SHLDQ - Sears Holdings Corp

[abitofvalue]

I work at one of the major prime brokers so I can try to answer your question. The vast majority of the time, the shares primes lend to hedge funds are "callable on demand" because whoever the original owner of the shares was, lent the shares to the broker also "callable on demand." When the owner recalls his shares from the broker, the broker has a 3 day settlement period to return the shares.  Please note that the owner doesn't need to sell his shares to demand a recall, he can just decide it. Now the prime doesn't want to piss off its client hedge fund, so it will go into the market and try to borrow the shares somewhere else to make the owner whole. However, if no other shares are available, the hedge fund is shit out of luck and the prime demands the short be closed and stock returned. Guaranteed or "locked up" shares for long periods of time are very rare in the industry. Now in practice there is rarely no borrow, it's more like the borrowing cost goes from 5% to 35% so that quickly shakes most of the shorters out, creating a short squeeze.

 

So it's possible, but like you said, ESL doesn't mind the low price if he is buying more, and if the borrowing rates spike, he will definitely want to collect 35% annual "income" on his long term position. Also, he can only make the no lend decision once, because if he turns it on and off repeatedly just to "shake" shorters he can be accused of market manipulation.

 

Hope that helps.

 

very helpful indeed.  thanks

[benhacker]

A couple of things (I may have missed a few replies above).

 

1) ESL can't only vote the shares he owns.  I would imagine legally speaking lending out shares as an insider would be problematic; although I'm not certain (remember once you lend, you are not the "owner").

 

2) I see references to very high rates for Sears borrow... that was the case in the past... but I'm seeing <3% for weeks at IBKR (that's the rate you pay, you would receive less)... so I'm not sure what the opportunity is that he is missing... sorry if I missed something.

 

Ben

[Mephistopheles]

Chevron to pay $12mn for 22.5 acre Kmart property.

 

http://www.bizjournals.com/pittsburgh/blog/the-next-move/2013/08/alerting-all-kmart-shoppers-chevron.html

[ragnarisapirate]

Kind of a junk/fluff article but it has a response from Lowes so ....

 

http://www.foxbusiness.com/industries/2013/06/19/craftsman-at-lowes-orchard-acquisition-could-make-it-happen/

 

I looked into the Orchard Supply S-1 from 2011, and there is a section that pertains to this Lowe's deal.  Bolds below are mine.

 

---

http://www.sec.gov/Archives/edgar/data/896842/000119312511335869/0001193125-11-335869-index.htm

From page 65 of S-1.

 

2. THE BRANDS AGREEMENTS

The Company entered into three brands license agreements, subject to the approval of the audit committee of Sears Holdings (the “Brands Agreements”), with a subsidiary of Sears Holdings effective at the Distribution pursuant to which Sears Holdings will allow us to purchase a limited assortment of Craftsman products, Easy Living and Weatherbeater paints, Kenmore-branded water heaters and consumer household products directly from vendors. Under the Brands Agreements, we will pay specified license fees to Sears Holdings. The agreements generally incorporate arm’s length terms and conditions, including market-based pricing and term of duration. The agreements have a three year term and may be extended subject to the mutual agreement of the parties.

 

The Company entered into a brands sales agreement with Sears Holdings on November 23, 2005, as amended (the “Brands Sales Agreement”), which will be terminated as of the Distribution. All Sears Holdings proprietary branded products purchased and sold to date were made under the Brands Sales Agreement. If the terms of the Brands Agreements with certain Sears Holdings subsidiaries were effective on January 31, 2010, the first day of fiscal 2010, the Company estimates that they would have recorded incremental costs of $0.5 million,...

---

 

I'm not an expert in this, but it looks to me like Sears has the ability to control the sale of Craftsman products at OSH even if Lowe's buys the stores.  According to the S-1, the idea that Lowe's is buying their way into Craftsman tools via OSH is a flawed theory.

 

This means if Lowes pays a high enough fee to SHLD, Eddie will likely have Craftsman tools avaiable in Lowes, right? That is not bad at all.

 

Sorry I didn't reply to this earlier.  Yes, I think if Lowes paid a high enough fee to SHLD, Eddie would sell Craftsman tools to Lowes.  But, that's a scenario I don't count as likely at this point (though anything is possible...and a large fee paid to SHLD may not be a bad thing).

 

I'm just glad to read in the OSH S-1 that Sears still controls the distribution of Craftsman Tools.

 

1 word: "Kobalt"

[texual]

Maybe Ackman can finally copy ESL and just become the next CEO of JCP.

[Luke 532]

Question for you all, especially those that are highly concerned about SHLD.  Would your concerns be largely mitigated if Lampert were to come out tomorrow and say "I plan on using SHLD as my permanent investment/capital vehicle, and it may or may not require SHLD to look vastly different five years from now than what it looks like today"?

