SHLDQ - Sears Holdings Corp

[Picasso]

Everybody has their theories and predictions.

 

What ultimately matters is ESL and what he thinks is the right course. So far he has been wrong about share buybacks, selling stores too slowly and not in enough quantity and now with Shop Your Way. He also is unable to find buyers for the pieces he wants to sell because the reputation of Sears is in decline. Not to mention he makes mostly bad headlines for lack of transparency and shrewdness which would be great if he was secretive in an Apple sense. However he hasn't done much for anybody regarding Sears. In many ways his investment in Sears peaked in 2007 when he didn't really do anything at all. With all this effort and involvement the past few years, he has honestly wasted his time. But I don't blame him, Sears was in decline many years earlier.

 

If he was truly a Buffet fan, he would have realized that an earlier liquidation or investing elsewhere could have changed the course of this company. Maybe he has other ideas. I don't know, but he is invested fully and I don't see him or Bruce Berkowitz backing off from making this work.

 

My thinking is that if you trust Bruce Berkowitz and I tend to believe he is smart, that Eddie is an 'economic' guy. However long he wants to give this retail turnaround a try is a mystery but eventually several things will happen that change the course of the investment. And I believe we are approaching the final part of the Sears story where Sears was a retailer being run by a investment guy. I'd love to see these two men team up and be shareholder friendly. I am also aware that we may not be coming along for the ride. I feel burned by SHLD but this has been a learning opportunity for me and fellow investors.

 

Ultimately nobody could have predicted the last ten years for Sears and there has been a lot of discussion from brilliant people on both sides. I'm of the opinion that if ESL sees this as a way to fund his e-retailing ambitions, than you must trust him in order to be a sharehold

 

+1

 

I think it is important to note that Berkowitz may have misjudged the inemptitude of Eddie or the impact that Amazon would play, but he was very right about the margin of safety in the shares up until this point.  There have been a lot of pieces flung out from inside Sears and there still are some valuable assets relative to the market cap.  It has shielded him from the losses better than most deep value investments.  Particularly when you think how bad 2008 was and the losses incurred since 2010.

 

Lands End alone has roughly half the market cap of Sears.  It may end up being that Lands End continues to do well and ends up providing a lot of the returns Sears was unable to provide.  That is a positive development for those that actually held onto the shares.  I know a lot sold but Fairholme did not.

 

If history had been a bit different, he definitely had downside protection in case some of Eddie's crazy retail ideas actually worked.  For the most part the thesis that Berkowitz has put out continues to hold true and there is something to be said for that. 

 

I also think truly successful long-term investors like Berkowitz have something in common.  They avoid a loss which would absolutely cripple their fund/wealth.  Fairholme has 7% of their assets in SHLD.  The fund lost 10% in a single day when F&F plunged, I doubt a loss in SHLD is going to sink his ship.  Even Ackman was able to put JCP behind him and move on to other opportunities.

 

I just hope the retail investors in this stock have sized up their risk the same way. 

[texual]

It would be worse for Fairholme from a reputation standpoint. If you look at Bruce Berkowitz and his history, seldom would you find stocks he has owned for as long as SHLD. And he has been a great advocate and supporter of the company. Had he spent the last five years mounting an assault on ESL and gone activist, people would say 'well Bruce tried to right a wrong.' But he didn't. Instead he kind of defended Eddie and Sears and made some lofty valuations that today look pretty wrong. I don't know if he suffers from hero worship.

 

As for losing 10%, that does suck but I believe he can overcome that and make it back eventually. If SHLD is only 7% he has to still accept the fact that it would cripple his funds reputation. It isn't like he bought some stock and a year later it went to zero. He has vigorously defended the thesis. For nearly 10 years.

 

I feel sorry for Bruce sometimes because he carries the burden of being a more public figure and defending his investments compared to ESL who has to answer to nobody except his private investors. Ignore the crowd sounds great but Fairholme is under much worse constraints.

 

My fear is that Bruce will have to capitulate or give up something to satisfy investors who arn't on the same page. Lately it seems nobody is on the side of SHLD.

[20ppy]

-1.

 

Many are on the side of Bruce and ESL.

[texual]

Maybe on this message board and some dark corners of the investment world. I would characterize the overall sentiment on Sears as poor, with very few outside investors being active buyers. The price action on the stock in the last few months suggests that.

