SHLDQ - Sears Holdings Corp

[A_Hamilton]

I would think Eddie understands IBM pretty well for a couple of reasons.

 

- His former CEO, D'Ambrosio, spent his a large part of his career at IBM - close to 20 years.

 

- Sears was always one of IBM's largest customers in Chicago. I was a technology sales rep

  with Sears as my major account for 6 years. We sold them software for their IBM operations.

  There was always a very close relationship between Sears and IBM - more strategic than most customers.

 

So I'd assume Eddie has decent insights into IBM's future value.

 

Hope IBM does cash and carry with SHLD the way Lampert is stripping this thing...IBM will be left with a big fat receivable worth approximately $0 someday.

 

[ni-co]

I would think Eddie understands IBM pretty well for a couple of reasons.

 

- His former CEO, D'Ambrosio, spent his a large part of his career at IBM - close to 20 years.

 

- Sears was always one of IBM's largest customers in Chicago. I was a technology sales rep

  with Sears as my major account for 6 years. We sold them software for their IBM operations.

  There was always a very close relationship between Sears and IBM - more strategic than most customers.

 

So I'd assume Eddie has decent insights into IBM's future value.

 

 

 

There might also be a Big Data angle/insight to his investment. 

[T-bone1]

I would think Eddie understands IBM pretty well for a couple of reasons.

 

- His former CEO, D'Ambrosio, spent his a large part of his career at IBM - close to 20 years.

 

- Sears was always one of IBM's largest customers in Chicago. I was a technology sales rep

  with Sears as my major account for 6 years. We sold them software for their IBM operations.

  There was always a very close relationship between Sears and IBM - more strategic than most customers.

 

So I'd assume Eddie has decent insights into IBM's future value.

 

 

 

There might also be a Big Data angle/insight to his investment.

 

That's a good point.  Interesting that both Buffett and Lampert (although this is currently a small investment for him) both run large enterprises and are apparently much more bullish on IBM's future than investors who don't run operating businesses.

[Matson125]

According to this article IBM was one of Eddie's first big scores

 

http://money.cnn.com/2006/02/03/news/companies/investorsguide_lampert/

 

 

[cubsfan]

This gives you a little insight into the tight relationship between Sears and IBM.

 

http://news.cnet.com/IBM-buys-rest-of-Advantis-network/2100-1001_3-279598.html

 

At one time, Sears had a totally dedicated IBM branch in Schaumburg ILL with a  huge telecom/data operation.

Advantis was eventually rolled into IBM Global Services, when IBM bought their joint venture partner, Sears, out for $450M.

 

As I remember, there were a few joint ventures between both firms int he 80's and 90's.

 

 

 

[CorpRaider]

Thanks for the thoughts guys.  I do think it was very noteworthy with respect to IBM for some of the reasons others have pointed out.  I'm planning to buy some in the mid $150s, if I get the chance.  WEB, JGB and ESL are hard to ignore.  Those are probably three of the greatest investors in my lifetime (at least they all were pre-SHLD). 

 

I meant more about how it sort cuts against the idea of SHLD as a "permanent capital vehicle" and winding down his funds.  Personally, if he made a large investment in another business or marketable security within SHLD, I would get pretty serious about going long. 

 

 

[Luke 532]

I meant more about how it sort cuts against the idea of SHLD as a "permanent capital vehicle" and winding down his funds.  Personally, if he made a large investment in another business or marketable security within SHLD, I would get pretty serious about going long.

 

Yeah, it does cut into that possibility.  There are too many variables to know for sure what his intentions are with IBM, but I'd prefer he not add to any non-SHLD positions in the future.

[Luke 532]

SHLD and Kroger...

 

http://mdjonline.com/view/full_story/26507547/article-Kroger-looks-to-open-in-Cumberland-Mall?instance=secondary_story_left_column

 

“Is it unusual? I’d say it’s certainly thinking outside the box,” added Sams. “It’s more of a situation where Sears has created an opportunity for this to happen. Sears is availing itself of a lot of different retail type of avenues and is utilizing its property to its fullest extent.”

 

Sams said the deal has been in negotiations and discussions for more than five years.

[Matson125]

Here's another one to keep an eye on:

 

http://www.examiner.net/article/20150307/NEWS/150309143/1994/NEWS

 

Sears Director of Corporate Communications Howard Riefs reported the Sears department store at the Independence Center will eventually be “streamlined,” or downsized in other words, to “better meet our needs in serving our members and customers and their desire to bring Dick’s Sporting Goods to the mall.”

[BargainValueHunter]

http://nreionline.com/leasing/reit-structure-solution-sears-woes

 

“I don't see how the REIT spinoff would help Sears in regards to being more competitive in today’s retail world,” says Jason Lail, manager of real estate research for SNL Financial. “And without new tenants in place, I don’t know how the REIT would thrive, when its main competitors would be retail REITs with a [highly diversified] tenant base and able to charge a good bit more per square foot to boot.”

