SHLDQ - Sears Holdings Corp

[Guest wellmont]

 

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.

 

he has more money in this because it was a bigger investment from the start. What esl did right here was fully protect his downside by buying his initial stake in bk. so he won't lose money, even though his opportunity cost of having so much money in this challenging business has been high. Buffett, as usual, was right to be openly skeptical of the turnaround possibility here. azn is a far better business, simpler, more definable, stable cash flows that were allocated well, better industry economics.

 

now though, esl has got himself stuck in a bad business, with bad industry dynamics. so imo the two situations are not comparable. esl unfortunately misjudged the retail markets. And my guess is if he had it to to do over, he would have not done this deal. Or he would have sold out shortly after emerging from bk for a quick profit. If, and it's a big if, he extricate himself from this pickle he is in, it really will cement him as one of the great capital allocators of our time.

[constructive]

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.

 

He paid 21x earnings for a great business that had grown earnings 24% annually over the last 5 years. Anyone could look at AZO in 1997 and see that it was increasing in value. Doesn't that strike you as a completely different type of investment from Sears?

[Luke 532]

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.

 

He paid 21x earnings for a great business that had grown earnings 24% annually over the last 5 years. Anyone could look at AZO in 1997 and see that it was increasing in value. Doesn't that strike you as a completely different type of investment from Sears?

 

Yes, completely different business and my reason for making that post wasn't to compare AutoZone and Sears, it was to just point out that those that ride with Lampert and are patient are more often than not handsomely rewarded.

[constructive]

My point is that patience is rewarded a lot better if the value of the business is increasing than if it's decreasing.

[Luke 532]

Buffett, as usual, was right to be openly skeptical of the turnaround possibility here.

 

I agree with you on this point, and with Buffett.  My thesis assumes that the retail efforts will fail (any positive that comes out of retail is a bonus).  My thesis centers around the real estate portfolio, the KCD brands, and the inventory value net of payables.  Yes, I understand that failed retail will impact the value of all three of those assets, but I also believe Lampert can have the retail slowly fail over time and get what he wants out of those assets at the time he feels is appropriate.  In my opinion, each of those three assets I mentioned on their own exceed the market cap... and all three together is 3x the market cap or more.  Couple that with liabilities that I believe are manageable (and are being managed by one of the most brilliant guys the world has ever known) and will shrink quickly in a rising interest rate environment, and I think a retail turnaround is not needed for significant profits.

 

And my guess is if he had it to to do over, he would have not done this deal. Or he would have sold out shortly after emerging from bk for a quick profit. If, and it's a big if, he extricate himself from this pickle he is in, it really will cement him as one of the great capital allocators of our time.

 

I disagree with this point.  I don't size Lampert up to be an investor who throws good money after bad.  He has added to his position this year and we all know how much he has added in the past handful of years.  Does one add to a position if things are not progressing and the plan is unfolding?  Perhaps there are aspects of the deal that would have changed (hindsight being 20/20) but I think in the back of his mind SHLD was always going to be his permanent vehicle and with every additional purchase he makes he is telling us that his thesis is playing out.

[Luke 532]

My point is that patience is rewarded a lot better if the value of the business is increasing than if it's decreasing.

 

Agreed.  It is prudent to keep in mind that the number of shares outstanding has decreased a great deal over the years so the "bang for our buck" will be greater going forward.

[texual]

The best catalyst would be the closure of his hedge fund!

 

The day he is the full-time CEO of Sears Holdings and ends his investment partnership is the one I am waiting on.

[Luke 532]

The best catalyst would be the closure of his hedge fund!

 

The day he is the full-time CEO of Sears Holdings and ends his investment partnership is the one I am waiting on.

 

With only ~150 investors left (and shrinking as time goes by) I think that day is fast approaching.

[ERICOPOLY]

In my opinion, each of those three assets I mentioned on their own exceed the market cap... and all three together is 3x the market cap or more.

 

How did you get to those values on each brand? 

 

at least $4.4b Die Hard

at least $4.4b Craftsman

at least $4.4b Kenmore

 

Collectively worth at least $13.2b

 

EDIT: For example, are you using the $10.5b market cap of Whirlpool (WHR) as an input for the value of Kenmore, or some other method?

 

[longtermdave]

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.

