SHLDQ - Sears Holdings Corp

[compoundinglife]

the street gets ESL strategy. they want him to move quicker in transforming it. because if you are an index hugging institutional investor, without any earnings nor prospects for any from operations, there is no reason to own this right now. and if you are the more adventurous sort, like the typical hedgie, eddie is probably moving too slowly to create value for you. that's why there are very few "fans" of the stock. cheers!

 

Agreed. Most people are not willing wait to years especially volatile years. If you are manager holding SHLD and the media is talking about how screwed they are and how ESL is a moron for attempting this, then your investors are going to think "hmmm, my money manager is a moron for holding SHLD". I am guessing that most managers are not willing to wait for outsized returns at the cost of the pain.

[txlaw]

I agree with everything you are saying here. I think the likely hood of bankruptcy is very low but it is still a possibility, so I would like to be able to assert with some confidence that if that happens there is enough MOS.

 

But BK for which entities?  Which entities do you think would be facing insolvency?  And how would that play out in terms of what's left over for owners of the Holdco?

 

That's why I said above that there should be some tearing apart of the financials, as per Sanjeev's friend's advice.

[txlaw]

A timely presentation entitled "Perception and Reality" was just posted on the OAK thread.

 

http://www.sec.gov/Archives/edgar/data/1403528/000119312512490268/d449181dex991.htm

 

Very much applicable to the SHLD situation.

[txlaw]

A timely presentation entitled "Perception and Reality" was just posted on the OAK thread.

 

http://www.sec.gov/Archives/edgar/data/1403528/000119312512490268/d449181dex991.htm

 

Very much applicable to the SHLD situation.

 

Not literally applicable, of course.  :)

[ShahKhezri]

Don't forget about the DTA's that were written down last year.  If you assume there will be some profitability down the road on a KCD/Hold Co..

[compoundinglife]

I agree with everything you are saying here. I think the likely hood of bankruptcy is very low but it is still a possibility, so I would like to be able to assert with some confidence that if that happens there is enough MOS.

 

But BK for which entities?  Which entities do you think would be facing insolvency?  And how would that play out in terms of what's left over for owners of the Holdco?

 

That's why I said above that there should be some tearing apart of the financials, as per Sanjeev's friend's advice.

 

Sure, so Sears Retail and Kmart would be the entities facing insolvency and the real estate holding company is untouched. I don't doubt that there is protection of assets in the structure. So lets say we rule out bk for the hold co and it is still left with the assets, a better of idea of RE value is still important to me. Appreciate your comments.

 

 

[compoundinglife]

A timely presentation entitled "Perception and Reality" was just posted on the OAK thread.

 

http://www.sec.gov/Archives/edgar/data/1403528/000119312512490268/d449181dex991.htm

 

Very much applicable to the SHLD situation.

 

Thanks. As I mentioned earlier the interview with Marks on Guru focus was what motivated me to think about this investment some more.

[txlaw]

I agree with everything you are saying here. I think the likely hood of bankruptcy is very low but it is still a possibility, so I would like to be able to assert with some confidence that if that happens there is enough MOS.

 

But BK for which entities?  Which entities do you think would be facing insolvency?  And how would that play out in terms of what's left over for owners of the Holdco?

 

That's why I said above that there should be some tearing apart of the financials, as per Sanjeev's friend's advice.

 

Sure, so Sears Retail and Kmart would be the entities facing insolvency and the real estate holding company is untouched. I don't doubt that there is protection of assets in the structure. So lets say we rule out bk for the hold co and it is still left with the assets, a better of idea of RE value is still important to me. Appreciate your comments.

 

Have you looked at which entities are guarantor versus non-guarantor subsidiaries for the senior secured notes, and how the balance sheet will change upon divestiture of more of SHOS and Sears Canada?

 

Just trying to provide some help.  Your comments and questions are very reasonable.  Please don't think I'm trying to push back on your point about the value of the RE.

[compoundinglife]

I agree with everything you are saying here. I think the likely hood of bankruptcy is very low but it is still a possibility, so I would like to be able to assert with some confidence that if that happens there is enough MOS.

 

But BK for which entities?  Which entities do you think would be facing insolvency?  And how would that play out in terms of what's left over for owners of the Holdco?

