caught up in the fervor of the Silicon Valley disruption scene, and is trying to conduct a transformation that he thinks he can orchestrate by virtue of having read Clayton Christensen.  But ESL is no Jeff Bezos.  In fact, ESL may even refute WEB's dictum: "I am a better investor because I am a businessman and a better businessman because I am an investor."

 

The range of outcomes is wide on this one, and I personally think the optimistic end of the range seem far out of reach at this point.  Is there a MOS in the assets?  Yes.  But I could easily see that MOS diminishing such that in 10 years, we're stuck holding a company whose stabilized IV is basically what we bought the company for. 

 

And I think that's because ESL is at the helm.

[krazeenyc]

-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!

 

I agree that the long term transformation of Sears is very challenging. But my investment thesis is a bit different -- which is also why I trade in and out of the stock on these big moves. My view is that my margin of safety is in the ability to spin off at least $X of assets  to shareholders such that we are playing with house money regarding the long term retail/real estate transformation.  Given this mindframe, I'm unlikely to reap the benefits if over the longer term if the stock is a multibagger. 

 

FWIW, In January, we were actually trading much lower than we are now. It was a MUCH bigger bargain then.

[krazeenyc]

Why do you think they are "sharply" discounting their goods at Sears Domestic? If you add back Lands End,  gross margins went from 25.9% to 25.4% hardly a relevant move. They also sold 3 higher quality Sears Domestic stores that are likely to have contributed a bit to  loss of gross margin %.

 

By the way I don't think SYW is very good or is even close to a better mousetrap.

[rogermunibond]

What's the SYW member demographic versus say Costco or Amazon member demos?  I would venture to guess that they are a lower income group.

 

Seems to me that SYW is attracting a demo not too dissimilar to BJs Wholesale.

[jmp8822]

Does anyone think that Sears Holdings is still a valid thesis?  I.E. Sears is a holding company with bankrupt remote subsidiaries with a few billion dollars worth of value.  The real estate moved from the Reinsurance business into its own subsidiary, the KCD brands, Seritage, etc.  Wouldn't the Sears Retail bankruptcy provide the liquidation that would quickly establish the remaining value?  Sears Retail can't be worth less than zero, provided that the debts, and cash burn are non-recourse to Holdings.  The Holdings specific corporate debt is what Lampert bought this quarter. That could be a catalyst (retail failing), if I'm thinking of the corporate structure correctly.

[peridotcapital]

Why do you think they are "sharply" discounting their goods at Sears Domestic? If you add back Lands End,  gross margins went from 25.9% to 25.4% hardly a relevant move.

 

 

I think your math is wrong. If overall GM went down by 3.3% of sales in Q2 '14, the LE portion alone cannot account for 2.8% of that.

[merkhet]

Why do you think they are "sharply" discounting their goods at Sears Domestic? If you add back Lands End,  gross margins went from 25.9% to 25.4% hardly a relevant move.

 

 

I think your math is wrong. If overall GM went down by 3.3% of sales in Q2 '14, the LE portion alone cannot account for 2.8% of that.

 

Maybe I'm looking at this wrong, but I think overall gross margin for the quarter went from 24.6% to 21.7% -- that's only a difference of 2.9%.

 

If you're talking about Sears Domestic GM, it's 25.9% to 22.6% and if you add in Land's End, you get back to 23.75%

[peridotcapital]

Why do you think they are "sharply" discounting their goods at Sears Domestic? If you add back Lands End,  gross margins went from 25.9% to 25.4% hardly a relevant move.

 

 

I think your math is wrong. If overall GM went down by 3.3% of sales in Q2 '14, the LE portion alone cannot account for 2.8% of that.

 

Maybe I'm looking at this wrong, but I think overall gross margin for the quarter went from 24.6% to 21.7% -- that's only a difference of 2.9%.

 

I was looking at Sears Domestic only, not the entire company.

[merkhet]

Yup -- figured that out and did the calculation above.

[hardincap]

Remember, Tom Tisch, an insider with superior information over all of us, added earlier this year at $33.

