SHLDQ - Sears Holdings Corp

[DCG]

So they both agree that it would be better for Sears to make money to lose money.

 

 

Sounds like a brilliant plan.

[tooskinneejs]

Here are excerpts from another brutal article, this time from Moneywatch:

 

"Is Sears heading for the recycling bin?"

 

"The downward spiral at Sears just might end up on a business school lesson plan about how quickly a CEO can ruin an American icon."

 

"When CEO Eddie Lampert reported financial results for Sears Holdings' first-quarter on Thursday morning, he blamed warmer-than-normal winter weather for the company's dismal results. If that were true, then the weather must have been lousy for the past several years, given the company's ongoing decline."

 

"The company has lost so much ground with consumers -- and financial strength as a result -- that one of the few analysts still covering it predicted earlier this month that Sears may face a "liquidity event" later this year."

 

"...only 1 percent of women shoppers say Sears is their preferred apparel store, ranking the store even lower than Goodwill, according to a recent survey from Prosper Analytics & Insights."

 

Here is the full article...

 

http://www.cbsnews.com/news/is-sears-heading-for-the-recycling-bin/

[peridotcapital]

Berkowitz Conference Call Transcript is available

 

http://www.fairholmefundsinc.com/Documents/Call2016.pdf

 

A few gems from the transcript:

 

"the retail losses, is, in our opinion, voluntary"

 

"Sears has a vast real estate empire"

 

"A considerable portion of the past cash burn is voluntary"

 

"much of what Sears’ management has written has proven true"

 

I wish Bruce would explain why he believes that Eddie "voluntarily" burned through $6 billion of cash over a 6-year period (2010-2015). The better explanation is that he has no control over it at all (if you did, why not operate at least at breakeven?). And even if you thought this was Eddie's grand plan, why would you invest alongside someone who would "strategically "torch $6 billion and get nothing in return? Mind boggling.

[tooskinneejs]

This company appears to be circling the drain.  They have very little cash even after selling off lots of real estate and other assets.  I could see a significant liquidity problem in the short term where their borrowing base capacity gets pinched.  I'd guess this is the final year for Sears.

 

Wasn't 2013 the final year?

and 2014?

and 2015?

now its 2016 which is the final year

Next year it will be 2017

 

Please link to any post where I've predicated those years would be the final year for Sears.  I'll be waiting (but not holding my breath).

[merkhet]

So they both agree that it would be better for Sears to make money to lose money.

 

Sounds like a brilliant plan.

 

That's... not quite what they're saying. They're saying that they really shouldn't be burning asset value to fund operating losses. Berkowitz has semi-publicly spoken about this before, but I don't think Lampert has ever done so until today.

 

But the proof is in the execution, right? Will Lampert actually be able to stem operating losses so that he doesn't burn through any more of the corpus than he already has? We'll see.

[Spekulatius]

Berkowitz Conference Call Transcript is available

 

http://www.fairholmefundsinc.com/Documents/Call2016.pdf

 

A few gems from the transcript:

 

"the retail losses, is, in our opinion, voluntary"

 

"Sears has a vast real estate empire"

 

"A considerable portion of the past cash burn is voluntary"

 

"much of what Sears’ management has written has proven true"

 

He trails the SP500 on  a 1,3,5,10 year trailing basis. I guess his investors don't mind paying up for good storytelling.

[valueinvestor82]

I for one believe that Berkowitz is accurate on the value of SHLD. Even if he's off by 20-30%, SHLD burning $1-$2 billion a year would take many years before today's price is "fair." And hit piece articles telling us what we already know about women's shopping preferences add no value to the discussion.

[DCG]

So they both agree that it would be better for Sears to make money than lose money.

 

 

Sounds like a brilliant plan.

