SHLDQ - Sears Holdings Corp

[ERICOPOLY]

:)

 

Don't you have the same feeling when you go in big @ BAC and FFH? Or you are much more convinced?

 

I went in @ BAC @ 5 as well but sold too early to fund my ATPG purchase, the rest of a nightmare. :o

 

BAC and FFH were far easier to see the path to success.

 

A financial (post runoff bleeding) like BAC can earn 13% on tangible equity.  On $13.50 of equity that's $1.75 of earnings and you are only paying $5 for the stock in your example.  So that's more than a triple in value once those earnings show up.  Then you only have to ask when the earnings will show up.  They were well enough capitalized to survive during the interim and therefore the only thing to do was to wait for the expenses to come down.  A bonus is that the company is highly visible -- it's not some obscure little microcap that the market can ignore for a while after earnings rebound.  So this catalyst (expense reduction) had a two year or three year timeframe.

 

Compare that to SHLD -- there is no nice tidy 2 or 3 year timeframe that I'm aware of that will assuredly bring a triple in price.

[ERICOPOLY]

So my more complicated view on SHLD is one of mostly speculative behavior -- like I said, it's what I do most of the time is speculative-like behavior  :)

 

The stock gets driven down:

1)  This happens because lack of clear horizon at relatively higher price allows stock to be knocked down to lower price by traders.

2)  At lower price, people feel comfortable that SHLD had lots of assets that far exceed the liabilities + market cap.

 

The stock gets driven up:

1)  This happens because at lower price people are attracted by the downside protection of the assets, shorts then cover

2)  It rises in price until it's unattractive to the bottom fishers without a clear horizon.  Some of them sell and this is exacerbated by short interest rising.

 

So without a whole lot of things to do that make perfect sense like the BAC investment in 2011, I'm acting like a trader here. 

 

There's the ugly truth.  I really shouldn't have bought any at $60 because I know myself better than that -- without a clear understanding of catalyst, I just don't have the patience to hold for years and years.  But I'm glad that I can be honest with myself about the game I'm now playing in the stock.

 

 

[rjstc]

So my more complicated view on SHLD is one of mostly speculative behavior -- like I said, it's what I do most of the time is speculative-like behavior  :)

 

The stock gets driven down:

1)  This happens because lack of clear horizon at relatively higher price allows stock to be knocked down to lower price by traders.

2)  At lower price, people feel comfortable that SHLD had lots of assets that far exceed the liabilities + market cap.

 

The stock gets driven up:

1)  This happens because at lower price people are attracted by the downside protection of the assets, shorts then cover

2)  It rises in price until it's unattractive to the bottom fishers without a clear horizon.  Some of them sell and this is exacerbated by short interest rising.

 

So without a whole lot of things to do that make perfect sense like the BAC investment in 2011, I'm acting like a trader here. 

 

There's the ugly truth.  I really shouldn't have bought any at $60 because I know myself better than that -- without a clear understanding of catalyst, I just don't have the patience to hold for years and years.  But I'm glad that I can be honest with myself about the game I'm now playing in the stock.

 

Kind of like Lvlt. Good managers, good story, just takes forever to play out unless your trading in and out. Too many better buys along the way.

[ERICOPOLY]

So what's the major thing between this gold bar and the ground in your opinion ?

 

Probably a long wait.  Just like if I had to dig a deep hole with a spoon.  Meanwhile the money I deploy could be earning cash elsewhere.  So whatever that real estate is worth if all sold today, is not what it's worth in today's stock price if liquidated not until far out in the future.

 

So I believe if Eddie could communicate with his investors what the time horizon is, and whether full monetization is even on the docket, then the stock could price it in.  The complete mystery of this thing leaves it in volatile trading land.

[ERICOPOLY]

And then if you pull up a 5 year chart, you might take a guess at why I decided to buy it back at $42-$43.  I feel like making 25% to 50% in a year is not unrealistic.  But it's just speculative.

[CorpRaider]

If I could square my feeling that he's a rational and excellent capital allocator who will cut his losses in retail when prudent and maximize the ROI for the holding company and its shareholders with the massive investments and commitment to the shopyourway initiative, I would buy it hand over fist.

[constructive]

Gross inventory, real estate, and brand value may all be worth more than the current market cap, but you can't hand wave away the liabilities! It makes much more sense to start from tangible book value (-$350M) and then add the appropriate off balance sheet values.

