SHLDQ - Sears Holdings Corp

[benhacker]

Despite the many continual claims of clarity here, there has been none which is why this issue keeping cropping up (that, and folks sometimes seem to be fighting a straw man).  There are / have been, apparently, a few folks saying comically incorrect things over the years about what bankruptcy remote means, but there is a fundamental question which has not been satisfactorily answered (in this thread) with references and documentation.  The last round of discussion was here, and can most succinctly summarize some interesting points, and it is a place where I think what many regard as the resident credit / ch 11 expert weighed in (Kraven) -  it is at this spot in the thread (IMO):

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/shld-sears/7655/

 

To be sure, there is still some question as to the following:

1) Does HoldCo have assets of significant value, that can be separated from Sears creditors... for less than fair market value???

2) Countering that, does / do subs of Sears have value which is claimed first by debt holders of the subsidiaries which claim value ahead of HoldCo obligations and shareholders?

 

Feel free to knock yourself out on a discussion here, but you may not get any / many takers (not even I, the continual glutten for punishment)

 

The fact is that SRAC debt has a higher rating by moody's than holdco debt, even though it's a subsidiary obligation.  However, the market has inverted the trade prices (thus assigning the inverse in terms of valuation).  Who is right?  This casts into doubt the terms / structure of the debt.

 

Further, shareholders continue to mumble about spinoffs (or... ?) getting to shareholders and not backing the debts (at either holdco or subsidiary)... however, all the spins recently have occurred with large cash infusions from rights offerings, so it seems unless the argument that these spins are being structurally underpriced (SCC.T down, OSH Ch 11, SHOS down, SRG up, .... so????) to advantage shareholders, it seems to be a weak argument at best.

 

I would say the most clear thing to give you a clue to what can be done is what *would* have been done if it were possible (if you expect Lampert to do XYZ, you might want to ask what a wise Lampert would have done 2,3,4,8 years ago).

 

If businesses X, Y and Z could be given to shareholders free and clear, or subsidiary A, B or C could have been put into bankruptcy without threatening other assets.... well I would only ask "why hasn't it happened yet?".

 

Hope that's as clear as mud.  Forgive me if I don't opaquely reference credit agreements or appeal to authority or call anyone names. :)

 

I'm just doing my best to get this thread to page 1,000 before SRAC bonds stop paying...

 

Good luck to all...

[Ballinvarosig Investors]

Real Estate Value. Generic calculations wont give anywhere near a correct valuation. Ignoring the Leases wont give a correct valuation either. A handful of properties can get you to 4 Billion. Sears share of South Coast Plaza could be almost 1 billion. The Manhattan K-Marts. Sears also occupy 7 of the top floors at Langham Place Hong Kong and are the main anchor tenant(No idea if they own or lease). etc

I was going with the original Baker Street research which is the most comprehensive valuation I have seen of Sears property on the internet.

 

http://www.bakerstreetcapital.com/BakerStreet_SHLD.pdf

 

I am happy enough to accept that their premise that 84% of the value of the real estate is in 20% of the properties. This stands to reason. When you consider that the Seritage spin-off occurred with 40% of the company owned stores going their way, I think it's fair the existing valuation be given a substantial haircut. Given that the Baker Street research has proven to be overly optimistic, I actually thought I was being a little generous with my valuation by using it. For a start, I didn't even consider the ~1000 leased stores that Sears are running that would cost money to close. I have also taken it for granted that Sears haven't just moved all the crown jewels into the Seritage spin-off. I don't think I am completely off the radar in my estimate either. The only analyst covering Sears has a $5bn valuation on remaining real estate.

 

If you want an absolute upper limit to real estate valuations, Baker Street reference Bruce Berkowitz stating $10-$11bn worth of real estate value. Sounds wonderful, until you read the estimate was from 2009, long before Sears spun out Seritage and sold a whole pile of other valuable property.

You are comparing a Auto Parts seller to a Auto Service Center using the one with the lower Price to Sales(O'Reilly and AutoZone sell for approx. 2.5x Sales). Taking half that multiple and applying it to the biggest Home Service provider in the country.