[adesigar]

Next week they are shooting a Western using the stores as abandoned silver boom towns.  Don't worry the studio is supplying the tumbleweed.  Too obvious?  :D

 

Now if you had said the silver was from dental fillings that would have been interesting.

http://consumerist.com/2016/02/26/yes-there-really-is-a-dentists-office-in-a-kmart-in-miami/

 

[bargainman]

 

"A considerable portion of the past cash burn is voluntary"

 

 

The greater context behind this statement was that they were investing in shop your way which is why they were burning cash.

 

I think he is wrong that it was voluntary even with that context. As somebody pointed out earlier in this thread or another, retail is brutal, and not just that it is changing at a blistering pace more so now than ever before. You basically need to run hi speed on a treadmill just to keep up and go nowhere. As such the cash burn was not voluntary but just part of keeping up and actually falling behind that industry.

[FCharlie]

Kmart no longer offers 5% in Shop Your Way points for using a Sears credit card.

 

I don't know how much that will help profitability, but it's certainly a good thing.

 

At one point in the past I recall SYW points were costing hundreds of millions of dollars annually.

 

 

[adesigar]

Kmart no longer offers 5% in Shop Your Way points for using a Sears credit card.

 

I don't know how much that will help profitability, but it's certainly a good thing.

 

At one point in the past I recall SYW points were costing hundreds of millions of dollars annually.

 

http://www.shopyourway.com/app/11150/l/partners?p=url=/partner/221554

[FCharlie]

Kmart no longer offers 5% in Shop Your Way points for using a Sears credit card.

 

I don't know how much that will help profitability, but it's certainly a good thing.

 

At one point in the past I recall SYW points were costing hundreds of millions of dollars annually.

 

http://www.shopyourway.com/app/11150/l/partners?p=url=/partner/221554

 

I've shopped at my local Kmart three times this year and no bonus points any more. I've asked the customer service employees about it and they say they offer that anymore.

 

That said, it wouldn't be the first time there was an error with the pricing and register, and it wouldn't be the first time the employees didn't know what the hell they were talking about.

 

 

[adesigar]

Chou Funds annual report has comments about SHLD

 

http://chouamerica.com/pdf/123115%20Chou%20Annual%20Report.pdf

[jeffmori7]

Ex-CEO of Sears on Lampert and the destruction of Sears: http://www.forbes.com/sites/markcohen/2016/02/29/sears-holdings-retailings-headless-horseman/#518932e7deb9

[SafetyinNumbers]

The decline in the last three months in SCC.TO has been astounding even versus SHLD. It's market cap is now below its pro forma cash position with no debt.

 

[Sunrider]

The decline in the last three months in SCC.TO has been astounding even versus SHLD. It's market cap is now below its pro forma cash position with no debt.

 

Sorry - could you break that down for me? I've just had a quick look at Morningstar to get at the numbers and I see 366m cap, cash of 256m, equity 500m and quite a bit of debt (probably trade receivables). I find the Canadian Edgar abominable and have no idea where to find better figures. Not sure what real estate that's worth anything above BV they still own?

 

Thank you!

[SafetyinNumbers]

I should point out that I'm quite ignorant on the name but I picked this up from the last financials press release. It obviously ignores trade payables and the retirement benefit liability.

 

"Cash Position.  Sears Canada ended the quarter with $75 million in cash, and expects to receive proceeds of approximately $211 million in the fourth quarter ($174 million of which has already been received at the time of this news release), primarily from the termination of the credit card agreement with JPMorgan Chase Bank, N.A. ("JPMorgan Chase") and previously announced real estate transactions that are scheduled to close in the fourth quarter.  The JPMorgan Chase transaction is discussed in more detail below in this release.  These proceeds, along with the $100 million of proceeds from the previously announced sale and leaseback of the Company's national logistics centre located in Vaughan, Ontario that is expected to close in the first quarter of 2016, would give the Company a pro forma cash balance of $386 million.  Sears Canada had no cash borrowings on the Company's $300 million credit facility as at the end of the third quarter."