 

Do you believe there are a lot more people interested in the Sears story today than in the past 10 years?

[cubsfan]

Maybe on this message board and some dark corners of the investment world. I would characterize the overall sentiment on Sears as poor, with very few outside investors being active buyers. The price action on the stock in the last few months suggests that.

 

Do you believe there are a lot more people interested in the Sears story today than in the past 10 years?

 

I'd have to agree with you. As the price has gone lower, I think many are more scared, as if the business might fail.

They should get more interested as the price falls, but the operating business is so challenged, it's tough to determine

if the real estate assets, etc can salvage the overall situation.

 

As, I think you said, there are many, many smart people on both sides - and after 600 pages - it's not much clearer

who will be correct in the end.

 

[wisdom]

Why do you need the herd with you if you are value investing?

Why do you care about the price either as long as the company survives and there is more value than you are paying?

 

 

[cubsfan]

Why do you need the herd with you if you are value investing?

Why do you care about the price either as long as the company survives and there is more value than you are paying?

 

It's not my goal to be with the herd. I'm more concerned about being right on a valuation.

 

After attending this year's annual meeting - I started to have serious doubts about being correct - so I exited.

Eddie was very firm about SYW and being committed to a difficult transformation that would take a long time.

SYW has plenty of flaws, all pointed out ad nauseam on this thread by others. You can say I'm not sold on

it. Meanwhile the cash burn continues. Looks like plenty of pain ahead.

 

So I really don't know what the value of SHLD is in the drastically reduced form that it is heading toward.

[AchilliesValue]

What hasn't been discussed is what Eddie will do w/ the proceeds from the Sears Canada rights offering. It's significant because (and correct me if I'm wrong) the Sears Canada stake is not a guarantor or the credit line and the 2018 bonds. So if he takes the proceeds and plows them into the pension, inventory, or the opco at he's essentially taking shareholder equity that is distributable and allowing the bond holders to have a claim on it. And if he puts it in the Opco where the SRAC bonds have a claim what does that say about the other SHLD Co assets (the KCD ip and other bizarre securitization transactions?)

 

Disclosure: No position just watching this as a fascinating case study

[texual]

11/8/2012 is the last thing i heard from bruce berkowitz on sears holdings. he seemed pretty positive about it, calling it the secret sauce and eventual end goal of ESL to achieve permanent capital. Has anyone gotten hold of any material or interviews from BB suggesting he is still interested in SHLD from this perspective?

[texual]

There is no way Fairholme could be happy with the capital allocation of ESL at SHLD currently. He may have spun off some value but to date, the investment has been enormous with awful results. I sometimes wish Bruce had gone more active on Sears and perhaps gotten on the board or something.

 

Theres a part of me that wonders if this could be too late to fix...

[Mephistopheles]

I think there are 3 possibilities with Sears:

 

A) SYW works: Stock is a 10 bagger, everyone wins.

 

B) Eddie gives up on SYW before it's too late, liquidates much of the retail ops, spins off assets, Seritage gets much bigger much faster and/or converts to a REIT: Everyone wins though not as much as scenario A.

 

C) Eddie continues with SYW, it doesn't work, and he needs to lend more and more money backed by more and more properties to keep operations afloat: Shareholders lose everything. Eddie wins big, more so than in scenario B, though not as much as scenario A.

 

I think it's clear where his incentives are here. Think about it, right now it's a $400 million loan, is it going to get any better next year? I highly doubt it. And they lose the credit facility in 2016 right? And the senior secured is due in what, 2018? So they're going to need a lot more liquidity in a few years, guess who will lend to them?

[Luke 532]

11/8/2012 is the last thing i heard from bruce berkowitz on sears holdings.

 

Here are just a few times he's discussed it since then...

 

Late-November 2012...

http://finance.fortune.cnn.com/2012/11/26/bruce-berkowitz-fairholme/

 

Lately you've begun talking about the real estate value of Sears, which accounts for 10% of your fund.

 

"The value of Sears (SHLD) [which trades near $60] would be over $160 a share if the land on the books was fully valued. You can look back at recent transactions and ask a question: How can Sears close stores and generate hundreds of millions of dollars of cash? It gets at the inventory. The liquidation value of its inventory approaches its stock price. Forget the real estate."

 

You make Sears sound like a liquidation play, not a retail recovery.

