SHLDQ - Sears Holdings Corp

[heth247]

I found this article mildly interesting.

 

http://www.scdigest.com/ONTARGET/15-01-21-1.PHP?cid=8897&ctype=content

 

Title:

 

"Supply Chain News: Sears Holdings Builds Its Own DOM Solution, Increases eFufillment Capacity, Avoids Costly CapEx Investment"

 

Thanks for sharing this article, it is indeed a good read!

 

Cheetah Store Program is a Success

 

With the program, Sears was able to increase its store fulfillment capacity by some 60%, and total capacity in the 2013 peak period by about 30% with very little capital investment. That additional capacity enabled Sears to fulfill more than twice as many ecommerce orders in the 2013 peak as it did in 2012.

 

The strategy is also enables Sears to provide high levels of customer service with little increase in inventory levels.

 

I think this gives us some quantitative measurement.

 

An algorithm takes all fulfillment locations under consideration (stores, online DCs, retail DCs), and selects the optimal location based on total fulfillment cost. It evaluates the handling cost and considers all potential shipping modes before making a final determination of source point and transportation mode to ensure that the order makes it to the customer on or before the promised date. The system also makes upgrade or downgrade decisions regarding the service offered to the customer.

 

If a facility is unable to fulfill the order, such as due to an inventory system discrepancy, the order goes back into the DOM system's logic for a ‘retry' to identify the next best location for fulfillment.

 

The system also looks at capacities versus volumes and various "weighting factors" in making a sourcing decision.

 

This probably explains somebody's experience of "ordering one pair of shoes, and received six". Obviously, their algorithm needs some bug fix and fine tuning.

 

[BTShine]

For the first time in years we see the media give airtime to a portfolio manager that is a bull on SHLD.  It feels like this has not happened since the mid/late 2000s (besides Berkowitz on WealthTrack w Consuelo Mack).

 

http://www.thestreet.com/video/13018336/sears-will-do-more-than-survive-says-tenth-avenue-fund-manager.html?puc=yahoov&cm_ven=YAHOOV

 

Edit: Maybe there were no SHLD bulls for the media to interview until they found Mr. Ingham. 

[ap1234]

It's been a long time since we had a guarantor/non-guarantor discussion on SHLD. Paging Kraven...

 

All joking aside, it's interesting to see that Horizon Kinetics (one of SHLD's largest shareholders) actually uses the non-guarantor structure to value the business (i.e. it appears to be central to their thesis). 

 

Go to pg. 6 for Horizon's write-up on SHLD.

 

http://horizonkinetics.com/docs/Core%20Value%20Strategy%20Selected%20Holdings.pdf

 

[Luke 532]

Wanted to wait until after the first of the year, but I finally finished converting my warrants into common over the past few weeks... average price $10.60.  Larger capital commitment, obviously, but the IV on those warrants, being north of 80, is just too rich for my blood.  More flexibility with the common as well (can convert into synthetic long, can loan them out, participate easier in the REIT offering if/when it comes, etc.). 

 

By the way, a huge congrats to those that held on to those bonds from the rights offering!  I sold them a little under 87 and left a nice chunk of change on the table.

[ni-co]

It's been a long time since we had a guarantor/non-guarantor discussion on SHLD. Paging Kraven...

 

All joking aside, it's interesting to see that Horizon Kinetics (one of SHLD's largest shareholders) actually uses the non-guarantor structure to value the business (i.e. it appears to be central to their thesis). 

 

Go to pg. 6 for Horizon's write-up on SHLD.

 

http://horizonkinetics.com/docs/Core%20Value%20Strategy%20Selected%20Holdings.pdf

 

It's unfathomable to me that you've got 2bn of assets under management and aren't willing to grab yourself a lawyer to have him walk you through this.

[Luke 532]

For what it's worth, a trusted source (who wishes to go unnamed) of mine mentioned this to me awhile back regarding bankruptcy remote:

I spoke to one of the SVP's (of a top restructuring group) regarding bankruptcy remote....and it turns out, it actually does mean those subsidiaries including the real estate and the IP is *theoretically* walled off from the rest of the company. However, he said in experience, he has more often than not seen that wall come down in a real bankruptcy situation, so whatever is barricaded usually ends up being up for grabs.

