SHLDQ - Sears Holdings Corp

[Jurgis]

Has anyone compared what ESL has done with total value of SHLD, Orchard Supply, SHOS, SRG, Sears Canada, any thing missing, 5 years ago versus today. Kind of like what LMCA does with Liberty and all its spinoffs and trackers.

 

This question is asked on this thread every couple of months. Search the thread, Luke?

[walt373]

Sears layoffs message board: https://www.thelayoff.com/sears-holdings?sort=active. Probably one of the most depressing things I've ever read.

[tede02]

I stopped into a Sears store this morning that is part of the most recent round of closures to see if there were any good deals.  It was just sad walking through it.  It was so obvious that the store had been neglected for years.  The lighting, flooring, virtually everything looked worn and tired.  I honestly felt sad seeing it and knowing this would be the last time I ever walked through the same Sears store I did as a kid (very good possibility I'll never shop at a Sears store again). 

[DTEJD1997]

Hey all:

 

I went shopping at a K-mart near my house today.  The K-Mart has been there as long as I've been alive and I can remember shopping in it as a child...

 

It is certainly run down, BUT it is reasonably clean and well stocked (at first glance).  Almost all of their clothing and shoes & boots are "house brands" or brands I've never heard of.  Selection was OK, but not great in terms of sizes. 

 

Physically, the store is in OK shape, but rough around the edges.  The workers seem to be doing the best they can with limited resources.  It was not the disaster that I was expecting after seeing reports on the interwebs of things being run down.

 

Check out was bad...too many questions, too slow, too many printouts & coupons.  I very strongly suspect that if one were sharp & inclined to figure out....there could be all sorts of ways to game the system at Kmart-Sears when buying things.

 

They had good bargains on certain items...but other items were priced way too high.

 

Food & toys & hardware seems to be less well stocked than in years past.

 

Overall, this store seems to be putting up a valiant fight...but THERE IS SIMPLY NO WAY OUT.  They are not going to be able to compete vs. Amazon, Wal-Mart, Cost-co, Meijers and others. 

 

In my opinion, shutting down/bankruptcy is the only option.  The only question is how long it will take.

[PLynchJr]

Yikes...approaching $7 a share today!  :o

[redwood]

estimate to burn 1.8 billion this year and the price of the whole company is 800M.

[Candyman1]

http://www.reuters.com/article/idUSFit987711

 

"Sears has injected almost $12 billion in liquidity between 2012 to 2016 to fund ongoing operations"

 

Also ... tangible equity at the end of October 16 was a cool negative $5.5 billion. SHLD's situation looks awesome now that it is expected to incorporate the Q4 losses after SSS declined 12% to 13% in November and December. And then 2017 is expected to blow through $1.8 billion after $250 million in positive inventory adjustment. It is pretty easy to see that tangible equity could be a negative $7.5 billion by the end of 2017. I know SHLD has some assets to sell but I seriously doubt if there is $7.5 billion in value to still sell. (Since Craftsman has not yet closed I did not include it yet.)

 

Also anyone notice how little SHLD got for Craftsman with only $525 million upfront. I don't think the $250 million that is supposed to come in 3 years will be of much value to current shareholders. I can only imagine how little Kenmore and Diehard will fetch upon a sale.

 

Hard to see how SHLD makes it past 2017.

[aws]

It's pretty crazy how expensive it is to short SHLD compared with other stocks.  The borrow cost is well over 50% at IB and has been as high as 100%.  I get why everything thinks Sears will fail, I just can't imagine how the risk-reward is there to justify paying 4 or 5% a month in fees to short it.  Even if you can hold it to zero you will give up half your gains in fees if it limps along for another year, and then you still have unlimited risk in case some miracle is pulled out and the common is left with some value. 

 

I think with that asymmetric risk-reward shorting is a terrible idea, but I just wish there was a good way to inverse the people shorting the stock.  Going long and lending shares doesn't really do that since at best a portion of my shares would be loaned and the broker would take most of the fee anyway.  The closest I can come up with is doing a synthetic long, where I sell a put and buy a call at the same price and date to take advantage of the discrepancy in put/call prices.  I could buy a $7 March call and sell a $7 March put for a net cost of 0, which would be effectively like buying the stock today for $7.  It's like a 6% discount over 7 weeks, which is pretty decent.

[DooDiligence]

Sears "Shop Your Way" Uber promo (digging deep...)

[ScottHall]

Sears "Shop Your Way" Uber promo (digging deep...)

