SHLDQ - Sears Holdings Corp

[FCharlie]

106.7 million shares outstanding. Lampert & Berkowitz & Tisch own all but about 11 million. I've heard that index funds own millions of shares.

 

What's fascinating is that Berkowitz was able to buy almost 800,000 shares and didn't move the stock at all.

 

 

 

 

[alpha asset strategies]

Does anyone think that Lampert and Berkowitz may eventually dump a large majority of their shares in the open market and send SHLD on an immediate death spiral into bankruptcy? 

 

From what I understand, Lampert is sitting in a controlling position with regard to SHLD's debt, so he would probably end up with control of the new company coming out of bankruptcy.  That would enable him to keep the SRG stores open for a while longer until new / higher paying / better tenants are found.  The majority of the other stores that SHLD operates could be shut down through the bankruptcy process.  It is my understanding that most of the better stores are in the SRG REIT anyway, so some of those stores MAY be slightly profitable (or at least show smaller losses than the others). 

 

At this stage of the game, I think Lampert and Berkowitz are looking at SRG as their "golden goose" over the long-term, and realize that SHLD is most likely a lost cause.  If they can somehow keep SHLD out of bankruptcy, I'm giving up investing for good - because all of the investment education and training that I have ever received will be proven wrong!

 

With all that being said, I absolutely cannot explain Berkowitz's most recent SHLD purchase - unless he has completely lost his mind or he is attempting to pump / manipulate the stock in an effort to dump shares at a higher price.  I have noticed that this stock does trade very strangely quite often - most likely as a result of the concentrated ownership.

 

The results from the most recent quarter were absolutely horrendous.  I don't see how SHLD makes it through the 2016 holiday season without raising AT LEAST several hundred million dollars more.  From what I understand, any proceeds from a KCD sale would go directly to the underfunded pension due to the "springing lien" from the PBGC.......so those funds could not be used by SHLD for operating purposes.  Perhaps they could sell off some more real estate?  However, if they survive through 2016, I think it will most likely involve "Lampert and company" making another real-estate secured loan to them.  I just don't know how much deeper "Lampert and company's" pockets are?

 

Through some channel checks and sources in the industry, I've been hearing quite a bit of chatter that several large suppliers are getting extremely nervous.  The suppliers reducing / cutting off credit (or demanding more letters of credit) can have an avalanche effect and put a retailer in bankruptcy in a matter of weeks.

 

There's no doubt that Lampert and Berkowitz have played their best "poker faces" with regard to SHLD (ie. losses are voluntary, etc.)  Even though many retail investors would want to "burn them at the stake" if Lampert / Berkowitz dumped their shares, I can't imagine why Lampert and Berkowitz would hold onto their common shares when they become certain that the ship is definitely going down - unless they are prohibited from selling due to inside ownership rules.

 

 

[Eye4Valu]

You should read Fairholme's conference call transcript and reports to get Bruce's take on SHLD. You and he are on two different pages obviously. As they say, that's what makes a market.

[alpha asset strategies]

You should read Fairholme's conference call transcript and reports to get Bruce's take on SHLD. You and he are on two different pages obviously. As they say, that's what makes a market.

 

I have read all of Berkowitz's material several times.  While I may have partially agreed with some of his assessments a few years back, SHLD's huge operating losses and cash burn over the past few years seem to have destroyed any equity value left in SHLD.

 

Berkowitz made the following quote in his Feb., 2016 conference call: "I don’t know yet. If Sears is able to return to profitability this year, which is the company’s most important focus during 2016, then yes it has been worthwhile. A considerable portion of the past cash burn is voluntary based on the transformation of the retail businesses."

 

Statements such as this really make me question either Berkowitz's integrity or ability as an investment manager.  SHLD's operating results have only continued to worsen over the past several years, and returning to profitability in 2016 - not counting the effect of any asset sales - is an absolute pipe dream.  In my mind, Berkowitz has got to know this........so why is he misleading his investors?  If anything, the shuttering of stores and / or liquidation of the retail business has occurred entirely too slowly.

 

Here is an interesting article from Seeking Alpha:

 

http://seekingalpha.com/article/3979780-sears-pension-time-bomb

 

Based on their agreement with the PBGC, it appears that SHLD has a strong incentive to maintain at least a $1 billion market cap.