[Sportgamma]

It's actually $9.2b in AUM

[ni-co]

http://basehitinvesting.com/sears-and-seven-foot-hurdles/

 

There are some really high quality write-ups I’ve read regarding the value of Sears’ assets, but many others that I’ve read forget the all-important concept of time value of money. Are those two birds in the bush really worth the one in the hand? The answer depends on many things, but specifically two come to mind: your level of conviction that there are in fact two birds in the bush, and your estimate of the time it will take to get those birds out of the bush.

 

I think ESL thinks about the time value of money every single day. A capital allocator as the control shareholder is a huge difference to the Sears of the 1980s – especially when it comes to the RE value.

[krazeenyc]

It's been a long time since we had a guarantor/non-guarantor discussion on SHLD. Paging Kraven...

 

All joking aside, it's interesting to see that Horizon Kinetics (one of SHLD's largest shareholders) actually uses the non-guarantor structure to value the business (i.e. it appears to be central to their thesis). 

 

Go to pg. 6 for Horizon's write-up on SHLD.

 

http://horizonkinetics.com/docs/Core%20Value%20Strategy%20Selected%20Holdings.pdf

 

It's unfathomable to me that you've got 2bn of assets under management and aren't willing to grab yourself a lawyer to have him walk you through this.

 

This is off-topic, having nothing to do with Sears. I haven't followed Horizon very much at all. However, I would't assume claims they make are correct just b/c they have a large AUM.

 

Just to give you an example, I've been re-researching Dreamworks Animation the last couple of days -- and while reading this thread stumbled upon the Horizon Kinetics DWA pitch.

 

As part of their DWA pitch they write:

 

"A follow-on effect, though, is that any future revenue associated with movies from the library (films that are at least 4 years past release) has very little associated cost and is largely converted to pre-tax earnings. In 2013, these revenues were $173 million."

 

They followed this statement using the $173 million "library" revenue to create a valuation for the DWA Library.  I actually did a lot of work on DWA at one point, and this immediately seemed wrong. In my memory, DWA put movies into their "library" 2 years after they release them.  Sure enough in the 2014 DWA 10K:

 

"Titles are added to the "Library" category starting with the quarter of a title's second anniversary of the initial domestic theatrical release."

 

I won't go into detail here about it, but this is important because there are significant revenues generated from various sources in the 3rd year of a film's release that are not generated in their fourth and fifth year. So in 2013, for example, a large chunk of the revenues generated by the Library are from titles in 2011 and (to a lesser degree 2010) .

 

This is just weird to me, I don't know if they just magically made up the 4 year figure or what?

[ni-co]

It's been a long time since we had a guarantor/non-guarantor discussion on SHLD. Paging Kraven...

 

All joking aside, it's interesting to see that Horizon Kinetics (one of SHLD's largest shareholders) actually uses the non-guarantor structure to value the business (i.e. it appears to be central to their thesis). 

 

Go to pg. 6 for Horizon's write-up on SHLD.

 

http://horizonkinetics.com/docs/Core%20Value%20Strategy%20Selected%20Holdings.pdf

 

It's unfathomable to me that you've got 2bn of assets under management and aren't willing to grab yourself a lawyer to have him walk you through this.

 

This is off-topic, having nothing to do with Sears. I haven't followed Horizon very much at all. However, I would't assume claims they make are correct just b/c they have a large AUM.

 

Just to give you an example, I've been re-researching Dreamworks Animation the last couple of days -- and while reading this thread stumbled upon the Horizon Kinetics DWA pitch.

 

As part of their DWA pitch they write:

 

"A follow-on effect, though, is that any future revenue associated with movies from the library (films that are at least 4 years past release) has very little associated cost and is largely converted to pre-tax earnings. In 2013, these revenues were $173 million."

 

They followed this statement using the $173 million "library" revenue to create a valuation for the DWA Library.  I actually did a lot of work on DWA at one point, and this immediately seemed wrong. In my memory, DWA put movies into their "library" 2 years after they release them.  Sure enough in the 2014 DWA 10K:

 

"Titles are added to the "Library" category starting with the quarter of a title's second anniversary of the initial domestic theatrical release."

 

I won't go into detail here about it, but this is important because there are significant revenues generated from various sources in the 3rd year of a film's release that are not generated in their fourth and fifth year. So in 2013, for example, a large chunk of the revenues generated by the Library are from titles in 2011 and (to a lesser degree 2010) .

 

This is just weird to me, I don't know if they just magically made up the 4 year figure or what?

 

Seems to be quite sloppy. My point with AUM was that they'd have the resources to do proper due diligence, which kind of goes into the same direction. I always try to do my own work.

[peridotcapital]

It's been a long time since we had a guarantor/non-guarantor discussion on SHLD. Paging Kraven...