 

[adesigar]

Berkowitz starting to sell SHLD after joining the board.

Sold 500,000+ Shares and Warrants since joining the board. None from FAIRX or FAAFX though.

 

Either he has learned something he doesn't like or is losing managed accounts.

[namo]

The latter.

 

"The securities were held in an account managed by Fairholme Capital Management, LLC ("Fairholme") and were sold pursuant to client instructions. Fairholme does not have any direct or indirect pecuniary interest in the managed account because Fairholme (i) does not receive any incentive compensation from the managed account and (ii) does not have a direct or indirect interest in the managed account."

[ap1234]

Peridot, any thoughts on Seritage’s Q4 results as a read through for SHLD real estate?

 

I know it’s a small sample size but so far it looks like the economics for the landlord are pretty healthy and the incoming rents are much higher than expected ($30/sqf!). You were concerned that Berkowitz was missing the fact that the landlord would have to spend a bunch of money in order to achieve higher rents and the ROI to the landlord would be high single digits. According to Seritage, they are expecting 12-13% unlevered returns on the projects that are underway (see below).

 

From the Seritage Q4 release:

 

-Average base rents for signed but not yet opened leases (“SNO leases”) increased to $20.73 PSF, reflecting average base rents of $30.03 PSF for 154,000 square feet of new leases signed during the fourth quarter; average base rents for in-place third-party leases and Sears Holdings Corporation (“Sears Holdings”) were $11.78 PSF and $4.30 PSF, respectively

 

-“In addition, we have successfully launched five new projects originated on the Seritage platform. Each of these projects involve the repurposing of single tenant buildings into multi-tenant shopping centers at materially higher rents. We expect to achieve 12-13% unlevered returns on these new projects based on the incremental rental income we generate on our invested capital. Additionally, our leasing pipeline remains robust and continues to grow. As of March 1, 2016, we had executed leases representing approximately 370,000 square feet since our inception. This space was signed at average rents of approximately $31.50 PSF, as compared to the $6.15 PSF paid by Sears Holdings on a same space basis. As we recapture and repurpose our portfolio of well-located real estate, we believe we can continue to deliver on our compelling built-in growth opportunity and drive long term shareholder value.”

 

[peridotcapital]

Peridot, any thoughts on Seritage’s Q4 results as a read through for SHLD real estate?

 

I know it’s a small sample size but so far it looks like the economics for the landlord are pretty healthy and the incoming rents are much higher than expected ($30/sqf!). You were concerned that Berkowitz was missing the fact that the landlord would have to spend a bunch of money in order to achieve higher rents and the ROI to the landlord would be high single digits. According to Seritage, they are expecting 12-13% unlevered returns on the projects that are underway (see below).

 

From the Seritage Q4 release:

 

-Average base rents for signed but not yet opened leases (“SNO leases”) increased to $20.73 PSF, reflecting average base rents of $30.03 PSF for 154,000 square feet of new leases signed during the fourth quarter; average base rents for in-place third-party leases and Sears Holdings Corporation (“Sears Holdings”) were $11.78 PSF and $4.30 PSF, respectively

 

-“In addition, we have successfully launched five new projects originated on the Seritage platform. Each of these projects involve the repurposing of single tenant buildings into multi-tenant shopping centers at materially higher rents. We expect to achieve 12-13% unlevered returns on these new projects based on the incremental rental income we generate on our invested capital. Additionally, our leasing pipeline remains robust and continues to grow. As of March 1, 2016, we had executed leases representing approximately 370,000 square feet since our inception. This space was signed at average rents of approximately $31.50 PSF, as compared to the $6.15 PSF paid by Sears Holdings on a same space basis. As we recapture and repurpose our portfolio of well-located real estate, we believe we can continue to deliver on our compelling built-in growth opportunity and drive long term shareholder value.”