 

Also note that you don't see any other retailers with balance sheets like Sears.  Look at case studies like Circuit City and Borders. Circuit City reported positive tangible equity immediately before they went bankrupt. Of course in a liquidation scenario the asset values almost always decline sharply, and shareholders are left with nothing.  Borders went bankrupt a few months after tangible equity went negative.

 

http://seekingalpha.com/article/409111-the-sears-real-estate-is-undervalued-myth

Sears real estate was written up to fair value in 2005. Kmart real estate was not written up and is more likely to be undervalued. Adjusting for reduced interest rates since 2005, the favorable leases might be marked up to $900M. Higher interest rates are probably a wash for debt costs plus favorable leases versus the pension liability.

 

The KCD and Land's End brands are carried as $2.8B intangibles. They may be worth more than that, especially with the balance sheet magic separating KCD from Sears.

 

Based on the comps (WHR, ELUXY, SWK, MKTAY, SNA, WMT, KSS, DDS, OSTK, HSNI, etc) here are some guesses on what the brands might be worth in an bullish scenario (SSS stops declining and Sears returns to modest profitability). The bear and base values would be significantly lower.

 

                    Revenue    Brand Value Multiple    Brand Value

Craftsman        $5.0                  0.8                        $4.0

Kenmore          $3.0                  0.3                        $0.9

DieHard            $2.0                  0.6                        $1.2

Land's End      $1.7                  0.6                        $1.0

All other                                    0                            $0

Total                                                                       $7.1B

 

http://www.nypost.com/p/news/business/lands_end_game_5p3ePLWUD0sqSpTPERJGeM

Sears wants $2B for Land's End but analysts consider $1.2 - $1.6B more likely. (Note that a Land's End sale would include tangible and intangible assets.)

[constructive]

Does anyone know the current borrow rate / lending rate for SHLD? I hope you all have lending turned on in your margin accounts to take advantage of that.

 

And is anyone using options? If the lending rate is high enough, there may be arbitrage available from covered calls or protective puts.

[Luke 532]

What's the balance between owned and leased buildings?

 

http://investorplace.com/2012/11/how-sears-is-worth-more-dead/

By Will Ashworth, InvestorPlace Contributor  |  Nov 30, 2012, 9:30 am EDT

Any conversation about the true intrinsic value of SHLD stock begins with real estate. Between Sears and Kmart, the company has 241 million square feet of retail space, 37% of it owned and the rest in long-term, below-market leases. Berkowitz values its real estate at $160 per share, or $17 billion.

 

[Guest hellsten]

Bruce Berkowitz Investment Thesis on Sears Holdings Corp. (2009)

http://www.gurufocus.com/forum/read.php?1,52787

 

I believe he’s not going to steal the company from the remaining shareholders. And I could easily see him you know retrenching to Sears. But I don’t know because I haven’t talked with him. I don’t need to know because it’s cheap enough. It – but I do not believe – I think the man is of a level of integrity and honesty that he won’t do that. But clearly, he is testing the faithful. And I don’t believe I’m being delusional on this issue.

…

It’s mostly – it’s based on assets and liabilities, with the assumption that he’s a good capital – that he will be a great capital allocator. But to make money right now all of you have to do is liquidate the company, that’s it. There’s no – it’s no more difficult than that given the assets and liabilities.

…

This summer, we spent a tremendous amount of time going to all of the tax collectors offices around the United States trying to get the tax value of Sears and Kmart properties, a lot of people, a lot of time. We came up with numbers that ranged between sort of 80 and $90 per share.

…

I still believe that Sears is quite reminiscent of Berkshire Hathaway’s days with the – with Warren Buffet’s days, I should say, with the Berkshire Textile Mills and that inflection point, that point when we decided it was time to move on and reallocate the cash to more productive uses. There’s nothing I see at this point which tells me that will not happen at Sears.

…

Shareholders: Can Sears pay off their debt? Can they refinance at reasonable terms?

Bruce Berkowitz: I think – I think the answer to both questions is yes and if Eddie Lampert has any difficulties I think he should call Fairholme cause we would be willing to help him at the right price.

…

Shareholder: If Sears retires a debt, but stops or curtails stock buybacks, what happens to the stock price when Sears can’t fend off the short-sellers?

Bruce Berkowitz: Well, probably if the short-sellers are still there it goes down. And I think – I hope the stock does go down because it will be to our long-term benefit.