 

 

I think a key point here is also that WEB is talking to his existing employees, and future business owners looking to sell, when he points out that he saved those jobs. Would you want to sell to him knowing your employees would be out of a job and everything you built dismantled at the first sign of trouble? Would you work as hard for him as an employee if you were in a shrinking business and saw him treat others in this position poorly?

 

[Buckeye]

In my opinion, each of those three assets I mentioned on their own exceed the market cap... and all three together is 3x the market cap or more.

 

How did you get to those values on each brand? 

 

at least $4.4b Die Hard

at least $4.4b Craftsman

at least $4.4b Kenmore

 

Collectively worth at least $13.2b

 

EDIT: For example, are you using the $10.5b market cap of Whirlpool (WHR) as an input for the value of Kenmore, or some other method?

 

 

Ericopoly -

 

I think what Luke meant was that Kenmore, Craftsman, & Diehard all together are worth more than market cap.  Also, the real estate by itself is worth more than the current market cap and the inventory next of payables is worth more than current market cap.

 

That how I read it.

[Buckeye]

In my opinion, each of those three assets I mentioned on their own exceed the market cap... and all three together is 3x the market cap or more.

 

How did you get to those values on each brand? 

 

at least $4.4b Die Hard

at least $4.4b Craftsman

at least $4.4b Kenmore

 

Collectively worth at least $13.2b

 

EDIT: For example, are you using the $10.5b market cap of Whirlpool (WHR) as an input for the value of Kenmore, or some other method?

 

 

Ericopoly -

 

I think what Luke meant was that Kenmore, Craftsman, & Diehard all together are worth more than market cap.  Also, the real estate by itself is worth more than the current market cap and the inventory next of payables is worth more than current market cap.

 

That how I read it.

 

One thing that is interesting is that Stanley just recently (2010) purchased Black and Decker for 4.5B.  Both hand tool companies have a long established and well recognized brand (B&D est. 1910) (Craftsman est. 1927).  The are probably two of the most comparable brands with Craftsman probably having a slightly higher mind share.

 

 

[plato1976]

btw, among the 150, how many are here ?

 

 

The best catalyst would be the closure of his hedge fund!

 

The day he is the full-time CEO of Sears Holdings and ends his investment partnership is the one I am waiting on.

 

With only ~150 investors left (and shrinking as time goes by) I think that day is fast approaching.

[Luke 532]

In my opinion, each of those three assets I mentioned on their own exceed the market cap... and all three together is 3x the market cap or more.

 

How did you get to those values on each brand? 

 

at least $4.4b Die Hard

at least $4.4b Craftsman

at least $4.4b Kenmore

 

Collectively worth at least $13.2b

 

EDIT: For example, are you using the $10.5b market cap of Whirlpool (WHR) as an input for the value of Kenmore, or some other method?

 

 

Ericopoly -

 

I think what Luke meant was that Kenmore, Craftsman, & Diehard all together are worth more than market cap.  Also, the real estate by itself is worth more than the current market cap and the inventory next of payables is worth more than current market cap.

 

That how I read it.

 

Buckeye is reading it correctly.

[ERICOPOLY]

In my opinion, each of those three assets I mentioned on their own exceed the market cap... and all three together is 3x the market cap or more.

 

How did you get to those values on each brand? 

 

at least $4.4b Die Hard

at least $4.4b Craftsman

at least $4.4b Kenmore

 

Collectively worth at least $13.2b

 

EDIT: For example, are you using the $10.5b market cap of Whirlpool (WHR) as an input for the value of Kenmore, or some other method?

 

 

Ericopoly -

 

I think what Luke meant was that Kenmore, Craftsman, & Diehard all together are worth more than market cap.  Also, the real estate by itself is worth more than the current market cap and the inventory next of payables is worth more than current market cap.

 

That how I read it.

 

Buckeye is reading it correctly.

 

I don't know how I read it that way -- I went back and read it again and you worded it pretty well.  Slow brain this morning.

[Luke 532]

One thing that is interesting is that Stanley just recently (2010) purchased Black and Decker for 4.5B.  Both hand tool companies have a long established and well recognized brand (B&D est. 1910) (Craftsman est. 1927).  The are probably two of the most comparable brands with Craftsman probably having a slightly higher mind share.

