SHLDQ - Sears Holdings Corp

[wisdom]

The holding company will end up with several business ala BRK:

 

- you will have retail/real estate/maybe data centres/home services/auto centres/global online retailer/.

 

This is why he does not need to buy any businesses. It is all within SHLD - right there for everyone to see.

 

This is why (most likely) Bruce keeps saying that this is Eddie's BRk.

[ERICOPOLY]

March 2009 ("last summer" so that is mid-2008):

http://seekingalpha.com/article/319106-tracking-bruce-berkowitz-s-fairholme-fund-holdings

"Last summer, we spent a tremendous amount of time going to all the tax collectors’ offices around the U.S. trying to get the tax value of Sears and Kmart properties — and we came up with numbers that ranged from between $80 and $90 per share."

 

This is what I keep coming back to.  A homeowner can have 3% home equity.  After paying the realtor for selling the home, he can have none.

 

Berkowitz never ever ever ever ever talks about the hidden cost -- only the hidden value.

[Luke 532]

March 2009 ("last summer" so that is mid-2008):

http://seekingalpha.com/article/319106-tracking-bruce-berkowitz-s-fairholme-fund-holdings

"Last summer, we spent a tremendous amount of time going to all the tax collectors’ offices around the U.S. trying to get the tax value of Sears and Kmart properties — and we came up with numbers that ranged from between $80 and $90 per share."

 

This is what I keep coming back to.  A homeowner can have 3% home equity.  After paying the realtor for selling the home, he can have none.

 

Berkowitz never ever ever ever ever talks about the hidden cost -- only the hidden value.

 

Agreed, I think he tries to dummy-it-down for the layman.  But I think the point he is trying to make is that there is a ton of value in the real estate that should exceed the costs by a wide margin.  That is, if he is not totally off-base with his estimate of the value of the real estate being 4x that of the current share price ($160 vs $40).

[Luke 532]

The holding company will end up with several business ala BRK:

 

- you will have retail/real estate/maybe data centres/home services/auto centres/global online retailer/.

 

This is why he does not need to buy any businesses. It is all within SHLD - right there for everyone to see.

 

This is why (most likely) Bruce keeps saying that this is Eddie's BRk.

 

Great point.  Somebody mentioned last week that Lampert hasn't made any significant investments in the past 10 years and I argued that SHLD is where all his investment efforts have been going.  Looking at it from the perspective you laid out he has been investing in some way, shape, or form in a handful of businesses for the past decade or so.

 

Furthermore, shouldn't it tell us something that SHLD is pretty much the only significant investment in the last decade for a guy that returns 25%+ annualized since 1988? 

[ERICOPOLY]

Furthermore, shouldn't it tell us something that SHLD is pretty much the only significant investment in the last decade for a guy that returns 25%+ annualized since 1988?

 

Going forward though, the 25% will either have to come from ESL's other investments, or from the operating results of SHLD if they aren't going to sell the assets.

 

Sorry to sound like a total pain in the ass.  But we should not be talking about Eddie's past success, and instead simply talk about what a wonderful stable of businesses SHLD owns.  Because if we compare it with Berkshire ("Eddie's BRK") then we need operating companies similar to Berkshire's.

 

Do we already have those operating businesses that are so wonderful?

 

This is why he does not need to buy any businesses. It is all within SHLD - right there for everyone to see.

[wisdom]

I am referring to the hypothetical exercise ealier.

 

Lets say I have 2 stores.

 

store A

net income is $10

 

Store B

net income is -$10

 

total is 0. The company looks expensive and returns look ugly. Everyone keeps talking about survival and RE.

 

I buy the company, close the store B at minimal cost and suddenly the company has $10 in net income.

 

at 10x the business is suddenly worth $100.

[ERICOPOLY]

I am referring to the hypothetical exercise ealier.

 

Lets say I have 2 stores.

 

store A

net income is $10

 

Store B

net income is -$10

 

total is 0. The company looks expensive and returns look ugly. Everyone keeps talking about survival and RE.

 

I buy the company, close the store B at minimal cost and suddenly the company has $10 in net income.