 

That's why I said above that there should be some tearing apart of the financials, as per Sanjeev's friend's advice.

 

Sure, so Sears Retail and Kmart would be the entities facing insolvency and the real estate holding company is untouched. I don't doubt that there is protection of assets in the structure. So lets say we rule out bk for the hold co and it is still left with the assets, a better of idea of RE value is still important to me. Appreciate your comments.

 

Have you looked at which entities are guarantor versus non-guarantor subsidiaries for the senior secured notes, and how the balance sheet will change upon divestiture of more of SHOS and Sears Canada?

 

Just trying to provide some help.  Your comments and questions are very reasonable.  Please don't think I'm trying to push back on your point about the value of the RE.

 

Txlaw, I don't think you are trying to push back and really do appreciate comments/questions. Yes KCD and the Real Estate company are non-guarantor for the notes. I realize that this is a big piece to the puzzle. But I also consider that ESL is not someone who is strictly numbers and has a sense of responsibility and ethics. So while I see that this structure protects some of the most valuable assets, I don't think its likely that he would walk away from the other subs responsibility on their liabilities, which is why I like to view it as a flat picture. Does it make sense to think about it that way?

 

[txlaw]

I agree with everything you are saying here. I think the likely hood of bankruptcy is very low but it is still a possibility, so I would like to be able to assert with some confidence that if that happens there is enough MOS.

 

But BK for which entities?  Which entities do you think would be facing insolvency?  And how would that play out in terms of what's left over for owners of the Holdco?

 

That's why I said above that there should be some tearing apart of the financials, as per Sanjeev's friend's advice.

 

Sure, so Sears Retail and Kmart would be the entities facing insolvency and the real estate holding company is untouched. I don't doubt that there is protection of assets in the structure. So lets say we rule out bk for the hold co and it is still left with the assets, a better of idea of RE value is still important to me. Appreciate your comments.

 

Have you looked at which entities are guarantor versus non-guarantor subsidiaries for the senior secured notes, and how the balance sheet will change upon divestiture of more of SHOS and Sears Canada?

 

Just trying to provide some help.  Your comments and questions are very reasonable.  Please don't think I'm trying to push back on your point about the value of the RE.

 

Txlaw, I don't think you are trying to push back and really do appreciate comments/questions. Yes KCD and the Real Estate company are non-guarantor for the notes. I realize that this is a big piece to the puzzle. But I also consider that ESL is not someone who is strictly numbers and has a sense of responsibility and ethics. So while I see that this structure protects some of the most valuable assets, I don't think its likely that he would walk away from the other subs responsibility on their liabilities, which is why I like to view it as a flat picture. Does it make sense to think about it that way?

 

I think that's right -- ESL seems like an honorable guy.  But the breakdown also tells us more about just who is and who isn't a guarantor of the notes.  The breakdown, which you can figure out by looking at the prospectus referenced in the thread started by Sanjeev, also allows us to put a potential value on the asset-lite side of the good co/bad co model, where runoff of capital from bad co is used to pay down liabilities, with the remaining equity/capital redeployed into the asset-lide side. 

 

In other words, the only way that I personally get to substantially more than the market cap is by taking the asset-lite model into account, and that's because I simply don't have the time or resources to figure out the value of the RE.  But I'm starting to think that I'm crazy for thinking about SHLD this way, and that I'm missing something or am mistaken about this.

[ShahKhezri]

I agree with everything you are saying here. I think the likely hood of bankruptcy is very low but it is still a possibility, so I would like to be able to assert with some confidence that if that happens there is enough MOS.

 

I have this comment saved from the Barrons article, have not been able to confirm it.

 

Cliff Orr, Privet Fund

Loan Documents indicate that KCD and other non-guarantor subs generate more than $600MM in FCF annually.

 

 

 

But BK for which entities?  Which entities do you think would be facing insolvency?  And how would that play out in terms of what's left over for owners of the Holdco?

 

That's why I said above that there should be some tearing apart of the financials, as per Sanjeev's friend's advice.

