SHLDQ - Sears Holdings Corp

[muscleman]

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.

 

 

I heard Santa Barbara is a rich city, no?

If there are no Walmarts there to compete with Kmart, at the minimum, SHLD should close the store and rent it or sell it to Walmart. :)

 

How would you evaluate the value of this Kmart property? It sounds like it is in a good location.

[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.

 

 

I heard Santa Barbara is a rich city, no?

If there are no Walmarts there to compete with Kmart, at the minimum, SHLD should close the store and rent it or sell it to Walmart. :)

 

How would you evaluate the value of this Kmart property? It sounds like it is in a good location.

 

There are plenty of struggling people here that clean houses, wash dishes, mow lawns for a living.  The store is just hideous inside.  It is located across the street from Home Depot and Costco, which are both inviting and thriving.

 

Goleta's Kmart -- if it can't thrive without Target and Walmart, then what possible hope is there for the rest of their stores?

[Luke 532]

When Berkowitz's fund dropped from roughly $20B to $7B due to market price declines and redemptions, how much SHLD did he sell?

[Guest hellsten]

 

I tried to kill Sears with Occam's razor:

a principle of parsimony, economy, or succinctness used in logic and problem-solving. It states that among competing hypotheses, the hypothesis with the fewest assumptions should be selected. In other words, the simplest explanation is usually the correct one.

 

These where the hypotheses I came up with. I'm sure others will find better ones:

 

Eddie and Bruce:

a)

Eddie and Bruce are rational. They are buying SHLD because they understand it's undervalued.

 

b)

Eddie and Bruce are delusional. They don't understand SHLD or retailing.

 

Assets:

a)

Wall Street is irrational. GAAP values assets incorrectly.

 

b)

Wall Street is rational. GAAP values assets correctly.

 

Bankruptcy:

 

a) Remaining assets have no value to shareholders in a bankruptcy.

 

b) Sears will be valued based on bankruptcy protected assets and subsidiaries.

 

 

Strategy:

 

a) Eddie's strategy 2005-2013 has failed: there's no value in real-estate, sears is a failed retailer

 

b) Eddie's strategy 2005-2013 has worked: he has done what he said he would do and there's value in real-estate

 

Future:

a) Eddie creates shareholder value by extracting value from assets

 

b) Eddie destroys shareholder value because he can't liquidate a company with 200 000 employees

 

I don't know if this exercise helped me or not. It's clear that Wall Street is wrong on many or all points? But Wall Street might be right if Eddie, or the economy, doesn't stop the bleeding.

[Luke 532]

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.

 

I wonder how much the real estate value on the books changed when they were marked up in 2005 (from decades-old values on the books)?

 

[FCharlie]

When Berkowitz's fund dropped from roughly $20B to $7B due to market price declines and redemptions, how much SHLD did he sell?

 

Here's his historical ownership of SHLD from 13F filings:

 

Date          Number of Shares.

 

 

Nov 2005:    150,000

 

Feb 2006:    719,371

 

May 2006:    1,080,671

 

Aug 2006:    995,871

 

Nov 2006:    987,071

 

Feb 2007:    990,871

 

May 2007:    989,589

 

Aug 2007:    987,589

 

Nov 2007:      2,892,489

 

Feb 2008:      6,176,419

 

May 2008:    8,999,590

 

Aug 2008:    12,368,790

 

Nov 2008:    14,596,690

 

Feb 2009:    12,799,740

 

May 2009:    14,338,939

 

Aug 2009:    13,576,439

 

Nov 2009:    15,277,039

 

Feb 2010:      14,951,639

 

May 2010:      14,714,071

 

Aug 2010:      14,037,171

 

Nov 2010:      14,661,671

 

Feb 2011:      14,917,873

 

May 2011:      16,313,973

 

Aug 2011:      16,380,680

 

Nov 2011:      16,270,692

 

Feb 2012:      16,108,492

 

May 2012:        16,813,480

 

Aug 2012:        16,829,880

 

Nov 2012:        16,934,080

 

Feb 2013:        18,146,573

 

May 2013:        19,508,773

 

[FCharlie]

FCharlie, how did you get at $2b for Land's end?

 

TIA!

 

 

$2 Billion is what they paid for it eleven years ago. I remember at the annual meeting a few years back Lampert saying that Land's End had achieved record profitability that year. I simply assume they could sell it for what they paid for it.