 

"The retail recovery is a potential upside. Regardless, you'll see gigantic cash flows from the closing of locations, the pulling-out of the cash from inventory, work in process, and distribution centers. They're not idiots when it comes to real estate. They understand that today's standalone store can be tomorrow's multi-use hotel/residential-retail center. I think Eddie Lampert will end up being one of a few unbelievable case studies on what it means to be a long-term investor."

 

January 2013...

As of January 2013, Berkowitz says this is all reminiscent of early Berkshire Hathaway if we play back the tape.

 

February 2013...

"I'll give you a hint. Go to Sears. Do an analysis of Sears' legal entities.

Separate the companies between guarantors and non-guarantors. Take a look at those two individual balance sheets and cash flows and tell me what you think."

http://investinginknowledge.com/info/2013/02/bruce-berkowitz-csima-2013-audio/ (starting at 59 minute mark)

 

September 2013...

Berkowitz* "If I’m in the same shoes I would have made the same decisions…”

 

*starts roughly at the 8 minute, 50 second mark of this video from September 2013: http://www.marketfolly.com/2013/09/bruce-berkowitz-talks-fanniefreddie.html

 

September 2013...

8:50 of the video… “Host: but they haven’t had a SSS upsale comp in years?!?  Berkowitz: if you look at sales per share it’s nowhere near as radical.  What really matters isn’t sales, it’s profits.” “I may be in the minority but I think Eddie Lampert has done a great job.  If I’m in the same shoes I would have made the same decisions…”, then he discusses the immense value of the real estate and compares it with Simon SPG, an says “…that’s the rub.  Nothing’s free in this world and you don’t know when.”  “We’ve spent our lives understanding the real estate structure, the ownership structure, the leasing structure.”  “There’s no free lunch.  To make a lot of money it can’t be easy.” “The price you’re going to pay for an above average return is short-term volatility.” Berkowitz, September 2013: http://www.marketfolly.com/2013/09/bruce-berkowitz-talks-fanniefreddie.html

 

Q2 2014 Letter...

Berkowitz Q2 2014 letter to shareholders (August 2014) : "Sears (SHLD) remains the Fund’s least successful investment, yet has the highest potential based on our estimates of tangible values."  "Patience will pay."

 

And speaking the loudest, his actions...

Nov 2012:        16,934,080

Feb 2013:        18,146,573

May 2013:        19,508,773

Aug 2013:         20,393,000

Nov 2013:         20,758,000

Feb 2014:  24,226,073

May 2014:        24,502,323

August 2014:    24,672,823

September 2014 (loan): 25,532,673

 

What else do we want him to say?  He's been very clear on his belief in SHLD.

[texual]

Thank you for that informative post and summary.

 

What do you make of Mephistopheles scenario C? Is there value in holding the common if that scenario is on the table?

[Luke 532]

Thank you for that informative post and summary.

 

What do you make of Mephistopheles scenario C? Is there value in holding the common if that scenario is on the table?

 

I think it's speculative as to whether B or C would bring more value to Lampert.  There are far too many variables at work to make generalizations like that.  And I wouldn't put much weight in there only being 3 possible outcomes.

[Mephistopheles]

Thank you for that informative post and summary.

 

What do you make of Mephistopheles scenario C? Is there value in holding the common if that scenario is on the table?

 

I think it's speculative as to whether B or C would bring more value to Lampert.  There are far too many variables at work to make generalizations like that.  And I wouldn't put much weight in there only being 3 possible outcomes.

 

The way I see it is this. With SYW there are 2 possibilities: it either works, or it doesn't work.

 

If it doesn't work, there is a range. One extreme end is of it is that he liquidates ASAP and to salvage the bleeding. The other extreme end is bankruptcy. Perhaps you're right that we can't know for sure which one of these is better for Eddie. But since we're talking about SYW not working, by definition that means operations will continue to deteriorate and cash will continue to burn. We can agree that it means that SHLD will need to borrow more and more money to finance operations. Management says that the loan from Eddie was the best deal they got; well why not continue with that? If operations continue to decline, the market borrowing rates become worse and worse, so then who will lend the cash?

 

Perhaps I oversimplified it, because then we have to talk about how the bankruptcy court would view this conflict of interest as well.

 

But this $400 million loan doesn't sit well with me, and there's no reason not to do it again next year, and to even a greater degree if needed.