 

The longer this situation plays out, the more I get convinced that Berkowitz and Lampert are absolutely "stuck" in this investment.  They have both been in the stock for over 10 years now, and it seems as if their options are rapidly dwindling.

 

Over the years, Berkowitz has made some brilliant deep-value investments - AIG, BAC, GGP - just to name a few.  However, with regard to SHLD, I think that Berkowitz missed his opportunity to exit with a huge profit several years back.

 

 

[KinAlberta]

This is isn't one I follow but SHLD's performance is widely trashed in the media and on at least one other forum. 

 

 

However, considering the spin offs, how has the combined performance really been?

[ScottHall]

This is isn't one I follow but SHLD's performance is widely trashed in the media and on at least one other forum. 

 

 

However, considering the spin offs, how has the combined performance really been?

 

Pretty awful, if you bought at $150. Pretty awful generally.

[Marve2013]

Looks awful ... I get it with all the going leaner, going smaller concept ... but the least they could do is keep it neat and tidy ...

 

http://www.businessinsider.com/sears-stores-are-in-decline-2016-6

 

[fareastwarriors]

Looks awful ... I get it with all the going leaner, going smaller concept ... but the least they could do is keep it neat and tidy ...

 

http://www.businessinsider.com/sears-stores-are-in-decline-2016-6

 

Maybe it's time for me to revisit my local Sears and try to score some deals. I do need some new clothing...pretty badly.

[oddballstocks]

Last week I needed something at the mall and decided that instead of parking at the mall entrance I'd park at Sears, walk through and check it out.  Our Sears is in a very nice mall.  Investors would probably claim it's invaluable for reinvestment because the mall upscaled over the past few years.  But instead of renovating Sears Nordstrom just built a brand new addition right next to Sears effectively cutting off the Sears wing.  Regardless, Sears is still there.

 

So I went in, walked around.  It was sad, a LOT of empty space.  Clothing racks spaced out to try to fill room, but there wasn't enough merchandise for the space.  There were a lot of empty areas like in the article as well.  Just corners of the store with nothing.  They had a large area dedicated to a Craftsmen line of clothes.  I didn't know this existed, but they were clothes people would need on a construction site.  Reflective shirts, overalls with reflectors built in etc.  The store was mostly empty.  Prices didn't jump out at me as low.  Heard some people discussing buying some clothes there and they decided to go to Burlington because Burlington has better prices and selection (which I agree with).

 

As I walked through I kept thinking "who would shop here?"  They don't have anything unique, they had very standard and bland clothes.  The prices weren't great, and the ambiance is depressing.  They're a general department store with slightly out of date items at slightly higher prices than competitors with poor surroundings.  Unless someone is loyal to Sears you can find the same merchandise anywhere else for a lower price.

[benhacker]

Pretty awful, if you bought at $150. Pretty awful generally.

 

Scott is right.

 

I think you can make an argument that ESL's cost (from KMRT notes days) has generated a good return here (I think ESL adjusted basis is ~$0 now), but SHLD common as a vehicle has not made any holder of any time frame money unless you were getting lending proceeds.

 

For detail, Morningstar has a good database of div's, splits, spins, etc, and their total return charts are highly accurate in my experience.  For rights + spins, I think they go with exchange pricing day of split / spin, but I'm not totally certain.

 

http://performance.morningstar.com/stock/performance-return.action?t=SHLD&region=USA&culture=en_US

 

Annualized returns...

3 yr          5yr          10yr

-29.94 -24.27 -19.45

[peridotcapital]

Pretty awful, if you bought at $150. Pretty awful generally.

 

Scott is right.

 

I think you can make an argument that ESL's cost (from KMRT notes days) has generated a good return here (I think ESL adjusted basis is ~$0 now), but SHLD common as a vehicle has not made any holder of any time frame money unless you were getting lending proceeds.

 

For detail, Morningstar has a good database of div's, splits, spins, etc, and their total return charts are highly accurate in my experience.  For rights + spins, I think they go with exchange pricing day of split / spin, but I'm not totally certain.

 

http://performance.morningstar.com/stock/performance-return.action?t=SHLD&region=USA&culture=en_US

 

Annualized returns...

3 yr          5yr          10yr

-29.94 -24.27 -19.45

 

I've been keeping a running list of the various corporate transactions for a while. Assuming you sold on the first day you could the total value of the divs/spins/rights comes to ~$24 per SHLD share. If you have held on to everything (much like Eddie has), it comes to ~$15 per SHLD share.