 

 

[FCharlie]

 

 

I wonder how much the real estate value on the books changed when they were marked up in 2005 (from decades-old values on the books)?

 

They didn't really change. They shifted. If you read the Sears Roebuck 10K from 2004 they claimed to have:

 

$392 million of land

$7.151 billion of buildings

 

After the merger SHLD claims to have:

 

$2.146 Billion of land

$5.920 Billion of buildings

 

Berkowitz is correct. GAAP is not valuing this correctly. According to GAAP you are supposed to mark property at fair value in a merger.

 

 

http://www.sec.gov/Archives/edgar/data/319256/000095013704001671/c83519e10vk.htm

 

http://www.sec.gov/Archives/edgar/data/1310067/000104746906003414/a2168332z10-k.htm

[ERICOPOLY]

Berkowitz is correct. GAAP is not valuing this correctly. According to GAAP you are supposed to mark property at fair value in a merger.

 

I'm really dense and usually just misunderstand plain English...

 

So given that, why is this not clear evidence that the real estate has been marked to fair value in the merger?  After all, doesn't GAAP mandate that they do so?

 

[ERICOPOLY]

Or at least, what legal problems would arise if they deliberately refused to mark to reasonable fair value in the merger?

[Luke 532]

When Berkowitz's fund dropped from roughly $20B to $7B due to market price declines and redemptions, how much SHLD did he sell?

 

Here's his historical ownership of SHLD from 13F filings:

 

Date          Number of Shares.

Feb 2011:      14,917,873

May 2011:      16,313,973

Aug 2011:      16,380,680

Nov 2011:      16,270,692

Feb 2012:      16,108,492

May 2012:        16,813,480

Aug 2012:        16,829,880

Nov 2012:        16,934,080

Feb 2013:        18,146,573

May 2013:        19,508,773

 

Thank you, Charlie.  So, Berkowitz's fund went from roughly $20B down to $7B due to market prices and redemptions, yet his SHLD holdings either were slightly down (talking a miniscule 1.7% of his share count from AUG 2011 to FEB 2012), flat or up.  What does that tell us about his conviction? 

 

Asset-value thesis aside (and I believe there exists amazing value in the assets minus liabilities), SHLD represents two of the greatest investors of all-time and they are BOTH selling everything except SHLD.  Think about that for a minute. 

 

I can understand why someone wouldn't buy SHLD (thesis might take too long to play out, or file it under the "too hard" category, or something like that) but I really can't understand any logical reason to be short this name. 

[FCharlie]

Berkowitz is correct. GAAP is not valuing this correctly. According to GAAP you are supposed to mark property at fair value in a merger.

 

I'm really dense and usually just misunderstand plain English...

 

So given that, why is this not clear evidence that the real estate has been marked to fair value in the merger?  After all, doesn't GAAP mandate that they do so?

 

Well,  Sears sold it's store in Calgary and booked a $32 million gain

 

Sears sold an auto center for a $35 million gain

 

Sears sold it's fashion center in California for a $21 million gain

 

Sears sold it's offices in Toronto for a $46 million gain

 

Sears sold a few Great Indoors stores for a $50 million gain

 

If you read through the 10K's you search for "Gain on sales of assets"

 

If Sears marked everything to fair value in 2005, why were they booking huge gains on sales of stores less than a year later?

 

 

[constructive]

Icahn is a genius so why did TWA go bankrupt? Cerberus let Chrysler go bankrupt. Falcone let Lightsquared go bankrupt. Einhorn let New Century go bankrupt. Lampert spun off Orchard for it to go bankrupt. Brian Hunter blew up Amaranth. Tom Brown blew up Second Curve. Ackman's Target fund blew up. Meriweather and Neiderhoffer both blew up twice.

 

Some of those people don't have the best reputations now, but at some point they were all regarded as brilliant investors.

 

People sometimes make mistakes. That's the point of analyzing the company, and not just asking yourself, "Are Lampert and Berkowitz geniuses or a morons?"

[ERICOPOLY]

If you read through the 10K's you search for "Gain on sales of assets"

 

If Sears marked everything to fair value in 2005, why were they booking huge gains on sales of stores less than a year later?

 

Then they didn't mark them to fair value -- so they violated the accounting rules.  Is that legal?

[ERICOPOLY]

It seems unlikely to me that they refused to comply with the accounting rules.