 

Well smoke 'em if you got 'em, because soon enough the only thing you'll be able to do with Shop Your Way points is wipe your ass with them.

[Jurgis]

We were in Burlington MA mall today. Sears closed one floor of their store. Now there is Primark ( www.primark.com ) store in that floor. Outside there is crappy signage for both Sears and Primark.

 

The remaining floor of Sears looks full of merchandise. We did not look in more detail.

[aws]

CBL & Associates Properties, Inc. Acquires Five Sears Stores for Future Redevelopment Through Sale-Leaseback

http://www.businesswire.com/news/home/20170130005370/en/CBL-Associates-Properties-Acquires-Sears-Stores-Future

 

CBL is up today, SHLD is down massively.  Not sure if it's related to this news or just a continuation of the prior few days of selling.

[Guest roark33]

I am sure everyone who traded this from 8 to 10 this past month sold at 10 and are now going to tell me when to buy at the bottom and when to sell on the spike?  Thanks in advance. 

[scorpioncapital]

Any reason they didn't sell the property to Seritage? Is it because the property was inside the mall owned by the buyer?

[peridotcapital]

Any reason they didn't sell the property to Seritage? Is it because the property was inside the mall owned by the buyer?

 

The natural, logical buyer for Sears stores is not Seritage, it is the mall owner itself. They can pay more because they have a lower cost of capital and it is more synergistic since they are managing the rest of the mall already. Owning one store in 100 different malls (the Seritage model) is less efficient and besides, they have more than 200 locations they need to redevelop... why would they feel the need to buy 5 more at this point?

[valueinvestor82]

Company sells property for $72.5 million, stock immediately wipes out $72 million of value. The absurdity is as follows- so SHLD sells another 10 properties for the same price tag. The stock declines to zero (current market cap adjusted for the cash received from the sale), then how does this "efficient" market punish SHLD? The first stock to go negative? I saw the same thing happen with OCN, it went to $1.50 because the analysts spreadsheets showed OCN losing a temporary amount of losses into perpetuity. Until they demonstrated the turning point, and then in a few months the stock went to $6. The market can't discount the assets forever, and Eddie can't burn the same cash forever, so someone will be proven right or wrong, and I hope it's sooner than later.

[scorpioncapital]

Sears is a closely held company, in this scenario the market price may not be as important as it could represent a minority interest. If they can wind-up the business, how much does it cost to operate a mailing list and a website? Maybe even outsource the dropshipping (e.g. Sears is a customer of CommerceHub).

The pensions and liabilities do seem worrisome. I'm not sure if those can be renegotiated outside of bankruptcy, anybody know? Or if it will be enough to wind them up and still not be a zero.

[Candyman1]

Company sells property for $72.5 million, stock immediately wipes out $72 million of value. The absurdity is as follows- so SHLD sells another 10 properties for the same price tag. The stock declines to zero (current market cap adjusted for the cash received from the sale), then how does this "efficient" market punish SHLD? The first stock to go negative? I saw the same thing happen with OCN, it went to $1.50 because the analysts spreadsheets showed OCN losing a temporary amount of losses into perpetuity. Until they demonstrated the turning point, and then in a few months the stock went to $6. The market can't discount the assets forever, and Eddie can't burn the same cash forever, so someone will be proven right or wrong, and I hope it's sooner than later.

 

So you assume that SHLD's losses are temporary? I guess after the Chapter 7 filing has been finished and all assets are sold off and ESL has stolen a good chunk of the real estate, that losses will actually be zero as there will be no more company left.

[Candyman1]

Sears is a closely held company, in this scenario the market price may not be as important as it could represent a minority interest. If they can wind-up the business, how much does it cost to operate a mailing list and a website? Maybe even outsource the dropshipping (e.g. Sears is a customer of CommerceHub).

The pensions and liabilities do seem worrisome. I'm not sure if those can be renegotiated outside of bankruptcy, anybody know? Or if it will be enough to wind them up and still not be a zero.

 

Wind up the business and then operate a mailing list and a website? Basically you want SHLD to compete directly with Amazon. I know this is one of Eddie's dreams, but a good luck with that one. What about the cost of winding down another 1,350 stores? All the while tangible equity at the end of Q3 was negative 5.5 billion. And that does not include Q4 2016 where SHLD has negative SSS of 12% in November and December. And what about the $1.8 billion in cash drain for 2017? That gets us easily over minus $7 billion in tangible equity after the $525 million from Craftsman at the end of 2017. I doubt if SHLD has enough assets to cover that. Regarding the pension plan, that is already ringfenced with assets by the PBGC. Basically if you want a stock going into BK not to be a zero I always assume that all the liabilities need to be paid in full.