[plato1976]

that will make me feel better

it's kind of confirmation

 

Question for you all, especially those that are highly concerned about SHLD.  Would your concerns be largely mitigated if Lampert were to come out tomorrow and say "I plan on using SHLD as my permanent investment/capital vehicle, and it may or may not require SHLD to look vastly different five years from now than what it looks like today"?

[texual]

Not really because the stock would spike and speculation would grow out of proportion - I wouldn't be surprised if that even makes it go higher when short interest squeezes further. Pretty much I would be happy if the stock stayed low, and things went at their own pace and with minimal publicity. It is better for long term owners to let things happen that way.

 

Also if you look at what is happening at JCP it mirrors exactly the kind of heated speculation people made up when ESL got involved as chairman. People wrote that he would save the retailer, nurture product categories and hire Millard Drexler to create the next J Crew and Restoration Hardware hybrid that would set the world upside down. At the time ESL said he was flattered with the media portrayal but he warned shareholders to follow his logic - he outlined how spending money on the stores and remodeling/rebranding and creating a new image would wind up hurting the company much worse than the natural course of events. To date, in a year and a half JCP did more damage to their brand and financial structure than SHLD could ever do.

 

To bring this full circle, JCP did exactly under Ron Johnson as people sort-of wanted ESL to do by reviving the Sears experience. I think it is ironic that Ackman basically piggybacked on the SHLD type investment with TGT (got annihilated), then would years later get slaughtered at JCP. OH and I forgot he also tried to get involved in SHLD, and did some things at Sears-Canada that would prove marginally successful for him.

 

Lets face it, ESL is the only man left standing. He hasn't been killed. I am glad I never took the JCP cool-aid and realize that ESL was right the entire way through. Stuck through all the misery, and SHLD is not as close to collapse as JCP is. I think Ackman wrote some letter he leaked - he said he was so worried that JCP would go to hell if they cant find 1/5 possible candidates in 30 days to be the new CEO. The board hates him, even Starbucks' CEO called Ackman a shill for hiring/firing Johnson, getting Ulman back, and now a few months later he is raging for a new CEO. Part of me just wants Ackman to take the CEO spot. Complete the circle, bro.

 

 

 

[muscleman]

Chevron to pay $12mn for 22.5 acre Kmart property.

 

http://www.bizjournals.com/pittsburgh/blog/the-next-move/2013/08/alerting-all-kmart-shoppers-chevron.html

 

http://www.bizjournals.com/pittsburgh/blog/the-next-move/2013/04/beyond-the-closing-kmart.html?page=all

The property is owned by Troy CMBS Property LLC, which shares a mailing address with Sears Holding corporate in suburban Chicago.

 

At first I was thinking if this is a SHLD property or it is something SHLD leased from another REIT. Now I think it is more likely that this is SHLD's own property.

[Luke 532]

Not really because the stock would spike and speculation would grow out of proportion - I wouldn't be surprised if that even makes it go higher when short interest squeezes further. Pretty much I would be happy if the stock stayed low, and things went at their own pace and with minimal publicity. It is better for long term owners to let things happen that way.

 

I agree it's better for those of us that are truly long-term holders for it to play out under the radar.

 

I also think that Lampert is giving pretty clear signs that he intends SHLD to be his permanent investment vehicle. Just a couple of the many signs he's giving: (1) minimal capex; I believe the reason is he doesn't want to waste money on improving stores that he is going to either sell or sub-lease/re-purpose, (2) He is still buying shares, he is buying his ESL partners' shares, he is choosing time and time again to sell AutoZone, AutoNation and others and not selling SHLD which effectively increases his concentration in SHLD.  ESL is becoming more and more SHLD concentrated as each day passes.  Do we really think a guy that has returned 25%+ annualized returns since 1988 would give up his existing hedge fund so that he could pour billions into a has-been retailer with no plans on making it his permanent investment vehicle... do we really think he would make SHLD his baby if he didn't think he had an excellent chance of returning 25%+ annualized?  Why risk giving up a hedge fund that is repeatedly crushing the market unless you were supremely confident you could earn better under a different structure?  Take a minute and think about that.  I give about a 1% chance of him NOT intending on SHLD being his permanent investment vehicle.  I know it sounds insane, but the stock market is essentially saying "we don't think he's making SHLD his permanent investment vehicle."  It's to the advantage of those building positions right now that the average investor and the rest of Wall Street doesn't recognize what Lampert is doing.

[Luke 532]

Further, if Lampert does intend on SHLD being his permanent investment vehicle (thus believing he would do better in SHLD than his current hedge fund), keeping in mind he has better annualized returns since 1988 than Buffett, then how the heck does a value investor NOT place at least some money in the name?

[muscleman]

I know it sounds insane, but the stock market is essentially saying "we don't think he's making SHLD his permanent investment vehicle."

