SHLDQ - Sears Holdings Corp

[zenith]

I also believe SHLD has a large MOS and I want to add something that was brought up at the Pabrai AGM about a week ago. He said in response to positioning that Munger has said that he would tell young people to put all of an IRA or funds in one stock. Basically, similar to what Jack Ma recently said, "Go big, or go home. Otherwise, you’re wasting your youth".

 

With that in mind, with Eddie and Berkowitz as the largest shareholders, and with a cost basis substantially higher than today's prices, why not put a majority of ones investment assets in it.

I avoid Analysis Paralysis

 

 

[Picasso]

I also believe SHLD has a large MOS and I want to add something that was brought up at the Pabrai AGM about a week ago. He said in response to positioning that Munger has said that he would tell young people to put all of an IRA or funds in one stock. Basically, similar to what Jack Ma recently said, "Go big, or go home. Otherwise, you’re wasting your youth".

 

With that in mind, with Eddie and Berkowitz as the largest shareholders, and with a cost basis substantially higher than today's prices, why not put a majority of ones investment assets in it.

I avoid Analysis Paralysis

 

Easy for someone to say when they have survived what normally destroys many.  The many people who have tried this and lost it all probably would love to spread out their risk a bit better if the clock could be turned back.  I think it is far more prudent to look at all your different investment options and find what provides the best potential returns with the highest probability of success. 

 

After looking through the vast universe of stocks out there, the best one could come up with is SHLD?  I think even Pabrai said "been there, done that" in regards to his SHLD investment. 

 

I get a little annoyed when someone unusually successful says "Yeah, take your risk tolerance in life and multiply it times 100.  It worked for me so it will also work for you." 

[Fat Pitch]

I also believe SHLD has a large MOS and I want to add something that was brought up at the Pabrai AGM about a week ago. He said in response to positioning that Munger has said that he would tell young people to put all of an IRA or funds in one stock. Basically, similar to what Jack Ma recently said, "Go big, or go home. Otherwise, you’re wasting your youth".

 

With that in mind, with Eddie and Berkowitz as the largest shareholders, and with a cost basis substantially higher than today's prices, why not put a majority of ones investment assets in it.

I avoid Analysis Paralysis

 

Easy for someone to say when they have survived what normally destroys many.  The many people who have tried this and lost it all probably would love to spread out their risk a bit better if the clock could be turned back.  I think it is far more prudent to look at all your different investment options and find what provides the best potential returns with the highest probability of success. 

 

After looking through the vast universe of stocks out there, the best one could come up with is SHLD?  I think even Pabrai said "been there, done that" in regards to his SHLD investment. 

 

I get a little annoyed when someone unusually successful says "Yeah, take your risk tolerance in life and multiply it times 100.  It worked for me so it will also work for you."

 

I think Munger would have one caveat to that… know what you are buying.

 

Sure Sears looks cheap with that illusionary margin of safety, but as an equity holder you are at the bottom on the totem pole when it comes to getting your hands on those assets. There’s 200k employees and crazy Eddy standing in your way. Seriously, there’s 15k+ securities out in the world and people focus on Sears???

 

Guys the markets don’t give out brownie points for attempting difficult things.

[zenith]

I also believe SHLD has a large MOS and I want to add something that was brought up at the Pabrai AGM about a week ago. He said in response to positioning that Munger has said that he would tell young people to put all of an IRA or funds in one stock. Basically, similar to what Jack Ma recently said, "Go big, or go home. Otherwise, you’re wasting your youth".

 

With that in mind, with Eddie and Berkowitz as the largest shareholders, and with a cost basis substantially higher than today's prices, why not put a majority of ones investment assets in it.

I avoid Analysis Paralysis

 

Easy for someone to say when they have survived what normally destroys many.  The many people who have tried this and lost it all probably would love to spread out their risk a bit better if the clock could be turned back.  I think it is far more prudent to look at all your different investment options and find what provides the best potential returns with the highest probability of success. 

 

After looking through the vast universe of stocks out there, the best one could come up with is SHLD?  I think even Pabrai said "been there, done that" in regards to his SHLD investment. 