[BeerBBQ]

Sears is a closely held company, in this scenario the market price may not be as important as it could represent a minority interest. If they can wind-up the business, how much does it cost to operate a mailing list and a website? Maybe even outsource the dropshipping (e.g. Sears is a customer of CommerceHub).

The pensions and liabilities do seem worrisome. I'm not sure if those can be renegotiated outside of bankruptcy, anybody know? Or if it will be enough to wind them up and still not be a zero.

 

Wind up the business and then operate a mailing list and a website? Basically you want SHLD to compete directly with Amazon. I know this is one of Eddie's dreams, but a good luck with that one. What about the cost of winding down another 1,350 stores? All the while tangible equity at the end of Q3 was negative 5.5 billion. And that does not include Q4 2016 where SHLD has negative SSS of 12% in November and December. And what about the $1.8 billion in cash drain for 2017? That gets us easily over minus $7 billion in tangible equity after the $525 million from Craftsman at the end of 2017. I doubt if SHLD has enough assets to cover that. Regarding the pension plan, that is already ringfenced with assets by the PBGC. Basically if you want a stock going into BK not to be a zero I always assume that all the liabilities need to be paid in full.

 

You are saying that the owned real estate is only worth book value at best. Why do you think that to be the case?

 

Also, do you have an estimate for the value (if any) of the below market leases?

[Candyman1]

Sears is a closely held company, in this scenario the market price may not be as important as it could represent a minority interest. If they can wind-up the business, how much does it cost to operate a mailing list and a website? Maybe even outsource the dropshipping (e.g. Sears is a customer of CommerceHub).

The pensions and liabilities do seem worrisome. I'm not sure if those can be renegotiated outside of bankruptcy, anybody know? Or if it will be enough to wind them up and still not be a zero.

 

Wind up the business and then operate a mailing list and a website? Basically you want SHLD to compete directly with Amazon. I know this is one of Eddie's dreams, but a good luck with that one. What about the cost of winding down another 1,350 stores? All the while tangible equity at the end of Q3 was negative 5.5 billion. And that does not include Q4 2016 where SHLD has negative SSS of 12% in November and December. And what about the $1.8 billion in cash drain for 2017? That gets us easily over minus $7 billion in tangible equity after the $525 million from Craftsman at the end of 2017. I doubt if SHLD has enough assets to cover that. Regarding the pension plan, that is already ringfenced with assets by the PBGC. Basically if you want a stock going into BK not to be a zero I always assume that all the liabilities need to be paid in full.

 

You are saying that the owned real estate is only worth book value at best. Why do you think that to be the case?

 

Also, do you have an estimate for the value (if any) of the below market leases?

 

On the leases ... remember when Ackman was high on Borders and the below market leases. Last time I checked Borders ain't around anymore and it took its leases down with it. My value for the below market leases is zero, actually negative as it requires SHLD to keep stores open and lose money or pay off the landlord. Also SHLD has closed a fair amount of below market rent stores and how many have they sold? You have to get approval of the landlords and other stake holders in many cases.

 

On the value of the real estate I find it hard to assume that the per store value of owned stores is more than the SRG EV per store. And all the while SHLD is blowing through cash at a 1.5 billion plus run rate. Just look at the SSS over the last 10 years, but especially the last 2 years. SHLD has been closing stores as fast as it can and its SSS continue to fall off a cliff. Think about it ... SHLD closed 235 stores in 2016 and SSS fell 12% in November and December. And that does not include the hundreds of stores more that were closed in the past. I have heard the story about halting the fall of SSS for a while now and despite the closing of many stores it continues unabated. As long as SHLD cannot halt the SSS declilne it is toast. Also the brands were supposed to be worth a lot more too and then Craftsman got sold for even less than I thought it to be worth. If Craftsman only fetched what it did, I can only imagine how little SHLD is going to get for Diehard and Kenmore. Also, I do believe that the real estate will be sold for less than most people believe it to be worth. What happens when you drop 1000 plus stores into a chapter 7 filing? Also don't forget that SRG is dropping 150 to 250 a square foot in redeveloping the stores. Now SRG is shopping all its properties to potential tenants and seeing what sticks. The first 2 million square feet was the easy part. We will see what happens when SHLD files for chapter 7 and suddenly we have a 1000 plus stores that hit the market.