[Picasso]

http://nreionline.com/leasing/reit-structure-solution-sears-woes

 

“I don't see how the REIT spinoff would help Sears in regards to being more competitive in today’s retail world,” says Jason Lail, manager of real estate research for SNL Financial. “And without new tenants in place, I don’t know how the REIT would thrive, when its main competitors would be retail REITs with a [highly diversified] tenant base and able to charge a good bit more per square foot to boot.”

 

Why do people keep calling this a spinoff?  This is not a spinoff transaction.  I suppose those bonds and warrants that were purchased last year were also a spinoff?

 

As far as the locations generating the most revenue also being the most valuable, well isn't this REIT rights offering an effort to solve that problem?  You pull out the value from the real estate to put into the operating business.  It is a lot different than closing the store to sell the real estate.

 

There are several Sears where I live.  One the same day I visted two locations relatively close to each other.  One location is in Woodland Hills where the neighbor anchors are Neiman Marcus and Nordstroms.  The store is run down and closing down sometime in May.  People in that area just don't shop at Sears.  About ten miles down in North Hollywood is another Sears next to a strip club.  That place was packed, associates have iPads, appliances have digital price tags (instead of sloppy paper tags with sharpie writing) and you can tell they run a profitable business.  The average wait time in the pick-up section was under two minutes.

 

Those two locations have very different values attached to them.  The Woodland Hills location needs to be redeveloped and the North Hollywood location needs to make that asset more valuable through operating cash flows. 

 

It seems to me that people are either saying this is a real estate company or a crapped out retailer.  In my view it is actually neither but a weird collection of assets that consolidated appear weaker than it actually is.  The value in buying SHLD relies on repositioning those assets so you can increase the cash flows of the operating business.  All these articles talking about sum of the parts or how pulling the value out the real estate will fail just miss the point.  Eddie isn't sticking around in SHLD this long to run down the business and distribute what is left.

[focusinvestor]

http://nreionline.com/leasing/reit-structure-solution-sears-woes

 

“I don't see how the REIT spinoff would help Sears in regards to being more competitive in today’s retail world,” says Jason Lail, manager of real estate research for SNL Financial. “And without new tenants in place, I don’t know how the REIT would thrive, when its main competitors would be retail REITs with a [highly diversified] tenant base and able to charge a good bit more per square foot to boot.”

 

Why do people keep calling this a spinoff?  This is not a spinoff transaction.  I suppose those bonds and warrants that were purchased last year were also a spinoff?

 

As far as the locations generating the most revenue also being the most valuable, well isn't this REIT rights offering an effort to solve that problem?  You pull out the value from the real estate to put into the operating business.  It is a lot different than closing the store to sell the real estate.

 

There are several Sears where I live.  One the same day I visted two locations relatively close to each other.  One location is in Woodland Hills where the neighbor anchors are Neiman Marcus and Nordstroms.  The store is run down and closing down sometime in May.  People in that area just don't shop at Sears.  About ten miles down in North Hollywood is another Sears next to a strip club.  That place was packed, associates have iPads, appliances have digital price tags (instead of sloppy paper tags with sharpie writing) and you can tell they run a profitable business.  The average wait time in the pick-up section was under two minutes.

 

Those two locations have very different values attached to them.  The Woodland Hills location needs to be redeveloped and the North Hollywood location needs to make that asset more valuable through operating cash flows. 

 

It seems to me that people are either saying this is a real estate company or a crapped out retailer.  In my view it is actually neither but a weird collection of assets that consolidated appear weaker than it actually is.  The value in buying SHLD relies on repositioning those assets so you can increase the cash flows of the operating business.  All these articles talking about sum of the parts or how pulling the value out the real estate will fail just miss the point.  Eddie isn't sticking around in SHLD this long to run down the business and distribute what is left.

 

+1. Very well said.

[benhacker]

It appears to be that someone has been accumulating SRAC notes.  Price has been on a steady uptrend and volume (for SRAC notes at least) has been consistently high.  HoldCo notes still trading well in the mid-90's as well.  I'm curious to see the REIT rights offering details, but I would imagine that this should be credit positive for the whole complex.

 

SSRAP still trading at 13+% yield, and 55% of par.  SRAC notes look like a good risk reward still to me... I'm not sure about the common though.

 

Continues to be an interesting situation for sure though.

 

Picasso, I like your points as well...