…

I guess we’ll know when he sells, but even when he starts to sell, we always say that they’re going to have to be careful. I mean the real estate probably very much matches up with some type of – and in our opinion is correct – some type of 80/20 rule, where you have 20 percent of the real estate is very, very valuable, even today, and 80 percent may not be as valuable as some might think.

In terms of meeting Eddie Lampert, it’s probably a good time, but it – just like Buffet though, I think if you – if you – if you read his letters, if you go through the queues and the news releases, I think he pretty much tells you the plan. And the plan does match up in my mind, again, with how Warren Buffet behaved with the Berkshire Textile Mills.

 

I think Bruce answered most, if not all, the questions people have posted here.

[ERICOPOLY]

Well, admittedly I had no idea that Sears sold this kind of thing:

 

http://www.sears.com/morris-leather-string-bra-g-string-w/p-SPM7505343902?prdNo=27&blockNo=27&blockType=G27

 

Go to their website and browse the "ELEGANT MOMENTS" brand.  Bizarre.

 

1)  Leather spanking skirt

2)  Chain leash with leather

 

Unfortunately when actually clicking on these items you get errors claiming "Whoops, that wasn't supposed to happen".

 

[ERICOPOLY]

That seems to illustrate a problem with the "Store within a store" concept.  I believe those items were in the "Humble Brothers LLC" storefront, but it's all within the Sears.com domain. 

 

Might not want to bring your kids to Sears.

[constructive]

Does bondage equipment count as Hardlines or Apparel?

 

That gives "Come See the Softer Side of Sears" a whole new meaning.

[Guest hellsten]

Credit Suisse analysts on Sears:

In a note to clients published on Thursday, Credit Suisse analysts said the investment bank lowered its breakup value for Sears after reviewing a detailed real estate valuation prepared by a leading real estate firm for a J.C. Penney Co. debt offering. The analysts now think Sears is worth somewhere in the range of $16 to $60 per share for the asset value. “The wide range primarily reflects the value of many of the leased properties and the likelihood that closing stores will cost money,” the analysts explained in the report.

 

Credit Suisse analysts did stress in the report that compared with Penney, Sears has “a select number of trophy properties,” where the zoning would allow for redevelopment of the site at a significant profit to Sears. The trouble is the analysts do not know how many of these sites exist. The analysts speculate it could be as many as 50.

http://www.institutionalinvestorsalpha.com/Article/3207208/Lamperts-ESL-Boasts-Soaring-Stock-Portfolio.html

[Luke 532]

Credit Suisse analysts on Sears:

“The wide range primarily reflects the value of many of the leased properties and the likelihood that closing stores will cost money,” the analysts explained in the report.

 

Gotta love the word "likelihood" to give them an out.  Analysts need to do their homework...

 

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

"The $1 billion net proceeds from 300 closed stores since 2006 - most of which occurred in 2012 - implies around $3.3 million net gain for each closed store."

 

http://finance.fortune.cnn.com/2012/11/26/bruce-berkowitz-fairholme/

Berkowitz: "How can Sears close stores and generate hundreds of millions of dollars of cash? It gets at the inventory. The liquidation value of its inventory approaches its stock price. Forget the real estate."

 

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

"Lampert further explains in his letter that the cash generated by liquidation of net inventory - free of obligations - at these locations typically covers and exceeds severance pay and all other costs related to closing the stores."

[Luke 532]

Credit Suisse analysts on Sears:

The analysts speculate it could be as many as 50.

http://www.institutionalinvestorsalpha.com/Article/3207208/Lamperts-ESL-Boasts-Soaring-Stock-Portfolio.html

 

Might be closer to 125 prime properties.  And KCD (and other non-guarantors) might be worth more than the current market cap (and this article is from exactly one year ago today when the stock was $50, not $41 like it is today).

 

http://online.barrons.com/article/SB50001424053111904239304577573161504132558.html

LAMPERT HAS TAKEN CARE TO separate Sears into "guarantor" and "non-guarantor" subsidiaries, with the former securing the company's $1.2 billion in senior notes due 2018. Importantly, KCD and a unit housing 125 properties leased to Sears aren't guarantors. The division signals where most of the value resides in the company.

