SHLDQ - Sears Holdings Corp

[wisdom]

He doesn't need to acquire many companies. He has several different lines of business within SHLD.

[compoundinglife]

Unfortunately I can't find any references at the moment, but I am fairly certain ESL does not lend out his SHLD stock as is evidenced by the high borrowing costs.

 

I think he has a fiduciary duty to lend his shares out.  It's almost like free money.  I'd be very surprised if he wasn't lending out his shares.

 

Why there is some risk to lending out your shares:

There is a small risk to using a margin account instead of using a cash account.  In theory, the whole stock market system could implode if some broker can't meet its obligations.  Suppose clearing company A and clearing company B have to clear all the trades made by their clients.  The trades are made beforehand and don't settle right away.  It's theoretically possible that some trader makes trade that they can't possibly pay for.  They're on margin and they have a huge mark to market loss that causes their account to go negative (e.g. like Buffett's sister selling put options).  If that happens, then the broker has to close out that client's account and eat the loss (and Buffett made his sister do that, to punish the broker for encouraging her to do inappropriate trades).  If the broker can't eat the loss, then the clearing company has to eat the loss.  If the clearing company can't do that, then the whole system breaks down and the loss will end up somewhere.

 

In practice, I think that the chance of this happening is extremely remote.

 

Guaranteed or "locked up" shares for long periods of time are very rare in the industry.

Well let me clarify.  There are various instruments that you can use to "lock in" a borrow:

 

a- Put options.  The use of put options is extremely common among short sellers.  Obviously, options are different than common stock.  You are also betting on volatility, interest rates, etc.

b- Any of the other instruments mentioned in Marc Cohodes' deposition.  Things like forward contracts, agreements to borrow shares for a specified period of time, etc.  I think those things are rare.

 

Coincidentally I just got a call from my broker about lending out the shares. They are currently offering me %2.

[CorpRaider]

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.

 

He calls him Lambert throughout the thread.  I'm not sure if its an inside gag or he's missing a key.

[constructive]

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 don't think it's that difficult for large fund managers to get control of permanent capital.

 

Third Point set up a closed end fund in London, that seems like a pretty easy option. Steel Partners converted funds to a publicly traded partnership, over the protests of some investors. Biglari used a relatively small equity position to install himself as dictator of BH.

 

Harbinger blew up because of Lightsquared and legal stupidity. HRG doesn't have those issues and is doing fine.

[Guest wellmont]

I think it's easier  for a large hedgie to get control of permanent capital, than it is to actually create value with the vehicle over the long term. it's just not as easy as buffett makes it seem. like anyone born with a once in a generation gift he makes it look so simple and effortless. the one thing esl has managed to do over the last decade is prove that he is not going to do things like buffett.

[Luke 532]

the one thing esl has managed to do over the last decade is prove that he is not going to do things like buffett.

 

That might not be such a bad thing!  Don't Lampert's annualized returns since 1988 eclipse Buffett's in the same time frame?

[Liberty]

the one thing esl has managed to do over the last decade is prove that he is not going to do things like buffett.

 

That might not be such a bad thing!  Don't Lampert's annualized returns since 1988 eclipse Buffett's in the same time frame?

 

You have to take the amounts of money they had to deal with in consideration for the comparison to be meaningful. I mean, Buffett said that the "knows" he could do 50% a year with small sums.

[Luke 532]

the one thing esl has managed to do over the last decade is prove that he is not going to do things like buffett.

 

That might not be such a bad thing!  Don't Lampert's annualized returns since 1988 eclipse Buffett's in the same time frame?

 

You have to take the amounts of money they had to deal with in consideration for the comparison to be meaningful. I mean, Buffett said that the "knows" he could do 50% a year with small sums.

 

Good point.  The fact remains that Lampert knows how to make money and he doesn't have to do things exactly like Buffett.

[CorpRaider]

I dunno what he's doing.  When you read the annual letters there's no discussion, direct or otherwise, of some grand conversion to an investment holding vehicle.  It's all about, "hmm what would happen if amazon and costco got it on?  Shopyourway!"  He has to rightly take some of the heat for making a huge retail bet right when e-tailers were decimating the entire industry.  Then he doubled and tripled down.  That would be like Buffett plowing ahead and becoming the largest textile magnate in the U.S. back when berkshire was starting out.  That alone means he will never be the next Buffett in my mind.  On the other hand, he's probably generated more fcf than Amazon has over the past decade, but hey they're still in a growth phase.  Maybe if he reinvests the real estate proceeds into building a death star the stock will zoom to $300. 

[krazeenyc]

Buffett is the GOAT.  Expecting anyone to be Warren Buffett is insane. But Lampert has had pretty good results over the longer term. I've said it before -- but I think for the most part he's accomplishing a lot of what he wants.  1) He's right sizing (shrinking) the retail operations 2) monetizing assets without short term mass layoffs.