 

Meanwhile, we're being asked to purchase SCC from ourselves so that he can fund the "transformation". Why can't he give us a piece of the loan instead? I will give him props for committing to exercising all of the rights he will receive; that is a positive among all the negatives.

[BargainValueHunter]

I'd love to hear Warren's take on Sears Holdings as it relates to economic moats, pricing power, brand power, free cash flow, compounding, etc.

 

Has he ever discussed Sears since Lampert gained control? I could see Warren investing in Sears 40 years ago during the post-conglomerate bust.

[UK]

I'd love to hear Warren's take on Sears Holdings as it relates to economic moats, pricing power, brand power, free cash flow, compounding, etc.

 

Has he ever discussed Sears since Lampert gained control? I could see Warren investing in Sears 40 years ago during the post-conglomerate bust.

 

http://www.fool.com/community/pod/2005/050713.htm

 

Q: What is your opinion of the prospects for the Kmart/Sears merger? How will Eddie Lambert do at bringing Kmart and Sears together?

 

Nobody knows. Eddie is a very smart guy but putting Kmart and Sears together is a tough hand. Turning around a retailer that has been slipping for a long time would be very difficult. Can you think of an example of a retailer that was successfully turned around? Broadcasting is easy; retailing is the other extreme. If you had a network television station 50 years ago, you didn't really have to invent or being a good salesman. The network paid you; car dealers paid you, and you made money.

 

But in retail you have to be smarter than Wal-Mart. Every day retailers are constantly thinking about ways to get ahead of what they were doing the previous day.

 

Retailing is like shooting at a moving target. In the past, people didn't like to go excessive distances from the street cars to buy things. People would flock to those retailers that were near by. In 1996 we bought the Hochschild Kohn department store in Baltimore. We learned quickly that it wasn't going to be a winner, long-term, in a very short period of time. We had an antiquated distribution system. We did everything else right. We put in escalators. We gave people more credit. We had a great guy running it, and we still couldn't win. So we sold it around 1970. That store isn't there anymore. It isn't good enough that there were smart people running it.

 

It will be interesting to see how Kmart and Sears play out. They already have a lot of real estate, and have let go of a bunch of Sears' management (500 people). They've captured some savings already.

 

We would rather look for easier things to do. The Buffett grocery stores started in Omaha in 1869 and lasted for 100 years. There were two competitors. In 1950, one competitor went out of business. In 1960 the other closed. We had the whole town to ourselves and still didn't make any money.

 

How many retailers have really sunk, and then come back? Not many. I can't think of any. Don't bet against the best. Costco is working on a 10-11% gross margin that is better than the Wal-Mart's and Sams'. In comparison, department stores have 35% gross margins. It's tough to compete against the best deal for customers. Department stores will keep their old customers that have a habit of shopping there, but they won't pick up new ones. Wal-Mart is also a tough competitor because others can't compete at their margins. It's very efficient.

 

If Eddie sees it as impossible, he won't watch it evaporate. Maybe he can combine certain things and increase efficiencies, but he won't be able to compete against Costco's margins.

[peter1234]

I'd love to hear Warren's take on Sears Holdings as it relates to economic moats, pricing power, brand power, free cash flow, compounding, etc.

 

Has he ever discussed Sears since Lampert gained control? I could see Warren investing in Sears 40 years ago during the post-conglomerate bust.

 

I found these comments as summarized by Brian Zen (looks like from the same meeting as previous post):

Warren Buffett: "Eddie Is A Very Smart Guy!"

In a recent talk to University of Kansas students, Warren Buffett made some interesting comments about Eddie Lampert. Buffett said that Eddie is a very smart guy but putting Kmart and Sears together is a tough hand. Turning around a retailer that has been slipping for a long time would be very difficult. Buffett challenged the students: "Can you think of an example of a retailer that was successfully turned around?"

The Oracle of Omaha further observed that broadcasting is easy; retailing is the other extreme. If you had a network television station 50 years ago, you didn't really have to invent or being a good salesman. The network paid you; car dealers paid you, and you made money. But in retail you have to be smarter than Wal-Mart. Every day retailers are constantly thinking about ways to get ahead of what they were doing the previous day.