 

All joking aside, it's interesting to see that Horizon Kinetics (one of SHLD's largest shareholders) actually uses the non-guarantor structure to value the business (i.e. it appears to be central to their thesis). 

 

Go to pg. 6 for Horizon's write-up on SHLD.

 

http://horizonkinetics.com/docs/Core%20Value%20Strategy%20Selected%20Holdings.pdf

 

I would echo what others have mentioned about the rigor of Horizon's DD. They had a Sears Canada write-up a little while back that was laughable (2013 maybe). All  you need to do is see how long they've owned SHLD and how much they paid and you can see they do not have a good grasp of it.

 

This latest blurb is also off-base.

 

They take 4 stores they sold and extrapolate that average across hundreds of owned stores. Really?

 

Then they "presume" that the 125 REMIC stores are the most valuable. Well guess what, you can take the time as I have and find out which stores those are and you will quickly realize they are not merely the "best."

 

And yet plenty of people are comforted by, and aren't bashful about pointing out, the fact that Horizon owns whatever % of SHLD and such and such owns another X%. Remember, Horizon has an incentive to publish something that sounds compelling because SHLD has been a dog of theirs for so long and they want to reassure their investors. In this case, though, I think they really just don't do the legwork as well as they should, as opposed to purposely leaving out less ideal details.

[BTShine]

I can't comment on if your criticisms of Horizon Kinetics are right or wrong.

 

But, the net returns since Jan. 1996 for their Core Value strategy are very good.  $100 invested in Jan 1996 is worth ~$800 today vs. ~$500 in the S&P.  That's an 11.3% return vs. 8.6% in the S&P.

 

http://www.horizonkinetics.com/docs/Profiles/HAM_Strategy_Profile_CoreValue.pdf

 

 

So, do you guys think (reason for outperformance):

 

1) Horizon Kinetics is lucky   

2) They just do loose/cursory/lazy research and subscribe to the motto "it's better to be approximately right than precisely wrong"?

3) Or, there's other reasons for their overall success in past 19 years but inaccurate assessments of SHLD?

 

 

[krazeenyc]

I can't comment on if your criticisms of Horizon Kinetics are right or wrong.

 

But, the net returns since Jan. 1996 for their Core Value strategy are very good.  $100 invested in Jan 1996 is worth ~$800 today vs. ~$500 in the S&P.  That's an 11.3% return vs. 8.6% in the S&P.

 

http://www.horizonkinetics.com/docs/Profiles/HAM_Strategy_Profile_CoreValue.pdf

 

 

So, do you guys think (reason for outperformance):

 

1) Horizon Kinetics is lucky   

2) They just do loose/cursory/lazy research and subscribe to the motto "it's better to be approximately right than precisely wrong"?

3) Or, there's other reasons for their overall success in past 19 years but inaccurate assessments of SHLD?

 

I'm not insinuating any of the above.  I have no opinion on Horizon Kinetics in general.  I'm just trying to say -- just b/c a firm talks their book -- don't believe everything they say. I think sometimes investment companies can play fast and loose with the facts -- to support their thesis. Perhaps the people who do the due diligence/research aren't the same ones writing the investor letters (info lost in translation and not checked carefully?)

[writser]

I hope it means that you can do cursory research on stocks, buy them if they appear cheap and outperform anyway. That would be great news because that's more or less my investment strategy :) .

[vinod1]

I can't comment on if your criticisms of Horizon Kinetics are right or wrong.

 

But, the net returns since Jan. 1996 for their Core Value strategy are very good.  $100 invested in Jan 1996 is worth ~$800 today vs. ~$500 in the S&P.  That's an 11.3% return vs. 8.6% in the S&P.

 

http://www.horizonkinetics.com/docs/Profiles/HAM_Strategy_Profile_CoreValue.pdf

 

 

So, do you guys think (reason for outperformance):

 

1) Horizon Kinetics is lucky   

2) They just do loose/cursory/lazy research and subscribe to the motto "it's better to be approximately right than precisely wrong"?

3) Or, there's other reasons for their overall success in past 19 years but inaccurate assessments of SHLD?

 

There is little outperformance if any and possibly underperformance if you compare their returns to the most relevant index.

 

Their portfolio is heavily in the mid cap space and tilting slightly to the value spectrum. So you need to use something like a mid-cap value index to benchmark their returns. I do not have the numbers handy, but it had a couple of percentage points higher returns than S&P 500. A more simpler benchmark would be S&P 500 equal weight. It also had a couple of percent higher returns.