 

I get a little annoyed when someone unusually successful says "Yeah, take your risk tolerance in life and multiply it times 100.  It worked for me so it will also work for you."

 

Good point, however, I have nearly lost it all twice, and still recovered and made much more than I lost by putting everything in essentially one company or at most 2 to 3. Pabrai lost with Delta Financial in 2008-2009, but made it back with ATSG. The point here is you do what your comfortable with.

 

Perhaps SHLD is not a winner, but you will survive and if you learn from your mistakes, you will still come out far ahead.

[Mephistopheles]

^I look at it differently. I look at my net worth much like I look at a stock. I am not worth what is in my bank account, but rather am worth the present value of all of my future cash flows. In my mid-twenties, the PV of all my future cash flows is far higher than my current accounting net worth. Therefore, putting 100% of it in one stock is not really 100% of my own "intrinsic value". Conversely, if I were to do that in my mid-fifties, it would be far riskier.

[merkhet]

I believe Munger's point was that you want to get to a point where you can invest as a "man of leisure" as fast as possible as it takes a lot of the psychology off the table.

[bci23]

What is the CFO (cough....Eddie) alluding to here with this quote:

 

"we believe that we have options that will allow us to highlight our significant real estate value and crystallize how we intend to transition away from an asset intensive, historically “store-only” based retailer to an asset light, integrated membership-focused company"

 

How would Eddie "crystallize" the situation here? Seems like a pretty strong statement that's alluding to something big in the works as the current situation is anything but crystal clear. REIT spin off?

[Luke 532]

What is the CFO (cough....Eddie) alluding to here with this quote:

 

"we believe that we have options that will allow us to highlight our significant real estate value and crystallize how we intend to transition away from an asset intensive, historically “store-only” based retailer to an asset light, integrated membership-focused company"

 

How would Eddie "crystallize" the situation here? Seems like a pretty strong statement that's alluding to something big in the works as the current situation is anything but crystal clear. REIT spin off?

 

Yeah, I wonder the same thing...

 

New post by CFO of SHLD

 

http://blog.searsholdings.com/leadership-viewpoint/setting-the-record-straight-just-the-facts/

 

I thought that was a very good post.  It would be nice if they gave the media that information directly so that mainstream media would be given a chance to get the story right.

 

I found the quote below very interesting.  I wouldn't be surprised if a major transaction with real estate is announced in the near future...

"Further, as we continue our transformation leveraging Shop Your Way® and Integrated Retail we believe that we have options that will allow us to highlight our significant real estate value and crystallize how we intend to transition away from an asset intensive, historically “store-only” based retailer to an asset light, integrated membership-focused company."

 

How do you highlight real estate value and crystallize how you intend to become asset light?  You actually have a large transaction take place.  I'm probably just reading into it, but an announcement wouldn't surprise me at all.

[TeddyLampert]

What is the CFO (cough....Eddie) alluding to here with this quote:

 

"we believe that we have options that will allow us to highlight our significant real estate value and crystallize how we intend to transition away from an asset intensive, historically “store-only” based retailer to an asset light, integrated membership-focused company"

 

How would Eddie "crystallize" the situation here? Seems like a pretty strong statement that's alluding to something big in the works as the current situation is anything but crystal clear. REIT spin off?

 

I grew up in California, but I may as well be from Missouri because it's the show-me state. With SHLD, my attitude is "show me the money, Eddie".

 

Picking apart the chairman's statements is a lot like reading tea leaves. We read into them what we want. This reminds me of when the CFO blogged and pointed at the real estate and said there's a lot of value there, which we're not going to quantify for you, hint hint, wink wink. Too clever by half. "We have options... to crystallize" is different from saying "we are taking options to crystallize". Notice the difference? It's subtle but big.

 

I started on this thread focused on the numbers and fundamentals (and I really respect guys like Chad who are objectively focused on analysis and not speculation), but then I realized that sometimes you have to return to things that are even more basic than that. How sincere and forthright is management? I don't confuse Eddie's past success and wealth as an affirmative answer to this question. How competitive will the new business be with Amazon, even IF the transformation can be pulled off? That question alone would fill up another 600+ pages.