 

If we believe the media reports (roughly $800 million original investment in Kmart debt) his total investment at the time of Kmart's emergence was just north of $1 billion. And that excludes the open market purchases he has made over the years. Given that SHLD has an equity value of $1.5 billion today, it's possible that Eddie could lose money when all is said and done (CAGR over 13 years is likely low single digits currently).

 

 

[Ballinvarosig Investors]

Just a thought on Berkowitz and Sears. I know when Bruce talked about the losses at Sears being voluntary, everyone had a good laugh at his expense. What if we aren't talking Berkowitz and his statement literally? When Berkowitz talks about a transformation at Sears, everyone has automatically assumed that the transformation will involve retaining a significant number of the physical stores. What if that assumption is incorrect? What if Berkowitz and Lampert are perfectly cognizant of the fact that their physical retail outlets are dead? If that is the logical conclusion, then the next step would be to excise the rotten carcass of the money-losing physical stores from the holdco. Obviously, this would have to be managed (hence Bruce talking about the losses as voluntary), so as to protect Seritage and the cash flows that accrue to it. The only bit I don't understand is how this can be achieved. Perhaps there is a way that Sears can allow the KMart and Sears subsidiaries to go into Chapter 11, while still protecting Seritage? If this could be figured out, you'd be left with the Sears real estate, the KCD brands, the online business and a much, much smaller store network to support the online biz. If this can be done, then the losses become voluntary.

 

Of course, this could be completely off the mark. Maybe Eddie and Bruce genuinely believe the existing retail operation can be turned around. Surely they can't be this stupid.

[Ballinvarosig Investors]

One more point that I haven't heard anyone mention. Investors obviously want the vast bulk of the Sears stores closed. I am sure Bruce and Eddie do too. However, Eddie in particular will be under huge political pressure to prevent a massive chunk of Sears' 180k employees from losing their jobs. I wonder is the intention to allow SRAC and Kmart to fall into a pre-packaged Chapter 11 agreement via some liquidity event, absolving Eddie from the dirty work of firing so many employees?

[alpha asset strategies]

I'm taking an informal survey.  How much cash do you guys estimate SHLD could legitimately raise from a sale of the KCD brands?  They have been written down on the balance sheet to somewhere around $1.9 billion - I believe.  However, I don't know if that is an accurate market value or not.

 

Of course, it depends on how any deal is structured.  If SHLD simply "partners" with another retailer(s) - kind of like they did with Ace Hardware selling Craftsman tools, I just don't see that type of deal raising more than perhaps a few hundred million (at best).  After all, the new "partner" would still be competing with Sears, K-Mart & SHOS.

 

I guess I could potentially see the brands selling for a few billion IF AND ONLY IF a buyer would demand exclusivity - meaning SHLD and related entities could no longer offer those brands.  In that case, I honestly cannot see how the Sears stores and SHOS - it wouldn't affect K-Mart stores as drastically - would even be anything close to a viable retailer and remain open for business.  Furthermore, I would think that there would be class action lawsuits from hundreds of SHOS franchisees if they could no longer sell any of the KCD brands; the franchisees are already a very unhappy group from everything I've investigated.

 

The other issue is how the warranties and extended warranties on the KCD products would be handled.  It seems there are hundreds of millions in liabilities for future warranty claims for the KCD brands - for which SHLD has already received (and spent) the warranty premiums.  Would a buyer of the brands assume these risks / liabilities or would SHLD retain that risk (even if they sell off the brands)?

 

The other huge issue is the springing lien on the KCD brands by the PBGC.  The pension deficit was $2.1 billion as of April 30, 2016.  It seems to me that a large portion - if not all - of the proceeds from any KCD sale would go directly to pay down the pension liability.

 

Adding all of this together, I just don't see how a sale of the KCD brands would help SHLD's dire liquidity situation - unless a sale could bring something like $2.5B to $5B.......but are those figures even reasonable?

[peridotcapital]

I'm taking an informal survey.  How much cash do you guys estimate SHLD could legitimately raise from a sale of the KCD brands?  They have been written down on the balance sheet to somewhere around $1.9 billion - I believe.  However, I don't know if that is an accurate market value or not.

 

Of course, it depends on how any deal is structured.  If SHLD simply "partners" with another retailer(s) - kind of like they did with Ace Hardware selling Craftsman tools, I just don't see that type of deal raising more than perhaps a few hundred million (at best).  After all, the new "partner" would still be competing with Sears, K-Mart & SHOS.