 

 

[Picasso]

That reminds me of this article Bloomberg had a few weeks ago:

 

http://www.bloomberg.com/news/articles/2015-02-19/sears-turnaround-seen-failing-by-traders-in-credit-swaps-market

 

The article keeps saying how Sears Holding is the one tied to those CDS contracts when it is in fact tied to the SRAC notes.  There is obviously debate as to how one affects the other in a bankruptcy process, but if you buy or trade those CDS to bet against Sears Holding, well let's just say it might blow up in your face.  How does no analyst they quote try to correct that?  I think there are only two analysts that cover this stock.  You'd think they out of anyone would know this.

 

I was thinking about how Third Avenue refers to certain parts of the capital structure as the "fulcrum security."  A cursory glance over the holding company structure leaves the recently issued 2019 notes as a sore thumb in front of pretty much everyone.  I was surprised to see investors who follow this company closely show disbelief when they traded at par.  Unless you thought all the liquid assets at Sears were going to be run down to a few hundred million from over $10 billion (in less than 5 years) it was not really a big surprise.

 

It is also interesting to see how something which most pundits seem to find a disaster inevitable has had many, many opportunities for killer returns.  If all you ever did was trade different parts of the Sears capital structure, you made a killing.  Granted the stock is a graveyard for lots of value investors but the market has been very inefficient with recognizing value in the different securities tied to it.

 

If anyone owns shares of SHLD, it is probably more important to know exactly why you own it.  If you think it's a real estate play then you will probably sell when/if it starts to trade near "book value."  If you view the stock the way Eddie is, well, you probably have to hold it when/if it trades above net asset value.  But it seems like there is a much better risk/reward in playing the real estate value (or whatever other assets you think are left) by messing with the bonds.  Otherwise you take on all the turnaround risk of the equity to *maybe* get a double.  I noticed that Chou had his thesis laid out in this simple way, whereas 90% or so of other fund managers just highlight the value of the real estate.  Things will start to work and you'll end up selling way too early because your idea of what capital allocation will look like are very different than reality. Or things will deteriorate and you'll hold on waiting for the real estate while the value is eroded away and those 2019 notes take over whatever company is left, which incidentally Lampert currently controls as well.

 

End rant.  I get a little frustrated when I see so many articles misstate the situation at Sears.  Reality is probably somewhere between what I constantly get on my news feed and that Baker Street presentation. 

[ni-co]

Picasso, do you really believe you'll only get a double if ESL turns this ship around? Or are you talking about selling it after a double because one believes that IV is reached?

 

SHLD holders shouldn't just want to own the RE upside. – For me, and I think for most equity holders, it has always been downside protection from the assets while being exposed to the full upside of a turnaround. In my opinion this is a much greater risk/reward bet than just the RE upside (though I'd agree that it's a nice bet itself). I think most investors own the equity because of this option-like payoff, not only because of the RE assets.

[Picasso]

If ESL turns around the retail it is more than a double.  I meant the view people have about the value in the real estate driving the share price.  Because of the enterprise value of the company, that can't really be true.  You won't have enough assets left by the time you pull out the real estate value to extract a lot from the current share price.

 

Maybe the majority of non-Lampert/Berkowitz investors in SHLD think the upside is the retail ops.  I get the sense that a lot of people are hanging their hats on the real estate potential. 

[Luke 532]

Recent transaction...

http://m.missoulian.com/news/state-and-regional/montana/article_c990606b-d315-5c3a-af96-ff1464203763.html?mobile_touch=true

"Southgate Mall manager Tim Winter told the Missoulian the mall has purchased Sears' real estate."

[Luke 532]

SHLD signs 27,000+ sq ft lease in Vegas.  Wonder what their plans are for that spot.

http://www.nevadabusiness.com/2015/03/colliers-finalizes-lease-sears-roebuck-co/

[davidoosnk]

It has been a long time since I looked at Sears. Still reeling from having exited a long position at the wrong time last fall. Did make a little since then on it but still wary of messing with it. Though the commentary on here is really good and so I'm tempted.

 

Noticed that SHOS Sears Hometown is down big today. Is there any real estate or other tangible value left in that equity?

[valuetrojan10]

It has been a long time since I looked at Sears. Still reeling from having exited a long position at the wrong time last fall. Did make a little since then on it but still wary of messing with it. Though the commentary on here is really good and so I'm tempted.

 

Noticed that SHOS Sears Hometown is down big today. Is there any real estate or other tangible value left in that equity?

 

I'll limit the discussion on this board since this is probably better suited for the SHOS board, but my response to your question would be not much.  There are some very smart holders that own large pieces of SHOS, so I've questioned myself a number of times.  The factors that caused me to sell SHOS are related mostly to the shared services contracts they have with SHLD.  These seem to both cloud the "true" cost of independence as well as limit the overall clarity of the business as a standalone entity.  In an ideal world, SHOS would be the entity that provides the sales outlet for SHLD KCD brands, however, this hasn't proven to gain much traction since SHOS broke off.  I also believe that SHOS is at a strategic disadvantage from a marketing perspective as their marketing is directly related to SHLD.  As SHLD shrinks, so do the marketing budgets, which directly impact the individual franchise-dependent SHOS stores.  SHOS strength is definitely in their Outlet segment, however, this still remains a minor portion of their overall footprint, albeit growing.  Frankly, I was surprised how bad the numbers have been these last two quarters in SHOS considering their continued emphasis on expansion. 