 

KCD - The Kenmore brand is listed separately but its integrated with Home Services. The reason Kenmore Appliances (manufactured by Whirlpool/Samsung/GE etc) gets consistently higher rating than Whirlpool/Samsung/GE is the feedback loop from the Home Services Techs from Service calls. The Home Service techs are also involved in the design of the products.

When all you have is a hammer... ;D The 10K has both Home Services and Auto revenue is booked together. Revenue has declined 25% in two years for the Services segment (broadly inline with the rest of the biz). I am not an American, so it's hard for me to know whether Kenmore is still a "thing". Revenues certainly suggest that at worse, it's a good business that is being quickly destroyed by association with the declining Sears business.

[Ballinvarosig Investors]

Anyone want to take a stab at valuing this thing?

 

I am going to present the Baker street sum of parts estimates for 2013 and my own updated estimates for 2016.

 

Real estate 2013 - $7.1bn-$10.1bn

Real estate 2016 - $4bn-$5.6bn

51% interest in Sears Canada 2013 - $0.7bn-$1.0bn

51% interest in Sears Canada 2016 - $0.18bn

Sears Home Service 2013 - $1.3bn-$2.4bn

Sears Home Service 2016 - $0.75bn

Sears Auto 2013 - $0.3bn/$0.7bn

Sears Auto 2016 - $0.25bn

Sears Online 2013 - $0.5bn/$1.5bn

Sears Online 2016 - $0.9bn

Kenmore, Craftsman, Diehard 2013- $2.2bn-$3.0bn

Kenmore, Craftsman, Diehard 2016 - $1.3bn

 

• You have to bear in mind, the real estate estimates were from 2013 when Sears owned 750 stores. As of the Seritage spin-off, that number is down to 420, so doing a back-of-enveloper calculation, the remaining real estate should be worth 56% of the 2012 estimate.
  
• The Sears Canada stake is at market value, so that one is easily identified.
  
• Sears Auto and Home Services appear to be lumped together in the financials with revenue for the two units at $2bn for 2015, shrinking significantly since the Baker report. When you consider that a well run Auto parts stock like AAP trades at about 1x revenue, you'd probably be thinking of Auto and Home Services being worth about 0.5x revenue
  
• Sears Online has probably grown since the original 2013 thesis, but even by Lampert's admission, it has not done enough. Using Overstocks $350m market cap as a guide, we can put a rough value on this. Overstock did $1.7bn in revenue last year, that report has Sears doing $4.2bn in revenue. 20% of all Sears revenue coming from online channels seems unlikely to me, but I will leave it up
  
• Kennmore/Craftsman/Diehard brands are undoubtedly impaired since the original thesis. I have no idea how to value these as I do not live in the US. However, given the fact that the stores that sell these products are struggling, I am going to use the original mid-point, then half it.
  

 

In the event of a liquidation, excluding land, buildings and brands, I have an equity value of negative $4bn-$5bn. After that gets taken out. That gives us an equity value remaining of $3.3bn, or about $33 a share compared to today's price of $11.50. Before anyone thinks this is a screaming buy, the values presented are very rough estimates and completely open to correction. Firstly, I think I have been too generous in my calculations. I think liquidation of current assets is likely to yield a great negative equity value. Also, I suspect that in a distressed sale, the valuations I am using might not be recognised in a stampede out. Finally, you need to also be cognizant of previous spin-offs. Lands End, Sears Home and Outlet were supposed to be the good bits of Sears, but yet when they were spun out, their values collapsed. It is possible that some of the parts in this analysis have no value, or even negative value, as there are costs to closing these operations down.

 

Can anyone take a look at my very approximate numbers and let me know if I am under or over-estimating anything? To me, Sears doesn't look invest-able and I just have no idea how Berkowitz could be thinking that this is worth $150+

On further study, I think my rough estimate may be overstated.