[Mephistopheles]

 

I started on this thread focused on the numbers and fundamentals (and I really respect guys like Chad who are objectively focused on analysis and not speculation), but then I realized that sometimes you have to return to things that are even more basic than that. How sincere and forthright is management? I don't confuse Eddie's past success and wealth as an affirmative answer to this question. How competitive will the new business be with Amazon, even IF the transformation can be pulled off? That question alone would fill up another 600+ pages.

 

I agree. If it was only based on the numbers, even with the cash burn, I'd invest at this price. But I really can't stand the way management is unforthcoming and even misleading in some cases. Which means I will have to wait for an even lower price.

 

I did sell some Jan '15 $20 puts the other day though.

 

Edit: I meant '15, not '16.

[Luke 532]

I grew up in California, but I may as well be from Missouri because it's the show-me state. With SHLD, my attitude is "show me the money, Eddie".

 

The only problem is that the stock price would likely reflect the transaction(s) once Eddie shows us the money.

 

Picking apart the chairman's statements is a lot like reading tea leaves. We read into them what we want. This reminds me of when the CFO blogged and pointed at the real estate and said there's a lot of value there, which we're not going to quantify for you, hint hint, wink wink. Too clever by half. "We have options... to crystallize" is different from saying "we are taking options to crystallize". Notice the difference? It's subtle but big.

 

Agreed, that is a big difference (taking vs have).  However, I would imagine anybody that has followed Lampert for any period of time knows that he doesn't choose his words lightly.  Why mention it at all? And this isn't the first time he has used interesting language (below is an excerpt of a longer post)...

 

In the Feb 2014 Chairman's letter, Eddie writes: "Over the course of the 2013 holiday season, many retailers—including and especially Amazon—competed intensely on the basis of price. As a result, many retailers reported disappointing sales and profits for the important fourth quarter of the year. We also competed on speed and this is where I think the seeds of Sears Holdings' competitive advantage may take root." (emphasis mine).

 

When I read that last sentence, I was intrigued. Anyone who's studied Buffett (and Lampert surely has) knows the importance of a durable competitive advantage and doesn't throw around that term lightly. So when Eddie used that term in his letter, my ears pricked up.

 

How sincere and forthright is management? I don't confuse Eddie's past success and wealth as an affirmative answer to this question.

 

Many won't be comfortable with a CEO that isn't necessarily divulging all the details with the public, but that simply isn't Lampert's style and it never has been.  The role of CEO of a publicly traded company is much different than a hedge fund titan, but Lampert likely views SHLD as his investment vehicle in one way, shape, or form so he's treating it similarly and keeping his cards close to his chest.  Just like he's always done even with his most successful investors from the past (below).  I don't expect this to ever change.

http://money.cnn.com/2006/02/03/news/companies/investorsguide_lampert_stockpicking/index.htm

Media mogul David Geffen, who has invested with Lampert since 1992, recalls insisting to him at one point, "I want to know where the hell my money is." Lampert refused to tell him.

[constructive]

Kind of funny that he chose a figure of speech - "crystallize" - the exact opposite of reality. The stores are currently solid and the primary process they are going through is "liquidation".

[TeddyLampert]

 

Agreed, that is a big difference (taking vs have).  However, I would imagine anybody that has followed Lampert for any period of time knows that he doesn't choose his words lightly.  Why mention it at all? And this isn't the first time he has used interesting language (below is an excerpt of a longer post)...

 

In the Feb 2014 Chairman's letter, Eddie writes: "Over the course of the 2013 holiday season, many retailers—including and especially Amazon—competed intensely on the basis of price. As a result, many retailers reported disappointing sales and profits for the important fourth quarter of the year. We also competed on speed and this is where I think the seeds of Sears Holdings' competitive advantage may take root." (emphasis mine).

 

When I read that last sentence, I was intrigued. Anyone who's studied Buffett (and Lampert surely has) knows the importance of a durable competitive advantage and doesn't throw around that term lightly. So when Eddie used that term in his letter, my ears pricked up.