 

On the redevelopment returns, I would guess they being very rational and doing the best projects first. That would explain why they are getting 12%+ on the first set of projects. The numbers should start high and then trickle down as they move through the pipeline, I would think.

 

As for rents, I'm not sure I would say that $30/sf for smaller spaces in their more desirable areas is all that surprising. It's not like they are leasing 75,000 sf boxes at those prices. We are talking about restaurants and the like. Small boxes in good areas will generate pretty high rents. The larger boxes will drag down the averages across the entire portfolio.

 

The issue for me is simply the valuation of SRG (I don't doubt they will be successful redeveloping the properties or that the real estate is valuable). It's just a matter of pinning down a fair price given their profit trajectory. I don't buy Fairholme's numbers because they don't apply a time value discount to their NAV assumptions, or even acknowledge that a fully leased/stabilized portfolio is not a relevant comparable.

 

Simply put, I am not going to pay 18.5x FFO for Seritage when the cream of the crop A mall companies (GGP/MAC/SPG) trade at 18.5x-19.5x. Now to be fair, given the secular trends in bricks and mortar retail coupled with where we are in the business cycle, I'm not going to pay nearly 20x FFO for any REIT, but that doesn't change the relative valuation of SRG.

 

Edit: Another data point that supports the idea they are starting with the best projects first: Sears pays average rent of $4.30 but they were paying $6.15/sf on the first set of projects. So Sears is likely paying as low as $2 in some places. Will the rents there also be $30/sf? Unlikely.

[Sergio8]

Well, I am actually surprised that Seritage does not trade at a huge premium compared to GGP / Simon as their redevelopment opportunity (= growth profile) is a lot superior to any comparable. I guess this is what makes a market.

 

Regarding the Sears RE, Seritage underscores an interesting dynamic : as Sears leaves more and more space in Seritage, everybody (including Mr Market) seems to understand that the value of the RE goes up (which is quite obvious as a tenant with a below market rent prevents a seller from realizing the market value of the properties).

The very same dynamic applies to the remaining properties and leases as Sears closes more locations, but the market apparently sees a different story in SHLD...

[moneyball]

Well, I am actually surprised that Seritage does not trade at a huge premium compared to GGP / Simon as their redevelopment opportunity (= growth profile) is a lot superior to any comparable. I guess this is what makes a market.

 

Regarding the Sears RE, Seritage underscores an interesting dynamic : as Sears leaves more and more space in Seritage, everybody (including Mr Market) seems to understand that the value of the RE goes up (which is quite obvious as a tenant with a below market rent prevents a seller from realizing the market value of the properties).

The very same dynamic applies to the remaining properties and leases as Sears closes more locations, but the market apparently sees a different story in SHLD...

 

Yeah, but the portfolio quality is less than that of GGP/Simon. Also the risk in owning seritage is higher for a few reasons: debt/capital; need for cash flow reinvestment; lack of dividend yield; and potential for litigation related to fraudulent conveyance. Also while SRG has a long dev pipeline, they have to reinvest capital and will potential need to issue equity/debt to facilitate the development. Lastly, and this is important, so I am repeating, the portfolio is not near the quality of its peers.

 

One unique opportunity for people that can get comfortable with SRG would be to look at WPG.

 

[Sergio8]

When your returns are substantially higher than your cost of capital, isn't cash-flow reinvestment opportunity a good thing? Shouldn't we be happy that there is a need to reinvest? Why would we want a dividend when our money can compound?

 

Litigation related to fraudulent conveyance would be strange as the money raised by the transaction was used to pay down debt (credit facility due 2016 then renegociated and a big chunk of 2018 bonds). Who would sue Seritage then?

 

As for the quality, it can be debated: the new rates paid by the tenants are great... But should it matter that much when a business is worth the sum of its future cash-flows? And Seritage is indeed growing at a nice clip for a REIT.

 

(I'm not sure WPG ROIs are comparable to those of SRG although the story is certainly worth a study)