 

I haven't looked in a few months, but I believe current assets less total liabilities is something close to $12 per share, depending on how much you want to discount inventory. 

[Against the crowd]

I have been tracking short interest in SHLD and seems like there is a steady decline.

 

http://www.nasdaq.com/symbol/shld/short-interest

 

Is it because people are replacing shorts with instruments like options and CDS or the shorts genuinely believe that SHLD is turning the corner. Anybody has data points on what's happening in options or CDS market for SHLD to present a better picture on the current mentality of shorts.

[benhacker]

Is it because people are replacing shorts with instruments like options and CDS or the shorts genuinely believe that SHLD is turning the corner. Anybody has data points on what's happening in options or CDS market for SHLD to present a better picture on the current mentality of shorts.

 

I think it would be unusual for a large synthetic short position via options to not make it's way into short interest, as the counterparty to the option trade would have to hedge somehow.  It may be that CDS would be (in Sears' case) more independent from common hedging, but I would personally doubt it was a big factor (folks switching from short common to long CDS)... Sears bonds have been reasonably strong recently, so perhaps there is just a general belief that Eddie is providing capital, doing the REIT, etc, and that is bad for the shorts.  I think the general answer is just that shorting SHLD is an unattractive proposition, and it remains expensive (5-6%)... although much cheaper than historically.  Seems like the market has risen a lot more than SHLD, so shorts probably just have other ideas.

 

My 2 cents.

[valueyoda]

SHOS results clearly indicate the eroding brand value of Sears and consequently also the eroding brand value of Kenmore. It goes to show you that turning around a troubled retail brand is an impossible feat, no matter how smart you are. Until early last year, I was a big bull on Sears Holdings, but I just think that Sears has crossed a bridge too far in its turnaround, and that there is little residual value aside from its top tier properties.

[BargainValueHunter]

http://www.businessinsider.com/americas-failing-malls-are-getting-a-second-life-2015-3

 

When the city government of Voorhees, New Jersey, near Philadelphia, outgrew its city hall, for example, it moved to the struggling Echelon Mall, which had lost two anchors, Sears and JC Penney, in the 90s. Now, the Pennsylvania Real Estate Investment Trust is investing millions to build residential units and offices on the property.

 

http://www.bizjournals.com/kansascity/news/2015/03/17/overland-park-council-creates-incentivesdistrict.html

 

Lane4 and The Kroenke Group acquired the site of the closed shopping centers in February 2014 and plan to demolish all existing structures except for the Red Lobster and Olive Garden restaurants. That includes the vacant 173,000-square-foot Kmart building, built in 1963 at the French Market, and 597,699 square feet of the Metcalf South indoor mall, built in 1967.

 

[peridotcapital]

The 10-K is out so I figured I would share some tidbits that I found interesting. Not much new in there, but the last one on the list below is what got my attention.

 

1) Cash flow statement was ugly. Free cash flow for the year was negative $1.58 billion, about $200 million worse than 2013. For those who like to exclude interest and pension contributions, the retail operations free cash flow was negative $926 million.

 

2) They expect a similar level of capex in 2015 vs 2014 ($270M) and pension contributions should decline about $150 million year-over-year. All else constant, cash needs for the year would be over $1.4 billion, which would be fully covered by REIT proceeds of $2 billion+.

 

3) The Sears pension plan sold $140 million of the 2018 HoldCo debt in 2014 and now holds only $110 million vs the original $250 million investment. Which ties into the next note:

 

4) ESL now owns $205 million of the 2018 HoldCo notes, vs just $95 million the year before. Sure looks like he bought directly from the pension plan.

 

5) Despite the sales decline overall, total home appliance revenue (all brands combined) held steady for the year at $4.7 billion.

 

And here's the big one in my view:

 

6) Advertising spending was cut dramatically during 2014; down 27% from $1.5 billion to $1.1 billion. For those of you waiting for Eddie to start coming through on his promise of cutting back on traditional advertising, there you go.

 

On the bright side, comps did not tumble in sympathy, which confirms what many thought (that tv and print ads don't do much to spur sales). On the other hand, both gross margin % and selling/administrative % got worse at Kmart and Sears during 2014, so they are still having to cut prices further to get people to buy stuff. If Eddie's plan works, and he can build relationships with his core SYW members, we should see comps and gross margins go the other way, even in the face of less tv and print spending.

 

That's it for me. Hope everybody is doing well so far in 2015!

 

Chad