 

One last point ... assets being worth book value ain't enough. First SHLD needs the asset value to cover the negative $7 billion plus in tangible equity at the end of 2017. But you also have to cover the equity valuation if you want to get a return for the shareholders. So SHLD has a market cap of $750 million right now. That means that if you want to get just the current market value of your equity you need to add $750 million to the $7 billion. And if current shareholders want to get a 100% return, which I believe should be a minimum requirement given the risk profile, then you'd need $1.5 billion on top of the $7 billion. And this assumes that after Q4 2017 there are no more losses. In short, if you want a 100% return on your equity you have to assume that the assets are worth $8.5 billion and you have to assume that SHLD can be liquidated at zero cost. Btw. Closing the last 1,500 stores in 2017 would cost $1.5 billion easily by itself.

 

 

 

[scorpioncapital]

Sounds like the value is in the redevelopment if the properties are worth so little as-is, so even if 1000 stores hit the market, they won't do much just sitting there. First mover advantage for SRG?

Also what do you see as the status of the debt-holders in bankruptcy, including Lampert? Do you think they think they will get close to full recovery and are sort of eyeballing for a soft landing to that target?

 

[BeerBBQ]

Sears is a closely held company, in this scenario the market price may not be as important as it could represent a minority interest. If they can wind-up the business, how much does it cost to operate a mailing list and a website? Maybe even outsource the dropshipping (e.g. Sears is a customer of CommerceHub).

The pensions and liabilities do seem worrisome. I'm not sure if those can be renegotiated outside of bankruptcy, anybody know? Or if it will be enough to wind them up and still not be a zero.

 

I appreciate the detailed thoughts.

 

As far as the below market leases go, for the stores that have been shut down, do you know how many of those leases were terminated/expired? Have any of those leases been kept for potential redevelopment? I think the point regarding the below market leases is how many square feet (if any) are possible for sublease at much higher rent.  It seems that in order to get anywhere close to what Berkowitz thinks SHLD NAV is, the leases have to be worth several $billion. I'm not saying he is right but he is likely to have more information regarding the potential value of those leases than I do.  I've been trying to find current evidence (there is a lawsuit from '07 that puts the value of those leases at $11m per store) that those leases have value (no luck yet) because if they don't, there really isn't much NAV. 

 

As far as owned real estate.  If I take the EV of SRG of $3.5B and divide that by 235 stores, I get $15M per store.  $15m x 400 stores left yields about $6B which is much higher than current BV of PPE.  I think that is too high btw.  I think the owned stores are probably worth 3.5-4.5B (based on valuing the remaining top mall properties similar to the valuation of the JV properties - $157/sq ft - and the rest of the stores between $53 and $68 a sq ft). Moody's recently said the 211 still unencumbered stores were worth about $2.5B or about 11M per store  which would put the value of all at owned stores at $4+B.  I think you make a good point regarding the pace of store shut downs and how it seems that the stores aren't being shut down fast enough because you would think profitability/SS would improve by shutting down the underperformers.  Seems like the deterioration in the remaining stores is occurring faster than what's needed to transition to the future vision for the company. However, regardless of the deteriorating economics for sears stores, there still seems to be an appetite for transactions of their owned real estate evidenced by the CBL transaction.  The owned stores will likely continue to have value for alternative uses and thus should be able to generate future cash. It seems they have bought more time to sell more assets and thus the real estate won't be dumped on the market via liquidation. As the RE assets continue to be sold over time, the values they receive will probably be closer to recent transaction experience. Obviously though, burning through that cash will further erode whatever NAV is there today. 

 

In terms of the Craftsman value.  I thought SWK was basically paying for the future growth of the brand outside of sears. Isn't there still value accruing to sears for the next 15 years (assuming they will be in business to capture those sales) from whatever product sales they make over that time frame and shouldn't the PV of that value creation be included in total brand value (I could be thinking about that incorrectly - so please correct me if I am wrong)? If that is the case, the value of the brand is more than what has been reported and probably closer to what many had believed it to be.  Thus the values for Kenmore, diehard, home services etc. which are not included in your TBV are probably worth more than the $2b intangible value on b/s and closes that gap you are referencing considerably.   

 

I think the key to NAV being positive is the below market leases have to have value.