 

Sears Online apparently only has about the same revenue as Overstock (http://fortune.com/2015/11/06/amazon-retailers-ecommerce/), so you can shave off 0.5bn from my valuation. The Sears Canada stake was incorrectly overstated, another chunk gone. My Sears Auto estimate may even be overestimated - it looks like this biz may have negligible value given the fact it has been run into the ground (just Google the Yelp reviews, if you think it's just cranks, Google Yelp reviews for competitors). The KCD brands I fully admit, I don't understand - but I am happy to go by revenues (which stink). Also, when the retails channels disappear (which KCD are dependant upon) - then surely the value for this also disappears. I know Francis Chou believe this is worth 3bn by itself - I just can't see that sort of valuation for a brand that is in collapse.

 

People say market are inefficient - but when I look at the current market price - I am inclined to think that maybe it isn't so far away from value as people think.

[BargainValueHunter]

http://www.forbes.com/sites/panosmourdoukoutas/2016/05/14/a-surprising-sign-at-sears/

 

...an unusual sign hanging in the front of the store: “Sears Now Hiring.” At least I noticed it at my local store.

 

While we have no information as to whether similar signs are posted in other Sears stores, we were able to find a few jobs postings by the company for human resource generalists, pharmacy associates, customer service associates, and cashiers.

 

I've noticed this too at the local SHOS outlets.

[DCG]

Couldn't that also be viewed as the stores being so bad that nobody wants to work there?

[Ballinvarosig Investors]

 

Sears Online sales tumble.

[adesigar]

So Ballinvarosig what is your final conclusion on SHLD online revenue?

Your previous link from Fortune.com said SHLD sales are the same as OSTK which is 1.6 Billion and Sears was approx 2 Billion. The image you linked says is 3.5 Billion.

[Marve2013]

Looking at the latest 13Fs, we see that Fairholme sold 5% (probably due to investor redemptions or tax reasons), RBS partners no sell, Chou Associates no sell ... and it seems to have been this way for a long while

 

Just wondering how the price managed to fall from $40s all the way to the current $12ish if none of the large shareholders had sold?

 

Is it the minorities selling and due to the very small free float having a over-sized effect on the stock price?  (which if the case we should pay less attention to the stock price)

 

Or is it just the shorts borrowing more and more to short sell?

 

I get it that the business fundamentals are deteriorating and all that ... but also want to understand how is it mechanically possible that the share price has dropped this much without any major shareholders selling.

 

Thank you

 

 

[valueinvestor82]

Because despite the bonds trading around $85 and all of the aforementioned facts regarding insider ownership, shares are shorted over 100% of the effective float, and everyone else (like the posters on this message board) have already sold, taking victory laps to stroke their egos about how the decline is rational and they knew that it would decline. Look at JCP, same basic story. I made a killing on JCP (sold at $11, but recently repurchased) and this seems even more clear-cut. I see 2009 property values being quoted and then I ask myself, have they looked at values 7 years later? Do bears watch Warren Buffetts moves in SRG, which practically require an orderly, lengthy transition of SHLD out of its real estate? Even though he's a crony capitalist, he's smart, and his actions show  that the Seritage deal undervalued the real estate. Berkowitz said the remaining properties substantially mirror the property values of SRG, but the market has assumed it's all over. Buffett's views toward SRG point toward the bear case as severely overstating the bankruptcy case. But like I said, credit markets valuing the bonds at $85 be damned, it's time to evaluate the bankruptcy scenario! Sarcasm emphasized.

[Picasso]

I must have missed that, where did Buffett make those comments today?

[valueinvestor82]

You missed nothing, Picasso. I misstated my point based on a compilation of items I read today, including an SA article on the point. I edited my post to correct my mistakes :) thanks (inadvertently) for pointing that out to me. I'll blame it on being a long Monday. Regardless, my belief is that the credit markets are correct in valuing the bonds at $85 and I trust Berkowitz' homework on individual property values. He has a record since his funds inception that many envy, and it appears he's no Bill Miller.

[Picasso]

Ah okay.