 

Sure, so Sears Retail and Kmart would be the entities facing insolvency and the real estate holding company is untouched. I don't doubt that there is protection of assets in the structure. So lets say we rule out bk for the hold co and it is still left with the assets, a better of idea of RE value is still important to me. Appreciate your comments.

 

Have you looked at which entities are guarantor versus non-guarantor subsidiaries for the senior secured notes, and how the balance sheet will change upon divestiture of more of SHOS and Sears Canada?

 

Just trying to provide some help.  Your comments and questions are very reasonable.  Please don't think I'm trying to push back on your point about the value of the RE.

 

Txlaw, I don't think you are trying to push back and really do appreciate comments/questions. Yes KCD and the Real Estate company are non-guarantor for the notes. I realize that this is a big piece to the puzzle. But I also consider that ESL is not someone who is strictly numbers and has a sense of responsibility and ethics. So while I see that this structure protects some of the most valuable assets, I don't think its likely that he would walk away from the other subs responsibility on their liabilities, which is why I like to view it as a flat picture. Does it make sense to think about it that way?

 

I think that's right -- ESL seems like an honorable guy.  But the breakdown also tells us more about just who is and who isn't a guarantor of the notes.  The breakdown, which you can figure out by looking at the prospectus referenced in the thread started by Sanjeev, also allows us to put a potential value on the asset-lite side of the good co/bad co model, where runoff of capital from bad co is used to pay down liabilities, with the remaining equity/capital redeployed into the asset-lide side. 

 

In other words, the only way that I personally get to substantially more than the market cap is by taking the asset-lite model into account, and that's because I simply don't have the time or resources to figure out the value of the RE.  But I'm starting to think that I'm crazy for thinking about SHLD this way, and that I'm missing something or am mistaken about this.

[compoundinglife]

 

 

I have this comment saved from the Barrons article, have not been able to confirm it.

 

Cliff Orr, Privet Fund

Loan Documents indicate that KCD and other non-guarantor subs generate more than $600MM in FCF annually.

 

I have always figured most of the KCD cashflow came from the products Sears sells, but it would be great to know how much of that is coming from outside sales.

 

 

[ShahKhezri]

Based on the SHOS filings, almost 88% of sales are products from SHLD, with agreements.

 

Asset light to me means royalty.  Sears Brands / Sears Real Estate.  Money flowing to Hold Co., EL investing as he sees fit.  Sub spinoffs spend the money on ad's, invest in working capital, etc. 

 

The point regarding analysts and investing community, if SHLD moves to more disclosure, breakout of sales (ie Land's end, KCD, etc.), restructuring...it's only positive. 

 

If you look at the top 10 shareholders as of 9/30...group the stable holders (ESL, Lampert, Fairholme, Tisch, Horizon/Kinetics) and the institutional (State Street, Vanguard, Investco, BlackRock) you see the stables owning more of SHLD with 89.6MM shares and the institutions owning 6.5MM shares.  Here's the funny thing, 9/30/12 was the most the stable's have owned (last data piece I have) and the least the institutionals have owned since 6/30/07.  This also doesn't include Chou and that's why my short interest as a % of float is much higher than reported. 

 

Lack of bad news is a catalyst, clarity on the company's direction is a catalyst. 

[spin]

"group the stable holders (ESL,"

 

Is ESL a stable holder?

 

http://www.sec.gov/Archives/edgar/data/860585/000118143112061481/xslF345X03/rrd361623.xml

 

1. Represents shares of common stock of Sears Holdings Corporation (the "Issuer") that were distributed by ESL Partners, L.P. ("Partners") on a pro rata basis to limited partners that elected to redeem all or a portion of their interest in Partners in 2012.

 

~40% addition to FF there - good for shorts for supply to cover if redeeming LPs shorted pre distribution or intend to bail.

 

Why did Eddie distribute ~20% of his holdings ( ~5.6% of SHLD outstanding) to LPs?  He didn't last year - What changed?  Why now?

 

Spin

[txlaw]

"group the stable holders (ESL,"

 

Is ESL a stable holder?

 

http://www.sec.gov/Archives/edgar/data/860585/000118143112061481/xslF345X03/rrd361623.xml

 

1. Represents shares of common stock of Sears Holdings Corporation (the "Issuer") that were distributed by ESL Partners, L.P. ("Partners") on a pro rata basis to limited partners that elected to redeem all or a portion of their interest in Partners in 2012.