 

at 10x the business is suddenly worth $100.

 

I understand your point but you didn't describe SHLD in your example.  They've already closed their 300 presumably worst stores.  And it didn't make the Adjusted EBITDA increase over that period.  It just made it suck less bad than otherwise.

[Luke 532]

Furthermore, shouldn't it tell us something that SHLD is pretty much the only significant investment in the last decade for a guy that returns 25%+ annualized since 1988?

 

Going forward though, the 25% will either have to come from ESL's other investments, or from the operating results of SHLD if they aren't going to sell the assets.

 

Sorry to sound like a total pain in the ass.  But we should not be talking about Eddie's past success, and instead simply talk about what a wonderful stable of businesses SHLD owns.  Because if we compare it with Berkshire ("Eddie's BRK") then we need operating companies similar to Berkshire's.

 

Do we already have those operating businesses that are so wonderful?

 

This is why he does not need to buy any businesses. It is all within SHLD - right there for everyone to see.

 

Do we already have those businesses? 

No sure, time will tell.  But I can see the potential, for what that's worth.

 

Don't apologize!  You don't sound like a pain... it's good practice to discuss all this stuff ad nauseam.  If we still can't kill it after long discussions then there is a solid and real margin of safety.

 

[Luke 532]

But we should not be talking about Eddie's past success, and instead simply talk about what a wonderful stable of businesses SHLD owns.  Because if we compare it with Berkshire ("Eddie's BRK") then we need operating companies similar to Berkshire's.

 

Do we already have those operating businesses that are so wonderful?

 

Let's do that, let's talk about the businesses under the SHLD umbrella already. 

 

ShopYourWay: #3 website (behind Amazon and Ebay) and nobody has heard about it yet.  A distant 3rd, but being #3 is pretty impressive so far.

 

KCD: All top-of-the-line brands and are non-guarantors.  Could possibly license these out.

 

Real estate: Seritage.com and 125 "Crown jewel" properties (non-guarantors) - where most of the real estate value is believed to be held.  Could be a nice REIT.

 

What looks to be a significant online retailer, a company that licenses out some of the best and well-known brands in the world, and a REIT.  Not a bad start for creating his own little holding company.

[valueinvestor82]

Ericopoly, I understand your point that not all properties sold will show gains in excess of closing costs. However (and you may have assumed everyone caught this), I think it's worth pointing out that "gain" obviously implies only the sales price over the stated cost of the property, so the proceeds from the assets themselves (regardless of "gain" or not) could still easily exceed closing costs. You may have assumed we all realize that, but its worth clarifying. Good discussion!

[Luke 532]

Lampert sells 500,000+ more shares of AutoNation.

http://utahpeoplespost.com/2013/08/insider-selling-edward-lampert-sells-531670-shares-of-autonation-stock-an/

 

His concentration is only getting larger in SHLD by selling other companies and keeping his stake in SHLD.

[mevsemt]

Look, from an operating perspective, Sears shows what the folk in b-school call a whale tail, where the x axis represents their stores as ranked from most to least profitable, and the y axis is cumulative profits: http://jonhillblog.files.wordpress.com/2010/10/whale-bone-curve.jpg

 

To put it another way, look at what Kmart did after bankruptcy but prior to merging with Sears. When they closed about 1/3rd of their stores (the least profitable ones), they started to generate significant cash.  By the way, it's worthwhile looking at their financials (not to mention stock chart) during this time...

 

To echo Parsad, the issue with Sears is simply they've been too slow to close stores.  We'll see how this all plays out, as a shareholder, I've got my fingers crossed...

 

mevsemt

 

mevsemt.blogspot.com

[texual]

When they closed about 1/3rd of their stores (the least profitable ones), they started to generate significant cash.

 

Therefore it is NOT in ESL's interest to do that right now with SHLD. It would be better to keep those stores underperforming and allowing the company time for him to consolidate control. When the time is right he would make a better investment selling those stores at higher prices, and allowing the cash generation to be in his/our favor.