At 75, Buffett vividly recalls his experiences with retailing about 40 years ago just like they happened yesterday. Buffett said: "Retailing is like shooting at a moving target. In the past, people didn't like to drive around and go excessive distances to buy things. People would flock to those retailers that were near by. In 1969, we bought the Hochschild Kohn department store in Baltimore. We learned quickly that it wasn't going to be a long-term winner in a very short period of time. We had an antiquated distribution system. We did everything else right. We put in escalators. We gave people more credit. We had a great guy running it, and we still couldn't win. So we sold it around 1970. That store isn't there anymore. It isn't good enough that there were smart people running it."

Will Sears and Kmart Succeed?

Facing a hard ball question about Sears and Kmart from the students, Warren Buffett did a quick-and-dirty analysis of the Sears/Kmart situation:

• Sears and Kmart have a lot of real estate.

• They have let go of a bunch of Sears' management (about 500 people) and captured some savings already.

• Maybe they can combine certain things and increase efficiencies.

• But they won't be able to compete against Costco's margins. Costco is working on a 10-11% gross margin that is better than the Wal-Mart's and Sams'. In comparison, department stores have 35% gross margins. It's tough to compete against the best deal for customers. Department stores will keep their old customers that have a habit of shopping there, but they won't pick up new ones.

• If Eddie sees it as impossible, he won't watch it evaporate. But it's a tough hand. How many retailers have really sunk, and then come back? Not many. I can't think of any. Don't bet against the best (Wal-mart and Cosco).

• We [berkshire Hathaway] would rather look for easier things to do. The Buffett grocery stores started in Omaha in 1869 and lasted for 100 years. There were two competitors. In 1950, one competitor went out of business. In 1960 the other closed. We had the whole town to ourselves and still didn't make any money.

So will Sears/Kmart succeed? Here is the Oracle's answer: "Nobody knows."

 

 

[Fat Pitch]

I wonder if anyone here thought about Sears from Eddie's point of view?

 

Sure you got some real estate that if he stopped the retail business and liquidated he'll walk away with a profit. If he is able to turn everything around and created another "Amazon" like business then wow the market will give this thing a market value of 30billion+. I mean he has the distribution centers already built and a website... he's *almost* there for the big win.

 

Eddie hedged himself with owning the most senior debt so if I were him, I would triple down and extract $$$ from other shareholders and go all in with SYW. The rewards are massive if it works... if it fails I'll walk away with a small profit.

 

Wouldn't you guys risk it all (just the equity) for a 30 billion+ pay day knowing if it fails you'll still be a *modest* billionaire? It clearly explains why Eddie is "burning" all the cash on SYW. It's his lottery ticket, I can't think of any other explanation aside that he went off the deep end.

[merkhet]

You're not considering the opportunity cost of that strategy.

 

Of course, he might be pot-committed. It's hard to tell.

[peter1234]

Good perspective, but hard to pull off.

 

You could argue that this is similar to the massive transformation that they tried at JCP.

 

;)

[texual]

The problem with SYW is that it depends on Sears and Kmart since those are the only places people would ever hear about it. Basically customers are bombarded with signs and associates pushing this membership platform on them. Thats all fine and good except it is tied into Sears locations and its association doesn't suggest its an online retailer like Amazon. Ultimately as Sears goes, so does SYW.

 

I just don't see the parallels with SYW and Amazon.

[texual]

That said... if the market were to start to buy into the SYW story they could push up the stock by giving it a higher multiple based on growth. This happened to lots of modern technology companies and the sweet spot is online retailing. So far ESL has been unable to convince the market that his online platform is big enough or even able to put any dent in the marketplace. I just dont know what it would take to make SYW something valuable. Wasn't it growing 20-30% each quarter?

[BTShine]

Based upon Alexa.com data shopyourway.com website traffic is up 40% over this time last year.  This time last year it was up 100% over the previous year. 

 

That said, we are working with a startup here and it's easy to have big growth when starting with small numbers.  On the other hand the numbers aren't tiny anymore.  SYW is a substantial entity.  When you look at Google Trends data and compare search terms for "Shop Your Way" with "Skymiles" (a highly successful loyalty program) we can see that SYW pulls about 1/3 the searches of that for Skymiles.

 

 

[texual]

Would you be able to share some of this analysis because I am actually starting to wonder how to see these sorts of trends and growth because I've been under the impression that shop your way was mostly the sales at stores using the membership card.

 

I had no idea people were visiting that website. however I don't think visitors and traffic could tell us how successful they are at selling products.

 

could you give some insight on how you figured out that skymiles trick? are there other ways to figure out how SYW is performing using these indirect methods?