 

Maybe the rules allow some inventive (not realistic) means of coming to "fair" value.  Or perhaps there was some nuance that allowed them to not have to revalue many of the properties?

[constructive]

Berkowitz is correct. GAAP is not valuing this correctly. According to GAAP you are supposed to mark property at fair value in a merger.

 

I'm really dense and usually just misunderstand plain English...

 

So given that, why is this not clear evidence that the real estate has been marked to fair value in the merger?  After all, doesn't GAAP mandate that they do so?

 

Well,  Sears sold it's store in Calgary and booked a $32 million gain

 

Sears sold an auto center for a $35 million gain

 

Sears sold it's fashion center in California for a $21 million gain

 

Sears sold it's offices in Toronto for a $46 million gain

 

Sears sold a few Great Indoors stores for a $50 million gain

 

If you read through the 10K's you search for "Gain on sales of assets"

 

If Sears marked everything to fair value in 2005, why were they booking huge gains on sales of stores less than a year later?

 

I just looked it up in the 10Ks - they're all negative numbers. What am I missing here?

 

                                                2012        2011        2010        2009        2008        2007      2006      2005

Gain on sales of assets            (468)        (64)          (67)          (74)        (51)          (38)        (82)        (39)

 

Are those numbers you quote really gains, or are they just cash flow?

 

Edit: disregard, I was confused and these are all positive gains from sales.

[Rabbitisrich]

Those figures are in the expense segment so they add to income.

[Guest hellsten]

If you read through the 10K's you search for "Gain on sales of assets"

 

If Sears marked everything to fair value in 2005, why were they booking huge gains on sales of stores less than a year later?

 

Then they didn't mark them to fair value -- so they violated the accounting rules.  Is that legal?

 

Isn't this the accounting rule – one of many – that was applied to the real estate in the merger:

 

“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.”

 

Paulo and other shorts see it differently:

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.

 

Maybe Paulo doesn't know what fair value means? I certainly don't.

 

The numbers listed by FCharlie are interesting:

 

They didn't really change. They shifted. If you read the Sears Roebuck 10K from 2004 they claimed to have:

 

$392 million of land

$7.151 billion of buildings

 

After the merger SHLD claims to have:

 

$2.146 Billion of land

$5.920 Billion of buildings

 

Berkowitz is correct. GAAP is not valuing this correctly. According to GAAP you are supposed to mark property at fair value in a merger.

 

 

http://www.sec.gov/Archives/edgar/data/319256/000095013704001671/c83519e10vk.htm

 

http://www.sec.gov/Archives/edgar/data/1310067/000104746906003414/a2168332z10-k.htm

 

Looks like the value of buildings was written down. This is why I coattail. I assume Bruce and Eddie are smarter than me and know what they are doing.

 

To me it looks like Eddie used creative accounting in the merger:

 

In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets", the carrying value of long-lived assets, including property and equipment, is evaluated whenever events or changes in circumstances indicate that a potential impairment has occurred relative to a given asset or assets. Impairment is deemed to have occurred if projected undiscounted cash flows associated with an asset are less than the carrying value of the asset. The estimated cash flows include management's assumptions of cash inflows and outflows directly resulting from the use of that asset in operations. The amount of the impairment loss recognized is equal to the excess of the carrying value of the asset over its then estimated fair value.

 

http://www.sec.gov/Archives/edgar/data/1310067/000104746906003414/a2168332z10-k.htm

 

I read the bolded text like this "We have written down the value of property and buildings because the cash flows from them will be negative".

 

Then there's also this:

Reduced depreciation, as a result of the write-off of long-lived assets in conjunction with the application of Fresh-Start Accounting favorably affected the gross margin rate 54 basis points in the fiscal 2004 period.

[constructive]

Those figures are in the expense segment so they add to income.

 

D'oh, my bad. Thanks for the correction.

 

My next question is how much are those total gain from sales over the last 8 years as a percent of the book value they were carried at? I haven't calculated it yet, but it's not a particularly high number, right?

[Luke 532]

People sometimes make mistakes. That's the point of analyzing the company, and not just asking yourself, "Are Lampert and Berkowitz geniuses or a morons?"

 

Definitely agree.  But when the analysis of the company shows that it is nearly impossible to kill it, with such incredibly valuable assets, and THEN you factor in that TWO geniuses (both value guys who focus on margin of safety) are involved it just adds to the potential value.  If SHLD was run by a no-name and Berkowitz wasn't involved it would still be very, very interesting given the assets.  But you add those guys in (and the amounts they have been buying... they're not just in it they are in it to a very significant degree) and it just makes it that much more attractive.