 

 

Yes, I did write that (got me!). Then Chad asked his question at the AR (paraphrase: why would someone want to shop on the SHLD site, versus another online site, and what can SHLD do differently that other retailers can't), which is essentially asking what is SHLD's competitive advantage as a retailer. Ever since Eddie wrote what he did, my ears were fine tuned to what his answer might be. If I may extend my geography metaphor: His answer was a bit like Oakland; there was no "there" there.

[Luke 532]

Yes, I did write that (got me!).

 

I wasn't trying to "get you" :)  My only point was that Lampert doesn't choose his words lightly and I appreciate you catching his verbiage in the past.  Whether the "crystalize real estate" was mentioned for a specific reason or not, I don't know, but Lampert likely scrutinizes over every sentence before anything is published.

[Picasso]

I am going to search the word "crystallize" on sec filings to see what other potential investments might come up.  Such careful word selection must mean something!

 

Sad state of the current thread when we have to analyze what that word might possibly mean.  Isn't the more logical answer that Lampert is going full hog on SYW (which he discussed at length at the annual meeting)?  Competitive advantage, asset light member model, etc, are all code words for SYW.  Other conclusions seems to me like speculation.

 

From Wikipedia:

 

Occam's razor (also written as Ockham's razor and in Latin lex parsimoniae) is a problem-solving principle devised by William of Ockham (c. 1287–1347). It states that among competing hypotheses, the one with the fewest assumptions should be selected. Other, more complicated solutions may ultimately prove correct, but—in the absence of certainty—the fewer assumptions that are made, the better.

[Luke 532]

Isn't the more logical answer that Lampert is going full hog on SYW (which he discussed at length at the annual meeting)?  Competitive advantage, asset light member model, etc, are all code words for SYW.  Other conclusions seems to me like speculation.

 

That doesn't mean there won't be any large real estate transactions.  SYW and any real estate transaction(s) aren't mutually exclusive.

[Picasso]

"we believe that we have options that will allow us to highlight our significant real estate value and crystallize how we intend to transition away from an asset intensive, historically “store-only” based retailer to an asset light, integrated membership-focused company"

 

I will translate this Eddie speak for you guys:

 

We have the ability to borrow against our real estate to invest back into SYW.  Stay tuned for the ability to earn points towards the purchase of any set of Craftsman screwdrivers.  You're going to need it after you see how much of that cash gets thrown back into SYW.

 

I am only partly joking.  Am I the only person who is drawing that conclusion from those blog remarks (minus the screwdriver imagery of course)?

[Luke 532]

http://www.sec.gov/Archives/edgar/data/923727/000119312514351000/d793976dsc13da.htm

 

Item 4. Purpose of Transaction.

 

Item 4 is hereby amended and supplemented as follows:

 

“On September 22, 2014, PYOF 2014 Loans, LLC (“PYOF”), purchased a 12.5% participation interest in the Loan from affiliates of the Reporting Persons pursuant to a participation agreement by and among PYOF and affiliates of the Reporting Persons (the “Participation Agreement”). Under the Participation Agreement, PYOF is obligated to participate pro rata in the additional funding of $200 million to Holdings on September 30, 2014, assuming satisfaction of certain required conditions.

[txlaw]

Further, as we continue our transformation leveraging Shop Your Way® and Integrated Retail we believe that we have options that will allow us to highlight our significant real estate value and crystallize how we intend to transition away from an asset intensive, historically “store-only” based retailer to an asset light, integrated membership-focused company.

 

I interpret this language like so.

 

We have options to:

 

(1) Highlight our significant real estate value, and

 

(2) Crystallize (i.e., make clear) how we intend to transition away from store-based retail to asset-light, integrated retail (transform ourselves)

 

I don't believe the CFO is referring to any actions to monetize or spin off real estate, unfortunately.

[txlaw]

http://www.sec.gov/Archives/edgar/data/923727/000119312514351000/d793976dsc13da.htm

 

Item 4. Purpose of Transaction.

 

Item 4 is hereby amended and supplemented as follows:

 

“On September 22, 2014, PYOF 2014 Loans, LLC (“PYOF”), purchased a 12.5% participation interest in the Loan from affiliates of the Reporting Persons pursuant to a participation agreement by and among PYOF and affiliates of the Reporting Persons (the “Participation Agreement”). Under the Participation Agreement, PYOF is obligated to participate pro rata in the additional funding of $200 million to Holdings on September 30, 2014, assuming satisfaction of certain required conditions.