 

~40% addition to FF there - good for shorts for supply to cover if redeeming LPs shorted pre distribution or intend to bail.

 

Why did Eddie distribute ~20% of his holdings ( ~5.6% of SHLD outstanding) to LPs?  He didn't last year - What changed?  Why now?

 

Spin

 

Tax reasons?

[Matson125]

5 years ago Lampert raised money through Goldman Sachs with a 5 year lock-up.  The lock-up expires at the end of the year according to WSJ

 

http://online.wsj.com/article/SB10001424052970203750404577173071474457812.html

 

[texual]

Assume you did all the homework and we all agree that today, as of this moment the value of the real estate is 18 billion dollars. And in a rising market those properties could be worth more. Now with that assumption out of the way and done, explain how we get from point A to B where I and all of the shareholders own a pure real estate company and have the cash returned to us or given to ESL to invest for us... instead of right now... where I seem to be loosing money and patience with the investment thinking we would be at point B, or at least damn close.

 

Also nobody should still be under the impression that SHLD is a ongoing 'turnaround' in any traditional sense of the word. JCP is in turnaround, fixing operations and improving stores. As of now Sears as a store is dead, theres no going back. So my question is if theres so much great value here, why not just go for the jugular?

 

I can wait another 5 years. I just don't want to watch JCP make more money for its shareholders using the traditional turnaround vs our value investors haven Bruce and Eddie telling us that theres value to be had. Show me the money!

[JRH]

Assume you did all the homework and we all agree that today, as of this moment the value of the real estate is 18 billion dollars. And in a rising market those properties could be worth more. Now with that assumption out of the way and done, explain how we get from point A to B where I and all of the shareholders own a pure real estate company and have the cash returned to us or given to ESL to invest for us... instead of right now... where I seem to be loosing money and patience with the investment thinking we would be at point B, or at least damn close.

 

Also nobody should still be under the impression that SHLD is a ongoing 'turnaround' in any traditional sense of the word. JCP is in turnaround, fixing operations and improving stores. As of now Sears as a store is dead, theres no going back. So my question is if theres so much great value here, why not just go for the jugular?

 

I can wait another 5 years. I just don't want to watch JCP make more money for its shareholders using the traditional turnaround vs our value investors haven Bruce and Eddie telling us that theres value to be had. Show me the money!

 

It is certainly possible that the reason the market doesn't "recognize" the sum-of-the-parts value of Sears is that they expect it to take forever to unlock.  Could think of it as a discounted cash flow valuation where all the meaningful cash flow is in the distant future (at least, distant enough to be uncertain).  Basically, the "lack of a near-term catalyst" thesis.  However, the spin-offs/distributions over the last year seem to suggest the time may actually be upon us.

[ShahKhezri]

"group the stable holders (ESL,"

 

Is ESL a stable holder?

 

http://www.sec.gov/Archives/edgar/data/860585/000118143112061481/xslF345X03/rrd361623.xml

 

1. Represents shares of common stock of Sears Holdings Corporation (the "Issuer") that were distributed by ESL Partners, L.P. ("Partners") on a pro rata basis to limited partners that elected to redeem all or a portion of their interest in Partners in 2012.

 

~40% addition to FF there - good for shorts for supply to cover if redeeming LPs shorted pre distribution or intend to bail.

 

Why did Eddie distribute ~20% of his holdings ( ~5.6% of SHLD outstanding) to LPs?  He didn't last year - What changed?  Why now?

 

Spin

 

I do.  At its max, ESL held 66MM shares, today ESL & EL own a combined 65.7MM shares.  If anything, the fact that he's putting his own chips in equity and debt, tells me he's vested.  If you're shorting this stock, you're nuts.  I haven't said that before about SHLD, but I think it's true now.  I think even the shorts get it, check out the 12/31/11 vs. 9/30 numbers.

[txlaw]

Fitch affirms CCC rating and says that outlook is Negative:

 

http://www.reuters.com/article/2012/12/05/idUSWNA052920121205

[spin]

Dollarbills:

"The lock-up expires at the end of the year according to WSJ"

Yes the locup expires and LPs are redeeming.  Last year LPs also redeemed.  Difference is Eddie distributed AN/AZO last year and tightly held SHLD, this year he distributed AN/OSH/SHLD.