 

Craftsman being comparable to B&D with B&D selling for $4.5B just a few years ago.  You can see why I'm pretty confident that the brands Craftsman + Kenmore + Diehard exceed SHLD's market cap of $4.4B (real estate for free, inventory net payables for free, Lampert for free).

[texual]

There was a bloomberg article which reported how there was a significant drop in number of partners at ESL investments. I think there were several hundred and last year in the 200's, with the latest figure at 150. None of those are referring to us, we would each need about 25 million in order to be considered eligible to invest with ESL ;)

[texual]

I used to use Black & Decker as a kind of approximation for Craftsman. I liked thinking of Kenmore ~ Whirlpool, and Jcrew ~ Lands' End. Worked out at the time for a back of the envelope calculation but if you wanted to add in some more components you can think of Simon Property as a conduit to the realty co. And theres also the home service aspect which I have never gotten much information on. You could also throw in a startup online retailer to approximate the Shop Your Way program. Either way you slice it the current market cap is far lower than most of these components alone.

[plato1976]

btw, I think the commercial real estate sears has is significantly different from what SimonP has ?

Sears has lots of space in big mall - and I am not sure who can take over those space in those malls (except sears itself)

 

...

 

I used to use Black & Decker as a kind of approximation for Craftsman. I liked thinking of Kenmore ~ Whirlpool, and Jcrew ~ Lands' End. Worked out at the time for a back of the envelope calculation but if you wanted to add in some more components you can think of Simon Property as a conduit to the realty co. And theres also the home service aspect which I have never gotten much information on. You could also throw in a startup online retailer to approximate the Shop Your Way program. Either way you slice it the current market cap is far lower than most of these components alone.

[plato1976]

wait a min, this basically assumes those brands together with the 16.5BILLION debt is still worth $4.5B equity ? Doesn't sound right to me...

don't forget SHLD 's huge debt load...

 

 

One thing that is interesting is that Stanley just recently (2010) purchased Black and Decker for 4.5B.  Both hand tool companies have a long established and well recognized brand (B&D est. 1910) (Craftsman est. 1927).  The are probably two of the most comparable brands with Craftsman probably having a slightly higher mind share.

 

Craftsman being comparable to B&D with B&D selling for $4.5B just a few years ago.  You can see why I'm pretty confident that the brands Craftsman + Kenmore + Diehard exceed SHLD's market cap of $4.4B (real estate for free, inventory net payables for free, Lampert for free).

[texual]

Nobody knows the value of anything until it is sold. So take a moment to realize that we may not benefit by selling stores in the long term. Right now he has to sell some to generate a bit of cash. In the last letter he said he did some transactions and spin offs that he would prefer NOT doing! 

 

1. Look up the carried value of the real estate. On the books, not happening. But I saw a dramatic line by Berkowitz suggesting that Sears real estate is like the equivilant of when the settlers valued Manhattan at 23 dollars or something. Thats really quite something if you are going to go on record saying the real estate is THAT valuable, right? With longer time frames real estate becomes worth a lot more. Waiting for the better times may be prudent.

 

2. Look at all the tax values from the stores and surmise a value on the whole. Berkowitz said that value came to 80 or 90 dollars conservatively back a few years ago. Today the values are moving up and down.

 

What does the existing store base mean for us? Nothing. They may never get sold!

 

I don't like valuing assets this way and I never like pretending there is a floor on any stock. It could go to zero, bankruptcy. Then some vulture can go after the stores like ESL did with Kmart. I don't want to be a doom and gloom guy but the real estate could prove to be their best or worst asset depending on many factors like occupancy, who buys them and what they want to pay for the stores. I don't think ESL can sell them fast enough, personally.

 

I wonder how much Manhattan is worth today and see if we can use Berkowitz' example as a conduit to the real value ;)

 

Sears Holdings (SHLD) (11% of the Fund) is one of the largest corporate real estate organizations in the world, with a portfolio of retail locations that is second to none. Generally Accepted Accounting Principles ("GAAP") mandate valuing their real estate at the lower of cost or market. GAAP would force the Dutch settlers to value Manhattan today at the 1626 purchase price of $23.70. The company's reported book value of $43 understates real values. - Fairholme

[Luke 532]

wait a min, this basically assumes those brands together with the 16.5BILLION debt is still worth $4.5B equity ? Doesn't sound right to me...

don't forget SHLD 's huge debt load...