 

Looks like the fees are also going to be distributed to participants on a pro rata basis.

 

So the actual interest rate, taking into account fees, is still very high, but at least ESL is not just pocketing the entire fee. 

[CorpRaider]

Provide Your Own Funding?

[merkhet]

It's the Perot family investment vehicle... David Radunsky is their COO.

[peridotcapital]

Further, as we continue our transformation leveraging Shop Your Way® and Integrated Retail we believe that we have options that will allow us to highlight our significant real estate value and crystallize how we intend to transition away from an asset intensive, historically “store-only” based retailer to an asset light, integrated membership-focused company.

 

I interpret this language like so.

 

We have options to:

 

(1) Highlight our significant real estate value, and

 

(2) Crystallize (i.e., make clear) how we intend to transition away from store-based retail to asset-light, integrated retail (transform ourselves)

 

I don't believe the CFO is referring to any actions to monetize or spin off real estate, unfortunately.

 

I think this is going to prove to be correct. They will highlight the real estate value by borrowing against it (just like $400M for 25 stores did already) and probably disclose more about their SYW plan. Think about all of those slides they published showing how they think a successful SYW could positively impact the financials. Get ready for more slide decks and prerecorded conference calls! Spinning off real estate now, when liquidity is such an issue, doesn't make a lot of sense since it's providing cash flow.

 

On another note, has anyone else noticed that over the last week or so the number of store closing announcements has ramped up tremendously? There was that huge surge early in the year, then it slowed, and now it seems a ton of stores are set to be closing in December. And whereas it was mostly Kmarts earlier in 2014, now we are seeing a lot more of the leased Sears stores being liquidated. Many of these leases are not even close to ending soon (they left a local Sears here in Seattle 18 months before the lease ended).

 

It would be my guess that since the financials are so bad, and Q3 is typically the worst quarter of the year in terms of cash burn, that we are well on our way to getting down to a core of their 675 owned stores. Sure there will be valuable mall-based leased Sears stores that stay open and/or bring in co-tenants, but money-losing leased locations are coming to an end, FINALLY.

 

One more point I think is important. Q3 is going to be terrible in terms of cash burn. Q4 will be positive but it will be limited to a large degree given that another wave of stores are going to be in liquidation mode during Oct/Nov/Dec and holiday inventory will be light relative to last year's Q4. Add in that Q4 comps will likely be the worst of the year (as they were last year due to increased industry-wide promotional activity) and I think they next 2 quarters will be quite ugly operationally (not just liquidity-wise).

 

What all of this means to me is that there is plenty of time to wait and see how things play out. I am very curious to see what the company's asset base looks like in February, what the balance sheet looks like, and where the stock price is as a result. I could envision a scenario, if I happen to be right about much of this, where things get even worse for a while, there is more media negativity, and as a result.... dare I say.... the stock gets to a point where I start to think about slowly creeping into it. Not saying that will happen, but I think it's possible, and it's what I am closely monitoring. I don't have a particular price in mind (it will depend on the assets and the balance sheet at the time), but whereas I was not even thinking this way at $40 or $50 (my valuations are not nearly as high as the bulls), now that we are sitting at $27 and I expect things to get worse for a couple more quarters at least, it's more conceivable. The next couple of quarters should be very, very interesting.

[Guest wellmont]

Further, as we continue our transformation leveraging Shop Your Way® and Integrated Retail we believe that we have options that will allow us to highlight our significant real estate value and crystallize how we intend to transition away from an asset intensive, historically “store-only” based retailer to an asset light, integrated membership-focused company.

 

This should be a blog post.

[merkhet]

I also noticed the increase in store closure rates over the last few weeks.

 

I floated an idea a few weeks ago to a few people (offline) that since the leases seem to have 5 year renewal rates, it would take 5 years for ESL to slough off the stores that weren't productive anymore. (And he seems to have started in 2012.)

 

It will be interesting to see where we stand in February -- agreed.