 

Vinod

[peridotcapital]

I hope it means that you can do cursory research on stocks, buy them if they appear cheap and outperform anyway. That would be great news because that's more or less my investment strategy :) .

 

You can definitely do this! If you simply split the S&P 500 index into quintiles based on P/E ratio, as one example, there is a direct inverse relationship between each quintile's P/E and the future returns for that group of stocks.

[chetster]

I’m starting to find reasonable write-ups about Sears in trade press.  For years there were almost none.  This one, like the others, has a few interesting items, including:

 

“In strong markets like Southern California, Sears holds a strong position. In fact, several deals Hammond tried to forge with the retailer there cratered “because Sears didn’t want to give up a space when they’re paying incredibly low rents on long-term leases,” he said. One high-profile grocery chain was willing to pay market rent to sublease a Southern California location, but Sears declined, choosing instead to continue paying rent that is one-third of the market average, noted Hammond.”

 

The article:

 

Changes in Sears’ $5 billion real estate portfolio affect retail landscape

 

http://www.icsc.org/sct/newswire/changes-in-sears-5-billion-real-estate-portfolio-affect-retail-landscape

 

[ni-co]

Since ESL's bridge loan was meant to be extended to February 28 at most, do you guys think we're going to see the REIT offering until then?

[Picasso]

Another question I have not seen asked yet.

 

Anyone worried about the latest quarter from Lands End?  The stock went from $53 to $37 is relatively short order. 

[merkhet]

Another question I have not seen asked yet.

 

Anyone worried about the latest quarter from Lands End?  The stock went from $53 to $37 is relatively short order.

 

Lands End has its own thread -- http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/lands-end/50/

 

And it was surprising to see a 5% revenue miss or thereabouts translate into a 31% drop in stock price.

[muscleman]

Another question I have not seen asked yet.

 

Anyone worried about the latest quarter from Lands End?  The stock went from $53 to $37 is relatively short order.

 

Lands End has its own thread -- http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/lands-end/50/

 

And it was surprising to see a 5% revenue miss or thereabouts translate into a 31% drop in stock price.

 

Did you follow Lands' End? I looked at it when it was $26 last year but didn't buy because I didn't understand the potentials. Then the earnings got better and the stock shoot up to $52 in 7 months.

But now it is suddenly down so much? That's surprising to me.

Do you have any thesis for LE?

[Picasso]

I didn't mean to start a discussion on Lands End but more insinuate potential weakness is Sears SSS.  I have not had time to look into the potential read through but was hoping someone else had.

[BTShine]

I did read through the LE release and here are my thoughts.

 

Strong dollar and weakness in Europe hurt international revenue (my guess is a drop of 10-20% in US dollar terms). Not surprising and not worrisome for the long term value of the franchise. Almost all of this decline was offset by gains in domestic online sales.  Online sales are increasing (not surprising).

 

In store SSS dropped by about 7%, which is a big % of a small portion of their sales.  In store sales are about 15% of total sales.  So, a 7% drop in SSS translates into only a ~1% drop in total sales.

 

Also, there were major costs associated with being a public company which affected earnings negatively by ~$10 million pre tax. 

 

Overall, my rough estimate is that the increase in domestic direct, or online sales are approximately offsetting the 7% decrease in domestic same store sales at the mall.   

 

What does this say for Sears?  My guess is that similar things are happening at Sears.  SSS are flat, and much of the online growth is being offset by falling sales at the stores.

[Against the crowd]

I think SHLD most likely is going to have a tough holiday season. Most retailers have performed poorly this holiday season and SHLD will be no exception.......On the contrary any surprise on SSS comps will be a big surprise. Full disclosure....I am long SHLD for almost 4 years now.

 

 

 

 

[BTShine]

It will be interesting to see the comp sales reported for Q4.  Sears has produced horrible Q4 comps the past few years (especially last year of -6.4%), but over the past few quarters domestic sales have been essentially flat (even beating Kohls and equaling Macy's). 

 

Interesting article from the WSJ about mall real estate and sales -- http://www.wsj.com/articles/high-end-malls-get-boost-from-high-tech-stores-1422402946?mod=e2tw

 

I found this paragraph to be very interesting:

 

"The share of retail sales completed online has risen steadily, from 4% in the third quarter of 2009 to 6.6% in the third quarter of 2014, according to the most recent data available from the National Retail Federation."

 

That tells me the mall is not going away anytime soon.