 

 

One thing that is interesting is that Stanley just recently (2010) purchased Black and Decker for 4.5B.  Both hand tool companies have a long established and well recognized brand (B&D est. 1910) (Craftsman est. 1927).  The are probably two of the most comparable brands with Craftsman probably having a slightly higher mind share.

 

Craftsman being comparable to B&D with B&D selling for $4.5B just a few years ago.  You can see why I'm pretty confident that the brands Craftsman + Kenmore + Diehard exceed SHLD's market cap of $4.4B (real estate for free, inventory net payables for free, Lampert for free).

 

As Lampert continues to either sell or sub-lease properties (and he's closed about 50 properties so far in 2013) the liabilities will decrease.  Given the high value of some of their properties, and the fact that many of those liabilities are long-term leases that were agreed to about a million years ago, I would imagine any sale and/or sub-lease will be beneficial to SHLD... and I think extracting $4.4B in net profit on their entire portfolio is more likely than not.  Note: I don't expect them to actually sell or sub-lease everything... the Minnesota development, Seritage, and many other options are available to them to develop properties.  But the point remains the same, I believe their real estate less liabilities will eventually prove to be worth $4.4B or much, much more.

 

I can't believe I'm linking to a Seeking Alpha article (probably the only article I've seen worth $0.02 in the past 5 years), but here is a brief discussion on the topic.

 

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

"One bright spot for Sears Holdings is that every time it sells a leasehold interest or enters an agreement to sublease real estate to another tenant, the company reduces a long-term lease liability. Eddie Lampert cited this in his 2013 annual Chairman's Letter as an important factor that is examined by the bond rating agencies when determining the risks involved with Sears Holdings' debt obligations. This also illustrates the necessity for the company to monetize its square footage to offset the liability of long-term lease obligations with either enhanced profitability per square foot of store space or renting it to a sub-tenant. Currently, Sears Holdings reports $16.475 billion of liabilities on its balance sheet."

[Luke 532]

btw, I think the commercial real estate sears has is significantly different from what SimonP has ?

Sears has lots of space in big mall - and I am not sure who can take over those space in those malls (except sears itself)

 

...

 

I used to use Black & Decker as a kind of approximation for Craftsman. I liked thinking of Kenmore ~ Whirlpool, and Jcrew ~ Lands' End. Worked out at the time for a back of the envelope calculation but if you wanted to add in some more components you can think of Simon Property as a conduit to the realty co. And theres also the home service aspect which I have never gotten much information on. You could also throw in a startup online retailer to approximate the Shop Your Way program. Either way you slice it the current market cap is far lower than most of these components alone.

 

I never really liked Berkowitz's comparison of SPG to SHLD in terms of market cap.  At the time of the statement I believe SPG was $50B and SHLD $5B (10:1 ratio) but SHLD had roughly the same amount of square footage as SPG.  But I still think it shows that there is *potential* for that type of value improvement.  Maybe SHLD uses Seritage to have a mini-REIT under it's umbrella?  That would be interesting.

[FCharlie]

 

 

Craftsman being comparable to B&D with B&D selling for $4.5B just a few years ago.  You can see why I'm pretty confident that the brands Craftsman + Kenmore + Diehard exceed SHLD's market cap of $4.4B (real estate for free, inventory net payables for free, Lampert for free).

 

Don't forget Land's End.  Perhaps $2 billion more?

[Luke 532]

 

 

Craftsman being comparable to B&D with B&D selling for $4.5B just a few years ago.  You can see why I'm pretty confident that the brands Craftsman + Kenmore + Diehard exceed SHLD's market cap of $4.4B (real estate for free, inventory net payables for free, Lampert for free).

 

Don't forget Land's End.  Perhaps $2 billion more?

 

To be conservative in my thesis I've discounted by a factor of 100% the value of Land's End, their stake in Sears Canada (49% last time I checked), Parts Direct and Appliance Repair services, their Auto business (does $3B/year in sales), etc.  I realize it's borderline insane to discount these to a value of $0, but I like to operate with a large margin of safety and I think SHLD fits the bill.