 

Or the other way, "we do believe that he is making SHLD his permanent investment vehicle, but we believe Lambert is an idiot instead of a genius."  :)

[ragnarisapirate]

Are there any current estimates to the value of SHLD's real estate floating around out there?

 

If someone had the time, they could go through all the various government property databases and get an interesting assessment...

[Guest wellmont]

Further, if Lampert does intend on SHLD being his permanent investment vehicle (thus believing he would do better in SHLD than his current hedge fund), keeping in mind he has better annualized returns since 1988 than Buffett, then how the heck does a value investor NOT place at least some money in the name?

 

he has made one investment in 10 years or so. restoration hardware. and that was some tiny weird arb thingy. how could investors believe it's his investment vehicle when he doesn't invest in anything but shld stock at over $100 a share?

[Guest wellmont]

I know it sounds insane, but the stock market is essentially saying "we don't think he's making SHLD his permanent investment vehicle."

 

Or the other way, "we do believe that he is making SHLD his permanent investment vehicle, but we believe Lambert is an idiot instead of a genius."  :)

 

it's not either or. the market price is simply reflecting the value destruction over the last decade of his stewardship.

[Guest hellsten]

Are there any current estimates to the value of SHLD's real estate floating around out there?

 

If someone had the time, they could go through all the various government property databases and get an interesting assessment...

 

Taking the models above, we calculate totals of $7.559 billion for the actual closed stores model, $26.925 billion for the five-city composite model, $39.6 billion for the Hudson's Bay model, and $50.66 billion for the GGP-Cadillac Fairview model. As you can see from the charts below, when these figures are averaged together, we estimate the value of Sears Holdings' retail commercial real estate to be $31.186 billion. This average increases dramatically when the outlier of the actual closed stores model is not factored into the analysis due to the weaknesses in its lack of distinction between owned and leased property prices. By including only the three more refined models of five-city composite, Hudson's Bay, and GGP-Cadillac Fairview in our average, we estimate the market valuation of Sears Holdings' retail commercial real estate to be worth $39.062 billion.

http://seekingalpha.com/article/1509142-sears-holdings-valuation-between-berkshire-hathaway-and-bankruptcy

 

You could easily take all the listed properties from http://www.shcrealty.com.

 

The site lists the relevant data per store, for example:

Format: Sears Grand

Shopping Center: Freestanding Store

Gross Sq Ft: 172,017

# of Floors: 1

Market: Austin-Round Rock TX

Address: 12625 N I-H 35 

Zip Code: 78753

 

Then you would have to get a rough price estimate from somewhere. I have no idea from where to get that data.

[CorpRaider]

I know he made a nice little 40% gain on GNW in one of his vehicles.  That one is seared (hah) into my memory, as I watched him get in and out and stood here sucking my thumb. 

[matts]

A couple of things (I may have missed a few replies above).

 

1) ESL can't only vote the shares he owns.  I would imagine legally speaking lending out shares as an insider would be problematic; although I'm not certain (remember once you lend, you are not the "owner").

 

2) I see references to very high rates for Sears borrow... that was the case in the past... but I'm seeing <3% for weeks at IBKR (that's the rate you pay, you would receive less)... so I'm not sure what the opportunity is that he is missing... sorry if I missed something.

 

Ben

 

Ya you are right, he loses "ownership" when he lends and can only votes shares he owns, hence the recall mechanism when he knows a vote is coming. It's not like you vote shares every day. And as far as I know, there is no insider trading problem with lending shares as you are still economically exposed to the price movements.

 

[Luke 532]

I know it sounds insane, but the stock market is essentially saying "we don't think he's making SHLD his permanent investment vehicle."

 

Or the other way, "we do believe that he is making SHLD his permanent investment vehicle, but we believe Lambert is an idiot instead of a genius."  :)

 

Classic!  They would say LamBert... I gave the market too much credit for saying LamPert :-)  I'd hate to know the public's opinion of me if they think a guy with Lampert's track record is an idiot.

[Luke 532]

Further, if Lampert does intend on SHLD being his permanent investment vehicle (thus believing he would do better in SHLD than his current hedge fund), keeping in mind he has better annualized returns since 1988 than Buffett, then how the heck does a value investor NOT place at least some money in the name?

 

he has made one investment in 10 years or so. restoration hardware. and that was some tiny weird arb thingy. how could investors believe it's his investment vehicle when he doesn't invest in anything but shld stock at over $100 a share?