 

Wind up the business and then operate a mailing list and a website? Basically you want SHLD to compete directly with Amazon. I know this is one of Eddie's dreams, but a good luck with that one. What about the cost of winding down another 1,350 stores? All the while tangible equity at the end of Q3 was negative 5.5 billion. And that does not include Q4 2016 where SHLD has negative SSS of 12% in November and December. And what about the $1.8 billion in cash drain for 2017? That gets us easily over minus $7 billion in tangible equity after the $525 million from Craftsman at the end of 2017. I doubt if SHLD has enough assets to cover that. Regarding the pension plan, that is already ringfenced with assets by the PBGC. Basically if you want a stock going into BK not to be a zero I always assume that all the liabilities need to be paid in full.

 

You are saying that the owned real estate is only worth book value at best. Why do you think that to be the case?

 

Also, do you have an estimate for the value (if any) of the below market leases?

 

On the leases ... remember when Ackman was high on Borders and the below market leases. Last time I checked Borders ain't around anymore and it took its leases down with it. My value for the below market leases is zero, actually negative as it requires SHLD to keep stores open and lose money or pay off the landlord. Also SHLD has closed a fair amount of below market rent stores and how many have they sold? You have to get approval of the landlords and other stake holders in many cases.

 

On the value of the real estate I find it hard to assume that the per store value of owned stores is more than the SRG EV per store. And all the while SHLD is blowing through cash at a 1.5 billion plus run rate. Just look at the SSS over the last 10 years, but especially the last 2 years. SHLD has been closing stores as fast as it can and its SSS continue to fall off a cliff. Think about it ... SHLD closed 235 stores in 2016 and SSS fell 12% in November and December. And that does not include the hundreds of stores more that were closed in the past. I have heard the story about halting the fall of SSS for a while now and despite the closing of many stores it continues unabated. As long as SHLD cannot halt the SSS declilne it is toast. Also the brands were supposed to be worth a lot more too and then Craftsman got sold for even less than I thought it to be worth. If Craftsman only fetched what it did, I can only imagine how little SHLD is going to get for Diehard and Kenmore. Also, I do believe that the real estate will be sold for less than most people believe it to be worth. What happens when you drop 1000 plus stores into a chapter 7 filing? Also don't forget that SRG is dropping 150 to 250 a square foot in redeveloping the stores. Now SRG is shopping all its properties to potential tenants and seeing what sticks. The first 2 million square feet was the easy part. We will see what happens when SHLD files for chapter 7 and suddenly we have a 1000 plus stores that hit the market.

 

One last point ... assets being worth book value ain't enough. First SHLD needs the asset value to cover the negative $7 billion plus in tangible equity at the end of 2017. But you also have to cover the equity valuation if you want to get a return for the shareholders. So SHLD has a market cap of $750 million right now. That means that if you want to get just the current market value of your equity you need to add $750 million to the $7 billion. And if current shareholders want to get a 100% return, which I believe should be a minimum requirement given the risk profile, then you'd need $1.5 billion on top of the $7 billion. And this assumes that after Q4 2017 there are no more losses. In short, if you want a 100% return on your equity you have to assume that the assets are worth $8.5 billion and you have to assume that SHLD can be liquidated at zero cost. Btw. Closing the last 1,500 stores in 2017 would cost $1.5 billion easily by itself.

 

I appreciate the detailed thoughts.

 

As far as the below market leases go, for the stores that have been shut down, do you know how many of those leases were terminated/expired? Have any of those leases been kept for potential redevelopment? I think the point regarding the below market leases is how many square feet (if any) are possible for sublease at much higher rent.  It seems that in order to get anywhere close to what Berkowitz thinks SHLD NAV is, the leases have to be worth several $billion. I'm not saying he is right but he is likely to have more information regarding the potential value of those leases than I do.  I've been trying to find current evidence (there is a lawsuit from '07 that puts the value of those leases at $11m per store) that those leases have value (no luck yet) because if they don't, there really isn't much NAV. 

 

As far as owned real estate.  If I take the EV of SRG of $3.5B and divide that by 235 stores, I get $15M per store.  $15m x 400 stores left yields about $6B which is much higher than current BV of PPE.  I think that is too high btw.  I think the owned stores are probably worth 3.5-4.5B (based on valuing the remaining top mall properties similar to the valuation of the JV properties - $157/sq ft - and the rest of the stores between $53 and $68 a sq ft). Moody's recently said the 211 still unencumbered stores were worth about $2.5B or about 11M per store  which would put the value of all at owned stores at $4+B.  I think you make a good point regarding the pace of store shut downs and how it seems that the stores aren't being shut down fast enough because you would think profitability/SS would improve by shutting down the underperformers.  Seems like the deterioration in the remaining stores is occurring faster than what's needed to transition to the future vision for the company. However, regardless of the deteriorating economics for sears stores, there still seems to be an appetite for transactions of their owned real estate evidenced by the CBL transaction.  The owned stores will likely continue to have value for alternative uses and thus should be able to generate future cash. It seems they have bought more time to sell more assets and thus the real estate won't be dumped on the market via liquidation. As the RE assets continue to be sold over time, the values they receive will probably be closer to recent transaction experience. Obviously though, burning through that cash will further erode whatever NAV is there today. 