 

He would prefer not closing stores for this reason. I would do the same thing if I wanted the optics of this investment to be slightly obfuscated from everyone except the ones thinking very clearly about how the many pieces fit together.

[Luke 532]

mevsemt, I stumbled upon your blog a long time ago and just checked it out again.  I like what you say here as it makes sense...

 

http://mevsemt.blogspot.com/2011/09/light-commentary-and-some-links.html

"Then there's Sears.  They're spinning off Orchard Supply, started selling Craftsmen tools at Costco, and hired a new CFO.  Taken individually these may not sound like much, but taken together this may signify the beginning of a transformation from a retail operation to a brand/real estate/asset holding company.  Here's a good blurb on the Craftsmen part: http://seekingalpha.com/article/292376-sears-holdings-externalizing-brands-could-be-major-catalyst-for-stock?source=yahoo.  Here's the Wikipedia page on the new CFO: http://en.wikipedia.org/wiki/Robert_Schriesheim.  Clearly, Schriesheim is a turnaround/restructure guy - my guess is Sears wouldn't have hired him unless this is their intent AND he wouldn't have accepted the job unless he judged there was a reasonable likelihood of succeeding."

[no_free_lunch]

Therefore it is NOT in ESL's interest to do that right now with SHLD. It would be better to keep those stores underperforming and allowing the company time for him to consolidate control. When the time is right he would make a better investment selling those stores at higher prices, and allowing the cash generation to be in his/our favor.

 

This seems optimistic.  You are saying he is allowing the company to bleed assets from losing stores, is that really in this best interest?  Only if he is gaining share.  I did a quick check and I see that he has been reducing his sears position.  From 48M shares in 2010 down to 33M, if you are reducing then what is the gain to obfuscating?

[compoundinglife]

Therefore it is NOT in ESL's interest to do that right now with SHLD. It would be better to keep those stores underperforming and allowing the company time for him to consolidate control. When the time is right he would make a better investment selling those stores at higher prices, and allowing the cash generation to be in his/our favor.

 

This seems optimistic.  You are saying he is allowing the company to bleed assets from losing stores, is that really in this best interest?  Only if he is gaining share.  I did a quick check and I see that he has been reducing his sears position.  From 48M shares in 2010 down to 33M, if you are reducing then what is the gain to obfuscating?

 

What data are you looking at? He personally has increased his position although some his funds have distributed shares to partners or to himself. His compensation as CEO is all stock and based on a $ value divided by the SHLD price at a certain time of the year. So if the stock is at $25 when this is calculated he gets double the shares vs it being $50 at the same time.

[no_free_lunch]

I am looking at this:

 

http://www.insidermonkey.com/hedge-fund/esl+investments/14/#/ffp=2010-12-31&fot=7&fso=1&pfp=2013-03-31

 

I think it is the shares held by ESL, which I believe is his hedge fund.

[jeffmori7]

Therefore it is NOT in ESL's interest to do that right now with SHLD. It would be better to keep those stores underperforming and allowing the company time for him to consolidate control. When the time is right he would make a better investment selling those stores at higher prices, and allowing the cash generation to be in his/our favor.

 

This seems optimistic.  You are saying he is allowing the company to bleed assets from losing stores, is that really in this best interest?  Only if he is gaining share.  I did a quick check and I see that he has been reducing his sears position.  From 48M shares in 2010 down to 33M, if you are reducing then what is the gain to obfuscating?

 

33M in his fund, but also 25M personnaly, for a total of 58M :

 

http://investing.money.msn.com/investments/five-percent-ownership?symbol=SHLD

[Myth465]

ERICOPOLY loving your comments, you are showing why many consider you one of the great analyst on the board.

You are asking all of the right questions.

 

 

 

[no_free_lunch]

Thanks jeffmori.  Do you know a spot that tracks the changes to his personal holdings?

 

[Luke 532]

ShopYourWay: #3 website (behind Amazon and Ebay) and nobody has heard about it yet.  A distant 3rd, but being #3 is pretty impressive so far.