 

Ragnar, as far as finding out some real estate values -- I think there is so much hidden value in the leased properties (of course not all the properties -- but it's important to be able to identify the standouts like the Hawaii flagship store was)  that simply figuring out all the owned real estate doesn't get you that far.  There is a bunch of information out there if you look through the 10ks of the real estate companies that own the malls Sears is in .

 

I've been trying to figure out how much Sears Canada and SHOS are paying for KDC (Kenmore Diehard Craftsman) license/royalties on a yearly basis. If anyone could help me with that I'd appreciate it.

 

On a side note, Wellmont, I like it when people bash investment ideas -- but are you long anything? You seem to hate a lot of investments :D (may or may not be an excellent thing).

[Guest wellmont]

i bash my longs.  :D

[racemize]

i bash my longs.  :D

 

Wait, are you in BBRY?  I would be stunned!

[Luke 532]

Sears unveils fresh look

http://www.nugget.ca/2013/08/09/sears-unveils-fresh-look

[Luke 532]

i bash my longs.  :D

 

Highly useful exercise... trying to "kill" a thesis (ala Berkowitz).

[texual]

Playing devils advocate is important. Kind of like Berkowitz' and killing a company. You all agree that WEB and ESL both took over or gained control of a former key player in a industry that has evolved or shifted, right? Both those companies had assets and long term trajectories that, even in dying, could keep churning even at a slow decline. It would have been foolish for WEB to shut down the mills soon after, or even 10 years later. If my history is correct, he shut the last mill in 1985, thats over 20 years AFTER!

 

People want to see ESL shut down a company that is magnitudes larger, in a shorter time frame? That would be insane. And ruin any reputation he could have had, by laying off a quarter million people. So thats off the table.

 

Now, if he wants to be a investment vehicle type of guy, he chose the wrong time frame because I don't think we as a group can find a lot of great investments today. The market is at all time highs. If ESL shot the fish in the bucket during 2009-2010 with SHLD cash flow, I would be impressed. We could have owned shares in BAC or anything and it would be just swell. Today, I find it hard to believe ESL could turn this switch on and find bargain stocks/investments that would generate Buffett-like returns. I wouldn't bet on him making ESL type returns either.

 

The next question is what can he do besides lay off people? Or shop for crappy priced stocks that don't have the returns he could have made a few years earlier?

 

SHOP YOUR WAY! I know it sounds stupid but this is pretty much the only thing he can afford to do until the time presents itself with ample opportunity and the cash is available. He spent little money on the program and it will keep growing until it becomes a significant part of the business. I don't expect that anytime soon but there really isn't any way he can compete in the brick & mortar business anymore. He doesn't have enough money or time to save the stores like Ron Johnson tried at JCP. That time is long past. All ESL can really do is try to mimic the online marketplace of Ebay and Amazon and use the Sears name as a way to at least advertise or keep it growing.

 

I heard that behind Amazon and Ebay, Sears Marketplace is a distant third. But thats still third place! Who knew? I think he can make something happen with the program and allow it to become a big enough brand that it deserves a higher multiple, maybe an Amazon-like multiple?

 

The point is even if this is the investment vehicle, now is not the time. He won't find bargains because WE can't find bargains like we did 5 years ago. He can save the company by building a online presence that would command a higher multiple and be insulated by the existing business no matter how crummy. Its like Amazon, but less volatile if you ask me. Maybe I am wrong. Time will tell.

[ItsAValueTrap]

It would have been foolish for WEB to shut down the mills soon after, or even 10 years later. If my history is correct, he shut the last mill in 1985, thats over 20 years AFTER!

 

He would have made more money if he had done that.  His early letters talk about why he didn't shut them down (because he doesn't want to put people out of work).  He also says that buying Berkshire Hathaway was one of his biggest mistakes!  And then retail is a brutal industry.  He said that Hochschild and Kohn was a bad idea and that he was lucky in breaking even.

 

http://www.berkshirehathaway.com/letters/1983.html

(The good stuff is further down in the letter.)

[texual]

Yes but isn't that exactly the appeal or part of the mythology of Buffett? That he didn't just cut throats and make dough,... that he wound up super rich in spite of trying to save the workers and business itself? I cannot imagine WEB would be so celebrated today if he just went George Soros after controlling the mills.

 

WEB is intelligent enough to understand that by saying he made a huge mistake, and that it would have made him richer, he implicitly is making a joke about how foolish he was. But that is part of his mythology. He is self critical in public and always laughs about himself and his mistakes. But nobody is uncalculated and winds up worth 30-50 billion...

 

I think he calculated the risks and made a few good decisions. Keeping the mills around kept him hidden from view, he could operate a investment vehicle without as much scrutiny. He kept workers working. He kept his company poised for opportunity while he worked to build a sizeable investment. IT ALSO MAKES FOR A DARN GOOD STORY! Remember, he took control of the company and shut down the hedge fund because he couldn't find much value. That means he may have had to stick to running the textile mill for a while before doing anything significant with the cash.