 

Cliff Orr, an analyst at Privet Fund, a hedge fund in Atlanta focusing on special situations, notes that loan documents indicate that KCD and other non-guarantor subs generate more than $600 million in free cash flow annually. Using conservative industry multiples to value their profit stream would suggest they are worth more than Sears Holdings' current value.

[jeffmori7]

and why are those assets worth more only when they liquidate it quick?

 

Exactly. Why not allow the retail operations to operate and continue to fund the pension? One thing I think that is often overlooked is that excluding pension funding, this company is free cash flow positive.

 

By allowing the operations to continue at least they have a chance to turn around, you don't have to lay off fifty thousand employees quickly, you don't have to have a fire sale of assets... The pension is frozen. Eventually it won't require any funding and Eddie Lampert mentions nearly every year at the annual meeting how the company is being hurt by the Federal Reserve holding rates at artificially low levels.  It would appear to me that interest rates have bottomed and the pain to Sears' pension is at maximum.  Isn't that when you want to buy? The point of maximum pain and pessimism?

 

Bingo.  And nearly everything is going to start moving in tandem.  Real estate values increase as the economy continues to improve.  KCD brands sell more stuff as housing market improves.  Pension liabilities decrease as interest rates rise... causing FCF to become positive and increase. 

 

All the while, Lampert gains more concentration in SHLD.  Berkowitz continues to work on getting permanent capital (he hints that his strategy is not suitable for the mutual fund structure - I agree that it would be very difficult for a true value investor that allows ideas to sit for 5+ years to run a MF) - listen to that video interview on Bloomberg earlier this year: http://www.bloomberg.com/video/berkowitz-says-investors-should-stay-the-course-xQ4cMqpsRcuLhgIWZVMIfQ.html.  Remember, both Berkowitz and Lampert now live in Miami.  Sure, Lampert could have moved for the Florida tax benefit but it just seems far too coincidental that he now lives in the same city as Berkowitz. 

 

It's all shaping up to be a perfect storm of sorts.

 

Luke..the perfect storm...

 

One thing I know from investing, never fall in love with a stock, it can be really dangerous. It seems that you're building yourself a beautiful fairy tale, looking only at what you want to look at and you mAke it beautiful! Be careful, you may be right in the end, I'm interested in what you say about Sears, but try not to be just a Sears fanboy or you could get hurt. Just an advice :)

[jeffmori7]

Guys, as there are no Kmart where I live (Quebec province),  I cannot really get what it is...what kind of store is a Kmart? Do you think they are worth something or will Lampert close most, if not all, the Kmart? Or are they better located than Sears? Does it have any value as a brand? Thanks in advance!

[Luke 532]

If I could square my feeling that he's a rational and excellent capital allocator who will cut his losses in retail when prudent and maximize the ROI for the holding company and its shareholders with the massive investments and commitment to the shopyourway initiative, I would buy it hand over fist.

 

*Excellent capital allocator: Check

https://sumzero.com/headlines/consumers_and_retailing/SHOS/175-sumzero-elite-exclusive-long-on-sears-hometown

"But most importantly, Eddie is one of the most disciplined capital allocators in corporate America. After losing his father early in life, Eddie became consumed with making money and earning financial independence. Even today as he sits atop a multibillion dollar personal fortune and a $15 billion dollar hedge fund, he still “counts the pennies” and personally signs off on every employee expense report."

 

*Maximize ROI for shareholders: Check

http://www.businessweek.com/stories/2004-11-21/the-next-warren-buffett

"Since he started ESL in 1988 with a grubstake of $28 million, he has racked up Buffett-style returns averaging 29% a year."

 

*Commitment to ShopYourWay: Check

ShopYourWay is #3 and nobody has even heard of it yet... imagine when it gains traction.

http://online.wsj.com/article/SB10001424127887324263404578613751354714698.html

"Sears's Marketplace is now the third-largest online vendor market by number of visits, but it trails Amazon and eBay by a wide margin, according to comScore. In June, Amazon had 98 million unique visitors, eBay had 69 million and Sears had 18 million."

 

*Buy it hand over fist: Join the club, my friend :)

 

[Liberty]

Guys, as there are no Kmart where I live (Quebec province),  I cannot really get what it is...what kind of store is a Kmart? Do you think they are worth something or will Lampert close most, if not all, the Kmart? Or are they better located than Sears? Does it have any value as a brand? Thanks in advance!

 

Think something more or less like Zellers.