 

I guess I could potentially see the brands selling for a few billion IF AND ONLY IF a buyer would demand exclusivity - meaning SHLD and related entities could no longer offer those brands.  In that case, I honestly cannot see how the Sears stores and SHOS - it wouldn't affect K-Mart stores as drastically - would even be anything close to a viable retailer and remain open for business.  Furthermore, I would think that there would be class action lawsuits from hundreds of SHOS franchisees if they could no longer sell any of the KCD brands; the franchisees are already a very unhappy group from everything I've investigated.

 

The other issue is how the warranties and extended warranties on the KCD products would be handled.  It seems there are hundreds of millions in liabilities for future warranty claims for the KCD brands - for which SHLD has already received (and spent) the warranty premiums.  Would a buyer of the brands assume these risks / liabilities or would SHLD retain that risk (even if they sell off the brands)?

 

The other huge issue is the springing lien on the KCD brands by the PBGC.  The pension deficit was $2.1 billion as of April 30, 2016.  It seems to me that a large portion - if not all - of the proceeds from any KCD sale would go directly to pay down the pension liability.

 

Adding all of this together, I just don't see how a sale of the KCD brands would help SHLD's dire liquidity situation - unless a sale could bring something like $2.5B to $5B.......but are those figures even reasonable?

 

I don't think the brands are for sale. The wording from the company read like they would try to expand distribution. This is amusing of course, because they have been trying to expand distribution for years with limited success. I don't think any company would actually pay money just for the right to sell KCD products (I doubt Ace handed over a dime, for instance). There is no reason to.

 

How they have handled the KCD business is mind boggling to me. For instance, how many Craftsman tools could they sell directly on Amazon? Would those sales not be more profitable than in-store sales that they now are losing money on? And after more than a decade they finally are testing a single, 10K sf appliance-only store in Colorado? What took so long? Did they just discover that their strongest category is appliances? It's all quite laughable.

 

As for how much the brands are actually worth, several billion is pretty aggressive in my view. Total KCD retail sales are $6B per year and falling. Let's assume a 5% royalty rate and a 50% profit margin. That's $150M of pre-tax profit on a business that gets the vast majority of its revenue from Sears and Kmart. Is that business worth more than $1 billion? Maybe you can pay more if you get big distribution deals with some big box stores, but those companies have proven already that they don't feel the need to carry Kenmore appliances when they sell everything else and are taking share from Sears anyway.

 

And that does not even factor in the pension problem. Low rates for longer coupled with the fact that the returns Sears earns on their pension plan are likely to be well below the assumed returns (7% annually) over the next 5 years will result in the pension gap being a huge problem for years to come. They had to ringfence KCD and 125 owned Sears stores, in addition to pumping $300-$400M of cash per year into the plans. It is really hard to see how this company keeps going for more than a couple more years. They are simply running out of assets to sell/pledge and the cash burn rate is actually getting worse not better ($750M in Q1 alone).

[alpha asset strategies]

peridotcapital-

 

Thanks for your valuable commentary.

 

I'm just trying to figure out where the additional cash is going to come from in order to fund operating losses (and inventory needs) through year-end.  It sounds as if we both doubt that cash will come from some sort of deal with the KCD brands.  Perhaps Lampert can arrange / fund another secured loan, but that's just adding more debt / interest expense to a company in a downward spiral that already has negative EBITDA?  Perhaps he can sell more real estate, but I'd be very surprised to see another large real estate sale (something around ~$500 million or more).

 

I know that many have been predicting the demise of SHLD for a few years now, and that Lampert has continually defied the odds; however, the financials and fundamentals seem to indicate that the end may very well be near - unless I am missing something major (and if I am, I encourage others to tell me what it is).

[peridotcapital]

peridotcapital-

 

Thanks for your valuable commentary.

 

I'm just trying to figure out where the additional cash is going to come from in order to fund operating losses (and inventory needs) through year-end.  It sounds as if we both doubt that cash will come from some sort of deal with the KCD brands.  Perhaps Lampert can arrange / fund another secured loan, but that's just adding more debt / interest expense to a company in a downward spiral that already has negative EBITDA?  Perhaps he can sell more real estate, but I'd be very surprised to see another large real estate sale (something around ~$500 million or more).