 

The sell thesis seems to be either 1) lampert is a stubborn idiot and will run the company into the ground or 2) lampert is basically stuck and can't salvage value, even if he wanted to. It's simply too hard to believe either of those could be true given lampert's record as a risk arbitrager, his obsession with managing the downside, and most importantly, that he and tisch have been adding to their stakes.

 

Also remember, 80+% of the real estate value (which exceeds the market cap) can be unlocked through 20% of the properties. Why couldn't he pull the plug on his transformation effort any moment now by making a mega deal to sell some (or all) of these properties?

[krazeenyc]

Why do you think they are "sharply" discounting their goods at Sears Domestic? If you add back Lands End,  gross margins went from 25.9% to 25.4% hardly a relevant move.

 

 

I think your math is wrong. If overall GM went down by 3.3% of sales in Q2 '14, the LE portion alone cannot account for 2.8% of that.

 

Maybe I'm looking at this wrong, but I think overall gross margin for the quarter went from 24.6% to 21.7% -- that's only a difference of 2.9%.

 

If you're talking about Sears Domestic GM, it's 25.9% to 22.6% and if you add in Land's End, you get back to 23.75%

 

Yes i was talking about sears domestic... and yes I did a stupid math error 23.75% is correct.

[peridotcapital]

Why do you think they are "sharply" discounting their goods at Sears Domestic? If you add back Lands End,  gross margins went from 25.9% to 25.4% hardly a relevant move.

 

 

I think your math is wrong. If overall GM went down by 3.3% of sales in Q2 '14, the LE portion alone cannot account for 2.8% of that.

 

Maybe I'm looking at this wrong, but I think overall gross margin for the quarter went from 24.6% to 21.7% -- that's only a difference of 2.9%.

 

If you're talking about Sears Domestic GM, it's 25.9% to 22.6% and if you add in Land's End, you get back to 23.75%

 

Yes i was talking about sears domestic... and yes I did a stupid math error 23.75% is correct.

 

Actually, I think it's 25.0%, not 23.75%. Last year Sears US had a GM of 25.9%, and 7% of sales was LE at a 38.2% GM (126/330).

 

So let's break that down into a simple equation:

 

total sales are $100.00

total GM is 25.9% ($25.90)

 

$93 of those sales have a 25.0% margin ($23.25)

$7 of those sales have a 38.2% margin ($2.67)

 

so the non-LE business saw GM decline from 25.0% to 22.6% year over year

 

 

 

[krazeenyc]

Why do you think they are "sharply" discounting their goods at Sears Domestic? If you add back Lands End,  gross margins went from 25.9% to 25.4% hardly a relevant move.

 

 

I think your math is wrong. If overall GM went down by 3.3% of sales in Q2 '14, the LE portion alone cannot account for 2.8% of that.

 

Maybe I'm looking at this wrong, but I think overall gross margin for the quarter went from 24.6% to 21.7% -- that's only a difference of 2.9%.

 

If you're talking about Sears Domestic GM, it's 25.9% to 22.6% and if you add in Land's End, you get back to 23.75%

 

Yes i was talking about sears domestic... and yes I did a stupid math error 23.75% is correct.

 

Actually, I think it's 25.0%, not 23.75%. Last year Sears US had a GM of 25.9%, and 7% of sales was LE at a 38.2% GM (126/330).

 

So let's break that down into a simple equation:

 

total sales are $100.00

total GM is 25.9% ($25.90)

 

$93 of those sales have a 25.0% margin ($23.25)

$7 of those sales have a 38.2% margin ($2.67)

 

so the non-LE business saw GM decline from 25.0% to 22.6% year over year

 

Yeah -- we're saying if LE was still with the company and had the same results as last year the overall gross margin would have been 23.75% at domestic Sears. But yeah margin declined more than I thought. 

[alertmeipp]

So sales from SYW members was 74% last Q and this Q is 73%.

 

Multi-channel CAGR was 19% last Q, now is 17%.

 

Time to cut some expenses there

 

 

[Luke 532]

"We can't deny that we're, one, a real estate company, and two, a customer company," Lampert said. "We still have the paradigm of trying to improve our operations but realizing we have a (real estate) asset base that deserves a return." http://www.memphisdailynews.com/news/2012/may/3/sears-execs-say-retailer-financially-strong//print

 

I think the above quote makes it pretty darn clear that if the transformation doesn’t work, Lampert believes there’s value to be extracted from the real estate. 