 

I don't think it makes sense to fall back on Bruce's track record.  He may have done well in the past, but he's been pretty wrong in regards to Sears.  If you look at how much Sears lost in the past several years, and is likely to lose over the next few years, Bruce was close enough in valuing the assets but he failed miserably at valuing the operating business.  I think investors in SHLD have to acknowledge that there was/is cash in the register but it's getting eaten up pretty quickly.  You have to make a decision here on whether that continues or not .  Relying on the net asset value simply won't cut it at this point.

 

But I feel like there's another "puff" at the cigar here.  Maybe a rights offering or "drop down" to SRG could start another big rally.  I wouldn't put it past Lampert to come up with another clever financial engineering move to pull out some more value, but he's probably getting tight on outside assets. 

[Ballinvarosig Investors]

So Ballinvarosig what is your final conclusion on SHLD online revenue?

Your previous link from Fortune.com said SHLD sales are the same as OSTK which is 1.6 Billion and Sears was approx 2 Billion. The image you linked says is 3.5 Billion.

Sears do not give out a breakdown of revenue, so the above is an approximation. Regardless, I would still be very concerned about this valuation of the on-line business. If revenue is falling, then it suggests that on-line sales are dependent on a physical retailing presence.

[A_Hamilton]

Looking at the latest 13Fs, we see that Fairholme sold 5% (probably due to investor redemptions or tax reasons), RBS partners no sell, Chou Associates no sell ... and it seems to have been this way for a long while

 

Just wondering how the price managed to fall from $40s all the way to the current $12ish if none of the large shareholders had sold?

 

Is it the minorities selling and due to the very small free float having a over-sized effect on the stock price?  (which if the case we should pay less attention to the stock price)

 

Or is it just the shorts borrowing more and more to short sell?

 

I get it that the business fundamentals are deteriorating and all that ... but also want to understand how is it mechanically possible that the share price has dropped this much without any major shareholders selling.

 

Thank you

There is no incremental bidder for shares.

[muscleman]

So Ballinvarosig what is your final conclusion on SHLD online revenue?

Your previous link from Fortune.com said SHLD sales are the same as OSTK which is 1.6 Billion and Sears was approx 2 Billion. The image you linked says is 3.5 Billion.

Sears do not give out a breakdown of revenue, so the above is an approximation. Regardless, I would still be very concerned about this valuation of the on-line business. If revenue is falling, then it suggests that on-line sales are dependent on a physical retailing presence.

 

The true online sales could be very small. Some people said when you buy in store, the checkout stand would use the online page to check you out, so the number is categorized as online sale, store pick up, exactly what Eddie envisioned and pushed.  :D The store checkout guys do this because they probably get a bonus when online sales grow.

 

Initially the online sales figure grew strongly because more store clerks started to do this.

Now that physical store are doing worse and worse, the "online" sales figure start to shrank.

[ratiman]

So Ballinvarosig what is your final conclusion on SHLD online revenue?

Your previous link from Fortune.com said SHLD sales are the same as OSTK which is 1.6 Billion and Sears was approx 2 Billion. The image you linked says is 3.5 Billion.

Sears do not give out a breakdown of revenue, so the above is an approximation. Regardless, I would still be very concerned about this valuation of the on-line business. If revenue is falling, then it suggests that on-line sales are dependent on a physical retailing presence.

 

 

 

The true online sales could be very small. Some people said when you buy in store, the checkout stand would use the online page to check you out, so the number is categorized as online sale, store pick up, exactly what Eddie envisioned and pushed.  :D The store checkout guys do this because they probably get a bonus when online sales grow.

 

Initially the online sales figure grew strongly because more store clerks started to do this.

Now that physical store are doing worse and worse, the "online" sales figure start to shrank.

 

Wow, that is incredibly cynical . . . and sounds plausible.

[Liberty]

So Ballinvarosig what is your final conclusion on SHLD online revenue?

Your previous link from Fortune.com said SHLD sales are the same as OSTK which is 1.6 Billion and Sears was approx 2 Billion. The image you linked says is 3.5 Billion.

Sears do not give out a breakdown of revenue, so the above is an approximation. Regardless, I would still be very concerned about this valuation of the on-line business. If revenue is falling, then it suggests that on-line sales are dependent on a physical retailing presence.