[Luke 532]

Luke..the perfect storm...

 

One thing I know from investing, never fall in love with a stock, it can be really dangerous. It seems that you're building yourself a beautiful fairy tale, looking only at what you want to look at and you mAke it beautiful! Be careful, you may be right in the end, I'm interested in what you say about Sears, but try not to be just a Sears fanboy or you could get hurt. Just an advice :)

 

Thanks for the words of caution, Jeff.  Things can always change for the worse (and sometimes without much notice at all), but I admit I've got a "heavy-like" for SHLD.  It's hard not to when every way I cut it and every angle I look at it from, I just can't kill it and come to a reasonable way to lose a ton (sure, there are ways that it could die but I handicap those possibilities as remote and not very likely).  In other words, I believe the margin of safety is there.  And the upside is quite astonishing.  Limited downside... say, maybe 50% from here (and that is a stretch if we're talking actual value of the company and not just the stock price at a given point of time), for what could possibly turn out to be a behemoth company for the next 5 decades.

 

I've managed our family money full-time for awhile now, and for me and my family the best course of action was/is to have a large chunk of our nest egg in the SHLD basket.

[Guest hellsten]

http://seekingalpha.com/article/409111-the-sears-real-estate-is-undervalued-myth

Sears real estate was written up to fair value in 2005. Kmart real estate was not written up and is more likely to be undervalued. Adjusting for reduced interest rates since 2005, the favorable leases might be marked up to $900M. Higher interest rates are probably a wash for debt costs plus favorable leases versus the pension liability.

 

Bruce Berkowitz includes the same fact in his thesis on SHLD:

Accounting rules did not require Kmart to revalue its real estate after it merged with Sears.

http://www.fairholmefunds.com/sites/default/files/120815%20SHLD%20Presentation.pdf

 

Then there's also this quote from the same presentation:

“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.”

 

Even if we exclude Sears locations from the equation, there are 1183 kmarts listed on shcrealty.com.

 

Paulo's writings on SHLD is an excercise in trying to kill SHLD:

http://seekingalpha.com/author/paulo-santos/articles/symbol/shld

 

Paulo in 2012:

http://seekingalpha.com/article/320959-sears-is-in-a-classic-short-squeeze

 

Something must have changed, right? No, nothing has. But when you mix a very hot market, buyout rumors, a very large short interest (58% of the float is shorted) and a low float (only around 40% of the outstanding shares trade in the open market), sometimes you get what you just saw: a 50% "straight up" move in a company with stock that should, instead, be imploding.

…

Sears is, after this short squeeze, a $5.3 billion market capitalization, with nothing supporting such valuation - certainly not the huge loss estimates as far as the eye can see.

 

Indeed, Sears is a prime candidate to file for Chapter 11 during 2012.

 

I'm having difficulties understanding how Sears is going to zero. The biggest risk IMHO is that the liquidation whatever Eddie is doing takes 5-10 years or longer, but why would Eddie allow that?

[plato1976]

imagine it as a much worse organized, yet more expensive Walmart...

 

Guys, as there are no Kmart where I live (Quebec province),  I cannot really get what it is...what kind of store is a Kmart? Do you think they are worth something or will Lampert close most, if not all, the Kmart? Or are they better located than Sears? Does it have any value as a brand? Thanks in advance!

[ERICOPOLY]

imagine it as a much worse organized, yet more expensive Walmart...

 

Guys, as there are no Kmart where I live (Quebec province),  I cannot really get what it is...what kind of store is a Kmart? Do you think they are worth something or will Lampert close most, if not all, the Kmart? Or are they better located than Sears? Does it have any value as a brand? Thanks in advance!

 

The Kmart in Goleta is pretty vacant of customers despite not even having a Target nor a Walmart to compete with.

 

Now that is pathetic!  The nearest Walmart/Target stores are like 45 miles away in Ventura.

 

The Goleta KMart also serves the neighboring city of Santa Barbara.

 

So no, to believe that Walmat and Target are killing them would be delusional.

[ERICOPOLY]

Last night I tried shopping for clothes on Amazon.  Sort of hard to try them on.

 

And the traditional stores don't often have what I want in my size/color.

 

What I need is a store that has a "demo only" inventory, where they won't sell the demos.  That way I could go in there and try it on, and then close the deal online.  Sears could be that store overnight if they had the widest "demo" selection at the best online pricing.