 

I'm wondering why he distributed SHLD this year when he could had distributed COF/GPS/AN + some of his smaller holdings if SHLD is the huge bargain, or at least minimised the SHLD distribution.    Here is what he distributed:

 

http://i45.tinypic.com/2zz1es7.png

 

ShahKhezri:

"I do.  At its max, ESL held 66MM shares, today ESL & EL own a combined 65.7MM shares."

Can you step me thru this?  5.9MM Shares distributed went to redeeming LPs vs Eddie hence the ESL+Eddie holdings are down I would think?

 

1. Represents shares of common stock of Sears Holdings Corporation (the "Issuer") that were distributed by ESL Partners, L.P. ("Partners") on a pro rata basis to limited partners that elected to redeem all or a portion of their interest in Partners in 2012.

 

Spin

[ShahKhezri]

Dollarbills:

"The lock-up expires at the end of the year according to WSJ"

Yes the locup expires and LPs are redeeming.  Last year LPs also redeemed.  Difference is Eddie distributed AN/AZO last year and tightly held SHLD, this year he distributed AN/OSH/SHLD.

 

I'm wondering why he distributed SHLD this year when he could had distributed COF/GPS/AN + some of his smaller holdings if SHLD is the huge bargain, or at least minimised the SHLD distribution.    Here is what he distributed:

 

http://i45.tinypic.com/2zz1es7.png

 

ShahKhezri:

"I do.  At its max, ESL held 66MM shares, today ESL & EL own a combined 65.7MM shares."

Can you step me thru this?  5.9MM Shares distributed went to redeeming LPs vs Eddie hence the ESL+Eddie holdings are down I would think?

 

1. Represents shares of common stock of Sears Holdings Corporation (the "Issuer") that were distributed by ESL Partners, L.P. ("Partners") on a pro rata basis to limited partners that elected to redeem all or a portion of their interest in Partners in 2012.

 

Spin

 

Down slightly, but not by a whole lot.  I thought it was for tax reasons as well.  Last year we had the fiscal cliff situation as well and I'm assuming he thought capital gains tax would adjust.  Just an assumption though.  Big picture, the believers are still long and strong holders and the group is more long than at any time in the last 5 years is my point.

 

[spin]

If RBS/ESL is now willing to distribute out 9% of their SHLD holdings for LP redemptions (for tax or otherwise) then I'm not sure I would say they are a stable holder is what I'm wondering really.  If that that 5.9MM chunk of SHLD shares is gong to LPs who are non-believers or indifferent  vs 'hold till I die' the free float just increased 40% which is good for the shorts - Killis the whole 'Shorts can't cover this and will get wiped out' argument it would seem.

 

Spin

 

 

 

[ShahKhezri]

Good point.  I've thought about  a 20-30% drop and what it would do to my view of the business, I only recently initiated a position (12/3) and I'm only 20% done with my position.  I have a really bad habit of anchoring to a price I like and that has caused me to stop adding to positions when they go up 10, 15, 20% from my original purchase.  So a big drop would be a good thing. 

[compoundinglife]

If RBS/ESL is now willing to distribute out 9% of their SHLD holdings for LP redemptions (for tax or otherwise) then I'm not sure I would say they are a stable holder is what I'm wondering really.  If that that 5.9MM chunk of SHLD shares is gong to LPs who are non-believers or indifferent  vs 'hold till I die' the free float just increased 40% which is good for the shorts - Killis the whole 'Shorts can't cover this and will get wiped out' argument it would seem.

 

Spin

 

Without knowing what agreements are in place with the different partners, its anybody's guess why is distributing SHLD this year vs not doing it last year. It could be that the partners want to ride out the SHLD investment but also want to have some liquidity in their shares without having locked up another 5 years. But who knows.

 

As for the free float, if it increases, who cares? Sure more people can short if those shares are available to borrow, but a short squeeze is really any part of the SHLD thesis. Although it is a fun thing to talk about and has introduced a ton of volatility.