 

Because building a behemoth investment vehicle takes time.  It's like building a house.  Not believing SHLD is his permanent vehicle is like saying "it's not a house" when the contractors lay the slab, build the frame, put in the drywall, etc.  It's more logical to say "they are building a house" instead of "it's not a house, they're just idiots putting a bunch of concrete and wood together in a silly structure of some kind that will probably have no use in the future."  Lampert is building his house.  He has told us through his actions (guarantor vs non-guarantor, buying his partners' shares, spending nothing on capex, segregating each division into it's own "company" with separate BOD's, reducing the float to increase his control, launching Seritage and UbiquityCE, hiring Schriesheim, hiring Lukes, Berkowitz's hints in interview earlier this year with Erik Schatzker about wanting permanent capital instead of a mutual fund,... and the list goes on) but the market wants him to spell-it-out for them... but as has been discussed on this board a lot that would not be beneficial to long-term holders.

[Guest wellmont]

people will start caring that it is his "permanent vehicle" for investing when he starts demonstrating that he can create value outside of 2/20. For a decade he has not demonstrated he can or will do this. In fact all he has done is administer shareholder repellent for 10 years. I don't blame investors for being rational. I will agree with you that he is cementing his control, as outside investors tire of his act and sell out in frustration.

[Luke 532]

people will start caring that it is his "permanent vehicle" for investing when he starts demonstrating that he can create value outside of 2/20. For a decade he has not demonstrated he can or will do this. In fact all he has done is administer shareholder repellent for 10 years. I don't blame investors for being rational.

 

Once it's proven that he's generating amazing returns comparable with what he's done in a 2/20 structure, and when people start clamoring to be an investor with Lampert, the share price will probably already be multiples of where it is today.  With the float being what it is it's not going to take too many large investors to move this stock into the stratosphere.  Your average investor is going to miss a very large chunk of profits.

 

"For a decade he has not demonstrated he can or will do this." 

But it's not like he hasn't been active and strategically making moves... it's just been almost ALL about SHLD.  I don't think he lost his desire 10 years ago to make money.  His actions by becoming more and more concentrated in SHLD show me that he is more interested than ever in becoming an investing legend.  Again, why would somebody that makes 25%+ annualized give that up unless he was supremely confident he could exceed that elsewhere.  Do we really think his plan was to return 25% annualized running Sears in its current state as solely a retailer?  Giving it some thought leads to the conclusion that it is only logical for him to make all the moves he's made because SHLD will be his permanent investment vehicle.  And I would wager (well, I am wagering!) that if/when he successfully transforms SHLD into his investment vehicle that he'll have excellent returns once again (probably exceeding 25%+).

 

So, the question is whether or not SHLD will survive long enough for Lampert to start making investments.  I believe the value of the brands exceed the market cap, the inventory (net of payables) exceed the market cap, and the real estate exceeds the market cap.  The pension liability is a concern but give me continued rising interest rates and I'll give you roughly $500M in pension liability relief for every 1% bump in interest rates.  And the guy in control of those assets and managing the liabilities is a genius capital allocator.  To me the answer is a resounding "yes, SHLD will survive long enough for Lampert to start making investments."  And if that's the case I sure as heck want to have a position in the $40's (disclosure: my avg price is high-$40's) with the permanent investment vehicle of one of the greatest investors the world has ever known.

[Guest wellmont]

I never said that it has to be "proven" with amazing returns to be stock you could own. What I said was he has to start doing some things that simply stop repelling shareholders. He can start with communication, being less opaque, more welcoming. He can start by developing a plan and telling people what it is so they can measure him against it. It's not as simple as you think for successful hedge fund managers to simply move to a permanent vehicle. if it was there would be more doing it. One who tried and failed is Falcone. He blew himself up. I mean lampert has never bought an entire company and integrated it in to shld. he does very well with arbitrage and stock picking. But he certainly, after 10 years, has done nothing to demonstrate he can do what Buffett can do. And Lampert has not given up his hedge fund yet. He's got his feet in both areas. More confusion. More shareholder repellent.

[Luke 532]

What I said was he has to start doing some things that simply stop repelling shareholders. He can start with communication, being less opaque, more welcoming. He can start by developing a plan and telling people what it is so they can measure him against it.

 

Honestly, I don't really think he cares about the general investing public.  He knows that the investors that are truly long-term will give him as much time as he needs.  And I would argue that his shareholder letters have outlined plenty of what he is planning on doing.  Does he spell it out?  No.  But the investors he probably covets don't need it to be spelled out.

[Luke 532]

I mean lampert has never bought an entire company and integrated it in to shld. he does very well with arbitrage and stock picking. But he certainly, after 10 years, has done nothing to demonstrate he can do what Buffett can do. And Lampert has not given up his hedge fund yet. He's got his feet in both areas. More confusion. More shareholder repellent.

 

Agreed, but he doesn't need to buy entire companies.  That is one way to go about it but certainly not a necessity.  It's also important to note that SHLD is much larger than a certain textile company when Buffett assumed control, so it will naturally take longer for the rubber to hit the road (adding in one of the worst market collapses in history obviously extended the timeframe, too).