SHLDQ - Sears Holdings Corp

[alertmeipp]

So far I can't talk myself into selling out.  The part about where Eddie claims that net inventory liquidation is funding the store closures is... I believe... just trying to get the message out that closing stores doesn't immediately threaten them.  I can't find another reason why he'd phrase it that way.  This way you could close stores and not be desperate to sell the underlying real estate -- closing the stores does not put a cash pinch on the company that would make them a distressed real estate seller.  It's a good message now that I think of it.

 

It's a very good message.  If SHLD can just sit on the real estate of closed stores and not lose much money as time goes by, then they can wait for the real estate market to continue to improve prior to leasing it or selling it.  It kills much of the risk of Lampert not moving fast enough.

 

But who would buy those locations?

 

One way I can think of is:

 

Say Gap, Shopper Drug, Toyrus are located in nearby a location to SHLD's but with much more expensive leases, they can terminate theirs and buy their leases from SHLD at a discount to the market. Those leases will be more valuable to them than Sears.

 

Do-able?

[mcliu]

Grenville, that's an interesting point, would you be able to point me to where it shows that the repurchases were made by the guarantor subs?

[alertmeipp]

From the discussion here, it seems obvious the SHLD offers good value, why does the market hate it?

[Luke 532]

So far I can't talk myself into selling out.  The part about where Eddie claims that net inventory liquidation is funding the store closures is... I believe... just trying to get the message out that closing stores doesn't immediately threaten them.  I can't find another reason why he'd phrase it that way.  This way you could close stores and not be desperate to sell the underlying real estate -- closing the stores does not put a cash pinch on the company that would make them a distressed real estate seller.  It's a good message now that I think of it.

 

It's a very good message.  If SHLD can just sit on the real estate of closed stores and not lose much money as time goes by, then they can wait for the real estate market to continue to improve prior to leasing it or selling it.  It kills much of the risk of Lampert not moving fast enough.

 

But who would buy those locations?

 

One way I can think of is:

 

Say Gap, Shopper Drug, Toyrus are located in nearby a location to SHLD's but with much more expensive leases, they can terminate theirs and buy their leases from SHLD at a discount to the market. Those leases will be more valuable to them than Sears.

 

Do-able?

 

I don't think we necessarily need to know who would take them, but just know that there are a good number of options available to Lampert.  Grocery stores (Whole Foods, Amazon), data centers, disaster recovery centers, bowling alley (they've rented parking space for a bowling alley), etc.  Is it a tall task to find tenants to sub-lease or to sell to?  Yes, of course.  But if indeed closed stores don't waste much money just sitting there for awhile, then at least Lampert and David Lukes have ample time to figure it out.

[Luke 532]

From the discussion here, it seems obvious the SHLD offers good value, why does the market hate it?

 

It comes down to an investors perspective and how they are trying to evaluate the company.  Personally, if I was looking at SHLD solely as a retailer I'd stay far away.  But that's not how I look at it.  D'Ambrosio had a great quote in January 2013 that summed it up nicely...

 

“I understand and I appreciate people looking at same-store sales as an indicator,” D’Ambrosio said during the call. “I think when you look at the financial shape of the company, there’s clear progress.”

http://articles.chicagotribune.com/2013-01-09/business/ct-biz-0109-phil-sears--20130109_1_sears-holdings-lou-d-ambrosio-hoffman-estates-based-company

[mcliu]

It doesn't feel that obvious to me. Real estate value is still a pretty big question mark while the company structure is pretty hard to decipher. I just started looking at the firm this week and it's been tough to put together a comprehensive picture of all the parts and intercompany transactions. How did you guys work through that? Is there a shortcut guide, or a good valuation (either online, or through a shop) that will help with the company?

 

Also, a couple of questions:

 

Does anyone know how the Sears Re sub works? Does it take in premiums and paying out claims? Are there any more details on that sub other than the presentation on their website and the disclosure in the 10-K? Where did the capital for this sub come from?

 

Does anyone know which stores (locations/mall?) were structured into REMIC?

[Grenville]

Grenville, that's an interesting point, would you be able to point me to where it shows that the repurchases were made by the guarantor subs?

 

Look at the cash flow statement in the 2010AR where the break out the different groups: guarantor, non-guarantor & parent

[Guest hellsten]

From the discussion here, it seems obvious the SHLD offers good value, why does the market hate it?