 

Murray Stahl: "Sears is also a major internet presence: it was listed as the 7th largest internet retailer in 2011 by Internet Retailer, directly behind Walmart.com."

http://www.horizonkinetics.com/docs/2011Q4_commentary.pdf

 

So the ShopYourWay has ramped up from #7 to #3 in a very short time.

[texual]

Well I put myself in his shoes years ago and decided him and I would essentially do the same thing. Obfuscate sounds bad but it really is a valid strategy. It isn't really malicious if you consider the bigger picture. Sure it sucks for shareholders to see under performance and that we want maximum return. But think about keeping employees on the payroll, contributing to the general economy. Holding onto your heritage and keeping the culture alive. If Sears went through a period such as the depression, two world wars, and everything since 1900 till 2013, we should KEEP THOSE STORES OPEN.

 

But that obviously isn't always possible. Hence the closings and the layoffs. However I think he kept the damage to a minimum. People still regard Sears as a place that keeps employees, contributes to the military/veterans, has layaway and is still a true American brand. I think he could also ratchet up the USA/Sears kind of like how Ron Johnson tried to play up that image at JCP. He really made some 'all-American' type ads, and the logo resembled our flag. It all comes with a culture. JCP really can't beat Sears when it comes to providing that heritage. That is why ESL has two sort of dilemmas about doing exactly what a businessman could do vs what he should do.

 

ESL is doing the right thing. Its right for himself in the long run but its also right for the country to be able to keep a large company productive and show that he can bring them out of this dark period mostly intact. Not easy but I think if the economy improves and housing gets back on track, we would see SHLD earn significantly better EPS. Hes closed a lot of stores and hes bought back shares too.

 

I really think the permanent capital vehicle is always an option. But first this is a retail company and his legacy rides mostly on the retail part. It isn't about assets and real estate. Its about retail. If you cant get comfortable about that part, I wouldn't hold shares. ESL is riding this retailer as far and as long as he can. Someday he might start running a investment portfolio out of it but my guess is that also wouldn't look so great on the optics either. Hes got to fix the brick and mortar equation and hes trying to bridge that with his desire to be like Amazon.

 

So far its been really awful.

[no_free_lunch]

So is that $500 million expense really attributed to selling the Sears stores?  If so it's vastly greater than the $261 million gain from selling the real estate.  Ouch!  Am I making some sort of mistake here?

 

I am not an accountant but based on what I see I don't think it is as bad as you are thinking.  From the annual report:

 

Selling and administrative expenses for 2012 were impacted by expenses of $617 million related to pension plans and $30 million related to store closings and severance,

 

Based on that store closing costs were vastly exceed by gain on sale of assets.  I am just not sure if this $30M listed here covers ALL closing/severance costs or only those that fall under selling and admin.

 

I am also not sure that they are selling every store that they close down.  I think there is a mismatch there in comparing the two figures.

 

Another way to look at the closing costs is based on page 11 of the latest 10-Q.  It gives a breakdown of closing costs for each quarter.  They had $26M in closing / markdown/severance costs (I excluded gain on lease) for closing 23 stores.  In 2012 they closing 31 stores and it cost $34M. 

 

Extrapolating out, you are looking at say $2-3B closing costs company-wide, assuming the remaining stores would have similar costs  (they might be higher depending on labor laws in each area). 

 

 

[no_free_lunch]

Textual,

 

I agree with pretty much everything you say here!  I just don't agree that there is some sort of secret agenda to keep the company unprofitable while holdings are built up.  If so, the holdings would be going up. 

 

I think, like you say here, he is doing the best with what he has in a fairly weak economy.  I think there is a real chance that between the economy continuing to improve, store closing of weak performers and some scaling of the various initiatives that the company could return to the black.  If that were to happen, it could be a very quick double.

[Liberty]

Hes got to fix the brick and mortar equation and hes trying to bridge that with his desire to be like Amazon.

 

Amazon's not making any money, though. If Sears tries to compete online while making money, they won't match the low prices, and if they play Amazon's game, they won't have margins on top of having to catch up with someone very smart with over a decade's headstart.