 

In terms of the Craftsman value.  I thought SWK was basically paying for the future growth of the brand outside of sears. Isn't there still value accruing to sears for the next 15 years (assuming they will be in business to capture those sales) from whatever product sales they make over that time frame and shouldn't the PV of that value creation be included in total brand value (I could be thinking about that incorrectly - so please correct me if I am wrong)? If that is the case, the value of the brand is more than what has been reported and probably closer to what many had believed it to be.  Thus the values for Kenmore, diehard, home services etc. which are not included in your TBV are probably worth more than the $2b intangible value on b/s and closes that gap you are referencing considerably.   

 

I think the key to NAV being positive is the below market leases have to have value. 

 

 

 

 

 

     

 

 

 

 

[Candyman1]

Sears is a closely held company, in this scenario the market price may not be as important as it could represent a minority interest. If they can wind-up the business, how much does it cost to operate a mailing list and a website? Maybe even outsource the dropshipping (e.g. Sears is a customer of CommerceHub).

The pensions and liabilities do seem worrisome. I'm not sure if those can be renegotiated outside of bankruptcy, anybody know? Or if it will be enough to wind them up and still not be a zero.

 

I appreciate the detailed thoughts.

 

As far as the below market leases go, for the stores that have been shut down, do you know how many of those leases were terminated/expired? Have any of those leases been kept for potential redevelopment? I think the point regarding the below market leases is how many square feet (if any) are possible for sublease at much higher rent.  It seems that in order to get anywhere close to what Berkowitz thinks SHLD NAV is, the leases have to be worth several $billion. I'm not saying he is right but he is likely to have more information regarding the potential value of those leases than I do.  I've been trying to find current evidence (there is a lawsuit from '07 that puts the value of those leases at $11m per store) that those leases have value (no luck yet) because if they don't, there really isn't much NAV. 

 

As far as owned real estate.  If I take the EV of SRG of $3.5B and divide that by 235 stores, I get $15M per store.  $15m x 400 stores left yields about $6B which is much higher than current BV of PPE.  I think that is too high btw.  I think the owned stores are probably worth 3.5-4.5B (based on valuing the remaining top mall properties similar to the valuation of the JV properties - $157/sq ft - and the rest of the stores between $53 and $68 a sq ft). Moody's recently said the 211 still unencumbered stores were worth about $2.5B or about 11M per store  which would put the value of all at owned stores at $4+B.  I think you make a good point regarding the pace of store shut downs and how it seems that the stores aren't being shut down fast enough because you would think profitability/SS would improve by shutting down the underperformers.  Seems like the deterioration in the remaining stores is occurring faster than what's needed to transition to the future vision for the company. However, regardless of the deteriorating economics for sears stores, there still seems to be an appetite for transactions of their owned real estate evidenced by the CBL transaction.  The owned stores will likely continue to have value for alternative uses and thus should be able to generate future cash. It seems they have bought more time to sell more assets and thus the real estate won't be dumped on the market via liquidation. As the RE assets continue to be sold over time, the values they receive will probably be closer to recent transaction experience. Obviously though, burning through that cash will further erode whatever NAV is there today. 

 

In terms of the Craftsman value.  I thought SWK was basically paying for the future growth of the brand outside of sears. Isn't there still value accruing to sears for the next 15 years (assuming they will be in business to capture those sales) from whatever product sales they make over that time frame and shouldn't the PV of that value creation be included in total brand value (I could be thinking about that incorrectly - so please correct me if I am wrong)? If that is the case, the value of the brand is more than what has been reported and probably closer to what many had believed it to be.  Thus the values for Kenmore, diehard, home services etc. which are not included in your TBV are probably worth more than the $2b intangible value on b/s and closes that gap you are referencing considerably.   

 

I think the key to NAV being positive is the below market leases have to have value.