 

One of the biggest bearish points is that it would take many, many years to sell some of their best real estate.  But what if just a fraction of the entire portfolio, say, 20% of the prime 68M sq ft, is sold?  How long would that take?  I’ve talked with a few other COB&F users in the past week or two and there is a case to be made that a transformative transaction like that could take place overnight if done with the mall properties.

 

Will Lampert do this now? 

Lampert is full-steam ahead on SYW and the transformation, so I don’t think he’ll do a deal like this now (I might be wrong).

 

Will Lampert do this a few years from now?

I don’t know.  But the odds likely increase over time if we assume…

1-SHLD keeps losing money and the transformation doesn’t work, 

2-then Eddie gives up on the transformation,

3-then Eddie decides to liquidate his best properties.

 

Do the malls want this kind of property?

Yes… take a look at the comments from Mathrani, Sokolov, Henry, and Lebovitz on pages 28-32 of Baker Street’s presentation.  For example, although GGP has spent the last few years fixing post-Chapter 11 problems, it sounds like Mathrani is ready to grow (GGP conf call 2/5/2014): So you could see how when you own an A or a B+ mall, or even a B mall for that matter, that recapturing these would be a complete bonanza for the mall owners. So firstly, I think [ph] the uses are tremendous. The demand is tremendous. We have no place to put the bigger box users, the H&Ms, the ZARAs of the world, the Anthropologies, the Urban Outfitters, anyone which is larger format, the DICK'S Sporting Goods, then this makes a perfect position for us to tear the box down and add on a [ph] clip-on with all those of types of tenants. So this could be a tremendous homerun for the mall industry. But we don't anticipate getting any of them back to speak of.

SHLD and GGP have made deals in the past.  And SHLD is an anchor in the vast majority of GGP malls… check out pages 18-21 of GGP’s 10-K for a list:  http://www.sec.gov/Archives/edgar/data/1496048/000104746913001941/a2213015z10-k.htm

 

What price would make financial sense for both SHLD and GGP (or another REIT)?

SHLD has 68M sq ft of prime real estate (not the lesser properties that are being neglected).  Let’s say the malls will buy some for $150/sq ft.  Since GGP and SPG are valued at $250/sq ft this kind of price would make sense for them.  Selling 10% of the 68M sq ft is $1B, 20% is $2B, etc.

 

Bottom-line

So, even if Lampert continues on the transformation path for the next 3 years losing a ton of money, wouldn’t a transaction like the one mentioned above still be possible? It also might be a game-changer in the way the market views SHLD’s remaining prime real estate portfolio.

 

Thoughts?

 

[alertmeipp]

Luke, your points are well taken, SHLD is clearly undervalued but many here are losing patience and cannot keep tolerating watching retails in action.

 

The transformation looks promising on paper, but #s are either lagging or just not going to happen.

[DTEJD1997]

Hey all:

 

I forgot to add that in addition to there being some bad stores in the MI area, the SYW program was riddled with silliness.

 

For example, they were giving away coupons for $1 off a gallon of gas at Speedway stores.  So I, and a couple of others, would figure out what is cheap, on sale, and can be stored, and then buy it up in bulk to get the SYW coupons for the gas.

 

Sometimes there would be other great offers too.  There is no way SHLD was making any money on these sales.  In fact, I would be reasonably sure that they were losing quite a bit.

 

I guess because it is "online" it is different than "regular" retail...and you can afford to lose money, just look at AMZN.

 

SHLD no longer offers the great gas coupons, so I don't really shop there.  The only reason to go was to take advantage of the crazy deals.  No more crazy deals, no more shopping :(  How many other did/do this?

[Luke 532]

Luke, your points are well taken, SHLD is clearly undervalued but many here are losing patience and cannot keep tolerating watching retails in action.

 

Lack of patience usually doesn't coincide with extremely successful value investing.  Unless, of course, the opportunity cost and/or destruction of value due to retail operations overrides the gap between value and share price.  I find that to be a pretty tough case to make with SHLD.