 

I should also mention that I believe having incredibly successful investors in a company, especially when one of them is on the inside and has access to all the numbers in real-time (not just when released quarterly), serves as a poor-man's checks-and-balances.  In my previous career I was an accountant.  If something in the financials slips past me, Lampert (and his team, not just him), and Berkowitz (and his team, not just him), then shame on us and it was probably something that nobody noticed in the first place (that's the risk of investing, the unknown).  Lampert and Berkowitz know exactly the situation SHLD is in, and what do they do?  They keep buying more and more.

[CorpRaider]

They wouldn't have had much (if any) incentive to mark the land up (or the buildings really) beyond the most conservative estimate of FMV, aside from making the balance sheet look prettier.  There's probably a footnote detailing their methodology.  Of course, the step up to "fair market value" certainly wouldn't account for any potential hypothetical changes in use in 8 years hence.  There is zero chance they stepped a dark box up to estimated FMV as a leased data storage facility, for example.  Of course, it remains to be seen if they can convert the uses on a large scale, but barring a liquidity issue it seems like it should be achievable over the longer term.

 

I would personally probably feel decent about a good margin of safety having gone through and added up all the tax values, as Berkowitz has done.  Of course, if you think Amazon is going to decimate all commercial real estate values nationwide you probably wouldn't agree.  Probably worth monitoring the federal internet sales tax legislation.  Last I heard, only ebay was really lobbying against it.

[Luke 532]

Of course, if you think Amazon is going to decimate all commercial real estate values nation wide you probably wouldn't agree.  Probably worth monitoring the federal internet sales tax legislation.  Last I heard, only ebay was really lobbying against it.

 

Amazon is a threat, but they might end up an ally.

 

"Sears' vast portfolio of real estate certainly contains pins in the map that could be ideal for Amazon.com, Inc. (NASDAQ:AMZN)'s expansion plans.

Amazon CEO Jeff Bezos recently announced the company’s entry into the grocery business. This new business initiative will certainly require additional facilities and boots on the ground."

http://www.insidermonkey.com/blog/amazon-com-inc-amzn-and-sears-holdings-corp-shld-strange-bedfellows-or-a-match-made-in-heaven-185421/

 

There are some Whole Foods inside of SHLD stores, so the precedent is there for AMZN to get into the grocery business in a big way by partnering with SHLD.

[CorpRaider]

At least amzn is not openly fighting the national sales tax legislation anymore.  I doubt they would be in the market for the primo locations like WFMI is, but the WFMI deals alone show SHLD has some really prime locations.  Have you done a breakdown of their cash and the burn rate?  That's really the only risk to me.  I've pretty much talked myself into buying a lot more in this thread.  Thanks for the fantastic discussion everyone!  A spin-off of lands end or craftsman would probably make this a quick double.

[Kraven]

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.

 

 

I heard Santa Barbara is a rich city, no?

If there are no Walmarts there to compete with Kmart, at the minimum, SHLD should close the store and rent it or sell it to Walmart. :)

 

How would you evaluate the value of this Kmart property? It sounds like it is in a good location.

 

There are plenty of struggling people here that clean houses, wash dishes, mow lawns for a living.  The store is just hideous inside.  It is located across the street from Home Depot and Costco, which are both inviting and thriving.

 

Goleta's Kmart -- if it can't thrive without Target and Walmart, then what possible hope is there for the rest of their stores?

 

Is the Goleta Kmart the one about a mile from UCSB?  If so, can't believe it's still there.  I remember back in the day it was the only place in the area to buy things like toiletries and such. 

[constructive]

They wouldn't have had much (if any) incentive to mark the land up (or the buildings really) beyond the most conservative estimate of FMV, aside from making the balance sheet look prettier.

 

Making the balance sheet look prettier would actually be a more reasonable goal than making earnings look prettier, considering that it has a tangible impact on debt covenants.

 

I assume they picked the most appropriate valuation methodology they could in 2005. But considering that department stores are not particularly easy to value, it's not surprising that GAAP fair value accounting doesn't exactly match realized value.

 

Is there any historical evidence that assessed tax values are more accurate than GAAP fair value? My assumption is that Sears accountants can consider more relevant information about the value of specific properties than tax assessors can.