 

Moreover, I think ESL is in a similar situation where firing and slashing the company makes him appear heartless and awful. A rapacious capitalist is never looked upon for their wealth. That's partly why today Bill Gates gets zero criticism. He chose philanthropy and now everyone thinks hes a different guy vs the MSFT era where he was like darth vader.

 

ESL may go down looking like a fool the last decade but I would be harder on him if he was foolish enough to do the opposite of Buffett on this particular issue.

[texual]

And someday ESL and Berkowitz can have a fireside chat about how Sears was one of the hardest things to keep going and how the workers were tireless but that the environment changed in retail, bla bla bla. They could have made trillions if they'd just shut down every store!

 

 

[merkhet]

Sears unveils fresh look

http://www.nugget.ca/2013/08/09/sears-unveils-fresh-look

 

I found the following piece of information quite interesting...

 

Gone from the department store are electronics and window coverings – which are still available in its catalogue and online – in favour of an expanded selection of other products including appliances and mattresses.

[Luke 532]

Sears unveils fresh look

http://www.nugget.ca/2013/08/09/sears-unveils-fresh-look

 

I found the following piece of information quite interesting...

 

Gone from the department store are electronics and window coverings – which are still available in its catalogue and online – in favour of an expanded selection of other products including appliances and mattresses.

 

Perhaps appliances, power tools, etc. (KCD) in the stores with a smaller footprint after closing a bunch of stores, and everything else via ShopYourWay?  That would be interesting.

 

Or perhaps the segregation of all the business divisions (and the drill-down to see what works and what doesn't) is starting to bear fruit on what should/should not be in stores and what should/should not be offered online.

[Kiltacular]

WEB is intelligent enough to understand that by saying he made a huge mistake, and that it would have made him richer, he implicitly is making a joke about how foolish he was. But that is part of his mythology. He is self critical in public and always laughs about himself and his mistakes. But nobody is uncalculated and winds up worth 30-50 billion...

 

I think he calculated the risks and made a few good decisions. Keeping the mills around kept him hidden from view, he could operate a investment vehicle without as much scrutiny. He kept workers working. He kept his company poised for opportunity while he worked to build a sizeable investment. IT ALSO MAKES FOR A DARN GOOD STORY! Remember, he took control of the company and shut down the hedge fund because he couldn't find much value. That means he may have had to stick to running the textile mill for a while before doing anything significant with the cash.

 

Moreover, I think ESL is in a similar situation where firing and slashing the company makes him appear heartless and awful. A rapacious capitalist is never looked upon for their wealth. That's partly why today Bill Gates gets zero criticism. He chose philanthropy and now everyone thinks hes a different guy vs the MSFT era where he was like darth vader.

 

I think this is a good insight -- mostly because it is exactly what I think about this situation.

 

On a related note, didn't Lampert make some good money on GAP in the last few years?

 

Don't own Sears yet -- been watching all these years.  But, that may be a mistake.  The sentiment could shift at any time and never turn back. 

 

I admire the patience of Lampert and, especially, Berkowitz.

 

 

[alertmeipp]

I just read the transcript. The clear message from Lampert was to make Sears profitable now and transform it so it will be competitive in the future. Does not look like asset liquidation to me.

 

Am I missing something?

[Luke 532]

I just read the transcript. The clear message from Lampert was to make Sears profitable now and transform it so it will be competitive in the future. Does not look like asset liquidation to me.

 

Am I missing something?

 

Both profits and a transformation, with a little liquidation mixed in.  The stores that will remain will be there to generate profits (smaller physical footprint, ShopYourWay as major focus), while also closing/selling some stores (~50 so far this year) as a partial liquidation.  ShopYourWay, Seritage, UbiquityCE, etc. are all part of the transformation.

[Luke 532]

 

On a related note, didn't Lampert make some good money on GAP in the last few years?

 

Also AutoNation (AN) in recent years.  He held it for a long time and started his significant selling in Q1 2010 and finished late 2012.

 

I admire the patience of Lampert and, especially, Berkowitz.

 

Makes me think of the following quote when Lampert discussed how those that were patient with him were handsomely rewarded (in AutoZone): "We purchased Autozone at $27 in 1997.  The stock stayed flat for 4 years.  Then it went to $70 in 2001.  It stayed flat for another 5 years until it went to $110.  Today it is $395 a share.  If you owned a hundred shares, a  thousand shares or a million shares you got to ride with us all the way up."

 

So, that's roughly a 15-bagger in roughly 15 years.  And he has more money in SHLD than he ever did in AutoZone.  Higher dollars = higher conviction.

[alertmeipp]

Thanks, interesting.

 

How do guy view JCP in relation to SHLD? Are they direct competitors?

 

If JCP get restructured/recapitalized (bad for equity but they will be more competitive as a company), what effect it would have on SHLD?