 

Wind up the business and then operate a mailing list and a website? Basically you want SHLD to compete directly with Amazon. I know this is one of Eddie's dreams, but a good luck with that one. What about the cost of winding down another 1,350 stores? All the while tangible equity at the end of Q3 was negative 5.5 billion. And that does not include Q4 2016 where SHLD has negative SSS of 12% in November and December. And what about the $1.8 billion in cash drain for 2017? That gets us easily over minus $7 billion in tangible equity after the $525 million from Craftsman at the end of 2017. I doubt if SHLD has enough assets to cover that. Regarding the pension plan, that is already ringfenced with assets by the PBGC. Basically if you want a stock going into BK not to be a zero I always assume that all the liabilities need to be paid in full.

 

You are saying that the owned real estate is only worth book value at best. Why do you think that to be the case?

 

Also, do you have an estimate for the value (if any) of the below market leases?

 

On the leases ... remember when Ackman was high on Borders and the below market leases. Last time I checked Borders ain't around anymore and it took its leases down with it. My value for the below market leases is zero, actually negative as it requires SHLD to keep stores open and lose money or pay off the landlord. Also SHLD has closed a fair amount of below market rent stores and how many have they sold? You have to get approval of the landlords and other stake holders in many cases.

 

On the value of the real estate I find it hard to assume that the per store value of owned stores is more than the SRG EV per store. And all the while SHLD is blowing through cash at a 1.5 billion plus run rate. Just look at the SSS over the last 10 years, but especially the last 2 years. SHLD has been closing stores as fast as it can and its SSS continue to fall off a cliff. Think about it ... SHLD closed 235 stores in 2016 and SSS fell 12% in November and December. And that does not include the hundreds of stores more that were closed in the past. I have heard the story about halting the fall of SSS for a while now and despite the closing of many stores it continues unabated. As long as SHLD cannot halt the SSS declilne it is toast. Also the brands were supposed to be worth a lot more too and then Craftsman got sold for even less than I thought it to be worth. If Craftsman only fetched what it did, I can only imagine how little SHLD is going to get for Diehard and Kenmore. Also, I do believe that the real estate will be sold for less than most people believe it to be worth. What happens when you drop 1000 plus stores into a chapter 7 filing? Also don't forget that SRG is dropping 150 to 250 a square foot in redeveloping the stores. Now SRG is shopping all its properties to potential tenants and seeing what sticks. The first 2 million square feet was the easy part. We will see what happens when SHLD files for chapter 7 and suddenly we have a 1000 plus stores that hit the market.

 

One last point ... assets being worth book value ain't enough. First SHLD needs the asset value to cover the negative $7 billion plus in tangible equity at the end of 2017. But you also have to cover the equity valuation if you want to get a return for the shareholders. So SHLD has a market cap of $750 million right now. That means that if you want to get just the current market value of your equity you need to add $750 million to the $7 billion. And if current shareholders want to get a 100% return, which I believe should be a minimum requirement given the risk profile, then you'd need $1.5 billion on top of the $7 billion. And this assumes that after Q4 2017 there are no more losses. In short, if you want a 100% return on your equity you have to assume that the assets are worth $8.5 billion and you have to assume that SHLD can be liquidated at zero cost. Btw. Closing the last 1,500 stores in 2017 would cost $1.5 billion easily by itself.

 

I appreciate the detailed thoughts.

 

As far as the below market leases go, for the stores that have been shut down, do you know how many of those leases were terminated/expired? Have any of those leases been kept for potential redevelopment? I think the point regarding the below market leases is how many square feet (if any) are possible for sublease at much higher rent.  It seems that in order to get anywhere close to what Berkowitz thinks SHLD NAV is, the leases have to be worth several $billion. I'm not saying he is right but he is likely to have more information regarding the potential value of those leases than I do.  I've been trying to find current evidence (there is a lawsuit from '07 that puts the value of those leases at $11m per store) that those leases have value (no luck yet) because if they don't, there really isn't much NAV. 