 

 

 

The true online sales could be very small. Some people said when you buy in store, the checkout stand would use the online page to check you out, so the number is categorized as online sale, store pick up, exactly what Eddie envisioned and pushed.  :D The store checkout guys do this because they probably get a bonus when online sales grow.

 

Initially the online sales figure grew strongly because more store clerks started to do this.

Now that physical store are doing worse and worse, the "online" sales figure start to shrank.

 

Wow, that is incredibly cynical . . . and sounds plausible.

 

Metrics-obsessed higher management that is far removed from the people on the ground, who probably don't feel much love for the company and just want to get their bonus... Yeah, sounds very plausible.

[tede02]

Metrics-obsessed higher management that is far removed from the people on the ground, who probably don't feel much love for the company and just want to get their bonus... Yeah, sounds very plausible.

 

Thumbs up!

[Broeb22]

Just a passing thought re: fraudulent conveyance concerns...

 

By most accounts Sears is paying very low, arguably below-market rents.

 

Isn't there some argument to be made that SHLD is actually benefiting "unfairly" from its below-market rents?

 

Obviously, ESL has no incentive to put SHLD into what would be almost certain bankruptcy if SRG charged market rents, but SHLD certainly would have a difficult time executing a sale-leaseback on such advantageous terms with a third party.

 

 

[CorpRaider]

Not sure I understand the above, but I did note that PBGC has recently entered into a pretty comprehensive agreement with sears including springing liens and a very detailed delineation of assets subject thereto to protect its (secured) interests.

[tede02]

Any bets on the last time Lampert actually stepped inside a Sears or Kmart store?

[enoch01]

Metrics-obsessed higher management that is far removed from the people on the ground, who probably don't feel much love for the company and just want to get their bonus... Yeah, sounds very plausible.

 

Thumbs up!

 

+1

[rogermunibond]

Any bets on the last time Lampert actually stepped inside a Sears or Kmart store?

 

There's a Kmart on Montauk Highway out in Bridgehampton.  You know ESL stops by there for provisions whenever he goes out to his Hamptons estate ;)

 

https://www.google.com/maps/place/Kmart/@40.9338541,-72.3154656,3a,75y,90t/data=!3m8!1e2!3m6!1s-ZxNoMrawEF8%2FUFhXS3NChEI%2FAAAAAAAABWA%2FOwQdEgv3QncYEI6KoJ2h-WmiiUWlWUoWw!2e4!3e12!6s%2F%2Flh4.googleusercontent.com%2F-ZxNoMrawEF8%2FUFhXS3NChEI%2FAAAAAAAABWA%2FOwQdEgv3QncYEI6KoJ2h-WmiiUWlWUoWw%2Fs114-k-no%2F!7i972!8i1296!4m8!1m2!2m1!1sThe+Hamptons+sears+store!3m4!1s0x0000000000000000:0x8e76b9cf68ad4c9c!8m2!3d40.9343301!4d-72.3157024!6m1!1e1

[merkhet]

http://www.bloomberg.com/news/articles/2016-05-26/sears-to-explore-options-for-kenmore-craftsman-diehard-brands-ioo5bitv

 

Sears Holdings Corp. plans to consider options for its Kenmore, Craftsman and DieHard brands as well as its Sears Home Services repair business, signaling that the unprofitable retailer may again be turning to asset sales to generate cash amid continued losses.

 

The company will “aggressively” evaluate all alternatives for the businesses and has hired Citigroup Inc. and LionTree Advisors to assist in the efforts, according to a statement Thursday.

[CorpRaider]

Sort of interesting to me that they would need to hire two investment banks to evaluate the options for those assets.  Presumably those options would have been under evaluation since at least the process surrounding creation of the bonds secured by the IP underlying those businesses.  So, for like the last decade?

 

Maybe CYA to bolster position in case arguments about whether SHLD obtained highest and best value/use arise whatever the posture.  Maybe just a mad scramble for cash, which inference would be sort of supported by CFO bailing.