 

I know that many have been predicting the demise of SHLD for a few years now, and that Lampert has continually defied the odds; however, the financials and fundamentals seem to indicate that the end may very well be near - unless I am missing something major (and if I am, I encourage others to tell me what it is).

 

I don't think you are missing anything. There are about 300 owned stores that can back more loans from ESL. That is a lot of money. And somehow you still have people like Bruce who are willing to invest in new debt. That buys them some time, maybe 1-2 years. I think we are going to see a sprint towards getting out of leases. If they can cut cash burn rates by a few points and close 250 stores a year for the next few years perhaps Eddie can get to EBITDA breakeven like he says he wants to.

 

Of course, that doesn't count the interest and the pension payments. They announced over 100 store closings in Q1 vs 50 actual closures during all of 2015. The SRG terms also help offset some operating losses through recapture payments and cheap lease termination fees. There is also $850M of annual ad spending he can slash. They are running out of time so now I think we'll see them scramble. And any small progress that results in a short squeeze in the equity will open up a window to make a bet that he can't keep this up for 5 more years (I don't think Eddie can run this thing profitably even with 600-700 stores).

[peridotcapital]

Technical question for everyone: are the 125 REMIC stores considered owned or leased in the Sears filings/presentations? Excluding the Seritage real estate, they are reporting 322 owned Sears and 234 leased Sears. Are the 125 locations included in the 322 or the 234? Sears technically owns the REMIC, but given it was a sale-leaseback kind of transaction, you could also say they are technically leased. Any thoughts?

[adesigar]

Technical question for everyone: are the 125 REMIC stores considered owned or leased in the Sears filings/presentations? Excluding the Seritage real estate, they are reporting 322 owned Sears and 234 leased Sears. Are the 125 locations included in the 322 or the 234? Sears technically owns the REMIC, but given it was a sale-leaseback kind of transaction, you could also say they are technically leased. Any thoughts?

 

The 125 are included in the 322 owned Sears.

[jeffmori7]

Was someone aware of this delivery division, which got Costco as a client?

 

http://nypost.com/2016/07/14/sears-finds-a-new-way-to-rake-in-cash/

[BargainValueHunter]

Was someone aware of this delivery division, which got Costco as a client?

 

http://nypost.com/2016/07/14/sears-finds-a-new-way-to-rake-in-cash/

Supposedly one of Lampert's strategies was to treat certain aspects of the business like an experimental start-up (remember the data centers?):

 

http://www.chicagobusiness.com/article/20130511/ISSUE01/305119976/why-sears-sees-salvation-in-servers

 

This Innovel Solutions long shot seems to be the ONLY initiative he has spearheaded that actually turns a profit.

[jeffmori7]

Was someone aware of this delivery division, which got Costco as a client?

 

http://nypost.com/2016/07/14/sears-finds-a-new-way-to-rake-in-cash/

Supposedly one of Lampert's strategies was to treat certain aspects of the business like an experimental start-up (remember the data centers?).

 

http://www.chicagobusiness.com/article/20130511/ISSUE01/305119976/why-sears-sees-salvation-in-servers

 

This Innovel Solutions long shot seems to be the ONLY initiative he has spearheaded that actually turns a profit.

 

But even so, it is probably a tiny thing in regards to the whole business...

[jeffmori7]

Was someone aware of this delivery division, which got Costco as a client?

 

http://nypost.com/2016/07/14/sears-finds-a-new-way-to-rake-in-cash/

Supposedly one of Lampert's strategies was to treat certain aspects of the business like an experimental start-up (remember the data centers?):

 

http://www.chicagobusiness.com/article/20130511/ISSUE01/305119976/why-sears-sees-salvation-in-servers

 

This Innovel Solutions long shot seems to be the ONLY initiative he has spearheaded that actually turns a profit.

 

I think the server business is still alive: https://www.ubiquityhosting.com/

[alpha asset strategies]

I am eagerly awaiting an announcement from SHLD in the near future with regard to how they are going to raise additional cash.  I don't see how they can possibly make it through year-end without doing so.

 

It must be horrible to be a SHLD employee and have such an uncertain future.  I can't believe the lower paid employees actually stick around; I would think they could find a much more secure (and probably lucrative) job with another retailer, but perhaps that's not the case.

[thinkpad]

The website was ubiquityce not ubiquityhosting

Ubiquityce is dead.