 

As far as owned real estate.  If I take the EV of SRG of $3.5B and divide that by 235 stores, I get $15M per store.  $15m x 400 stores left yields about $6B which is much higher than current BV of PPE.  I think that is too high btw.  I think the owned stores are probably worth 3.5-4.5B (based on valuing the remaining top mall properties similar to the valuation of the JV properties - $157/sq ft - and the rest of the stores between $53 and $68 a sq ft). Moody's recently said the 211 still unencumbered stores were worth about $2.5B or about 11M per store  which would put the value of all at owned stores at $4+B.  I think you make a good point regarding the pace of store shut downs and how it seems that the stores aren't being shut down fast enough because you would think profitability/SS would improve by shutting down the underperformers.  Seems like the deterioration in the remaining stores is occurring faster than what's needed to transition to the future vision for the company. However, regardless of the deteriorating economics for sears stores, there still seems to be an appetite for transactions of their owned real estate evidenced by the CBL transaction.  The owned stores will likely continue to have value for alternative uses and thus should be able to generate future cash. It seems they have bought more time to sell more assets and thus the real estate won't be dumped on the market via liquidation. As the RE assets continue to be sold over time, the values they receive will probably be closer to recent transaction experience. Obviously though, burning through that cash will further erode whatever NAV is there today. 

 

In terms of the Craftsman value.  I thought SWK was basically paying for the future growth of the brand outside of sears. Isn't there still value accruing to sears for the next 15 years (assuming they will be in business to capture those sales) from whatever product sales they make over that time frame and shouldn't the PV of that value creation be included in total brand value (I could be thinking about that incorrectly - so please correct me if I am wrong)? If that is the case, the value of the brand is more than what has been reported and probably closer to what many had believed it to be.  Thus the values for Kenmore, diehard, home services etc. which are not included in your TBV are probably worth more than the $2b intangible value on b/s and closes that gap you are referencing considerably.   

 

I think the key to NAV being positive is the below market leases have to have value. 

 

Re Craftsman: Why would you think Sears will be around in 15 years? Look at the performance of SHLD over the last decade.

I did a quick comparison with WMT:

Q3 2016

WMT gross margin 25.30%

SHLD gross margin 19.10%

 

WMT SGA Margin 21.80%

SHLD SGA Margin 30.70%

 

The retail space continues to evolve, and I know that Sears is not the same retail business as WMT. But as an indication in Q3 2016 SHLD had a gross margin of 19.1% and an SG&A margin of 30.7%. WMT had a gross margin of 25.3% and an SGA margin of 21.8%. Lets say we want SHLD to stay in business then we would have to lets say go to net margin of 2%. Currently SHLD has a Gross Margin minus SG&A Margin of -11.6%. Add 2% to that and SHLD has to gain 13.6% in delta, either through an increase in the gross margin, a decrease in the SG&A margin or a combination of both. Currently WMT has a delta of 3.5%, which puts in perspective what a guarantuan task SHLD has ahead of itself. And that is before we had another minus 12% SSS quarter. And that is before all the interest and other liabilities that are on the balance sheet. There is no viable business to be had for SHLD. Fixing SHLD isn't one bridge too far, its five bridges too far. I just do not see how the cash losses can be abated, except for closing down the business which seems to be the only opportunity to bring losses to zero.

One more point ... remember on the SWK call how they made sure to stress they were not taking any credit risk towards SHLD. In short they are saying they will only sell to SHLD for cash payment. It seems SWK also believes that SHLD will not be around for much longer.

 

What is so valuable about Kenmore? Millennials don't even know the brand, its that old appliance that they see in their grandparent's kitchen. Kenmore is only a brand, it produces nothing, has no R&D, etc. Who is waiting for that brand?

Die Hard's position is a little better, but it is just a small brand. I find it very hard to see how the total sale value of the brands is more than $1.5 billion.

 

On the leases, I still believe they are worth little. I do not have data on SHLD selling leases. If they had I am sure we would have heard more about it. Please let me know if someone has the data. From my talks with people that develop for some of the JV partners, they doubt this whole "value in below market leases" thesis.

 

 

[Candyman1]

Sounds like the value is in the redevelopment if the properties are worth so little as-is, so even if 1000 stores hit the market, they won't do much just sitting there. First mover advantage for SRG?

Also what do you see as the status of the debt-holders in bankruptcy, including Lampert? Do you think they think they will get close to full recovery and are sort of eyeballing for a soft landing to that target?

 

Yes, there is value in redeveloping owned properties at about 150 to 250 a sq foot that is a huge bill. Per 1 million square foot that is a capital outlay of between 150 and 250 million. Btw. As of march 2016 SRG had another 33 million sq feet to go before the JV requirements. If for some reason SHLD goes chapter 7 soon, SRG will have to find $6 billion plus and the people to redevelop which isn't easy in itself. Naturally they will have to either sell properties outright or JV with other developers. But what happens if rents do not hold up because of continued mall sales deterioration and because 1500 plus stores hit the market at the same time?

 

On the BK, I am sure Eddie L will not lose money. He will find a way to profit I believe.