 

There are many reasons to hate SHLD and Eddie Lampert, probably more than there are things to like:

- Eddie bought Kmart in 2005. We thought he was the next Warren Buffett. I have waited 8 years. He's clearly no Buffett. I don't want to wait for x more years.

- There are no hidden assets at Sears, because GAAP would have identified them.

- Sears is close to bankruptcy according to metric xyz, the media and analysts.

- Nobody shops at Sears any more.

- Insiders are saying Sears "will not exist in the same manner it exists now".

- Nobody can compete with Amazon, Costco, Walmart, Google, etc.

- "I don't know what Eddie's plan is. What's the endgame?"

- "America's worst CEO"

- "America's worst place to work"

- "Turning around a retailer that has been slipping for a long time would be very difficult." Warren Buffett

- "Crazy Eddie"

The lessons of Crazy Eddie seem so obvious that a bunch kids running a lemonade stand could understand them.

- Eddie is killing Sears:

"Lampert said it was a bad investment to invest in the stores," says Paul Swinand, a Morningstar analyst who covers retail stocks. "That's like saying in the airline business, it's bad to buy planes. That's the wrong way to run a business." in 2010, Sears was investing an industry low of $1 to $2 a square foot in stores, calculates Swinand.

 

- Eddie Lampert doesn't know retail, because all of the above is true.

 

We should also ask us if the statements are true and if things can change. We should also evaluate them on what Eddie has said and done in the past.

 

Disclosure: Long SHLD

[bennycx]

it is very hard to invest after hellsten listed down the plain facts/observations as it is...

[Luke 532]

it is very hard to invest after hellsten listed down the plain facts/observations as it is...

 

Bennycx, remember that our job on this board as investors is to ultimately try to (1) figure out if we can kill the company (can we lose money?), and (2) try to figure out why the market is pricing a security the way it's being priced.

 

Nearly all of the items Hellsten mentioned are headlines and give the average investor an excuse to not look deep into the company to truly understand it.  Every single investment I've ever made has had similar headlines.  And all of my current investments have similar headlines.  It just goes with the territory of value investing. 

[no_free_lunch]

Thanks hellsten.  The optimism was getting pretty high around here, in that climate your post was refreshing.

 

My personal take is that there is no doubt, from anyone that sears will not exist as it does today. 

 

Reading through the materials  I think Lampert makes his strategy relatively clear.  He doesn't have a plan per se, he has a strategy.  If you need him to have a full vision of exactly what will occur, you have to move on.  His strategy includes:

 

- Decentralized decision making via giving various department head relative  autonomy. 

- Liquidation of money losing stores

- Reduction of square footage (right-sizing) stores while leasing out the remaining space.

- New initiatives:

    -Wifi/cell-phone leasing on roof space

    - Data centers,

    - Online sales with in-store pick-up

    - etc

- Sale/lease of nearly any store

- Selling existing brands through alternative methods

- Selling other brands via sears channel

- more I can't think of.

 

He wouldn't be doing all of these various things if he had a definitive plan.  His plan is to try a lot of different things and pour more money into those that work.

 

You need to get comfortable with this strategy and come up with some estimate of when it might hit the black but really there are so many permutations it is very difficult to do.

 

I just keep falling back on the fact that the space is worth quite a bit of money if it can be leased and ultimately I believe most of it will be leased.  Even if it takes 5 or 6 years I think I would in the end get my money back in this case.  Meanwhile these various initiatives may stem the losses from the core retail operations.  If the retail operations ever break-even, it could double.  If they ever get to the point where they are making a more reasonable 3% net on the core retail, even on a reduced 20-25B sales, plus a little bonus from leasing/initiatives you could be looking at a 3-4 multiple from here.  At the end of the day though there are definitely risks, this isn't a slam dunk.

[Luke 532]

If they ever get to the point where they are making a more reasonable 3% net on the core retail, even on a reduced 20-25B sales, plus a little bonus from leasing/initiatives you could be looking at a 3-4 multiple from here.  At the end of the day though there are definitely risks, this isn't a slam dunk.

 

And if at that point the company is generating significant FCF then Lampert will have a great vehicle to use that money to invest.  I don't think he's completely lost all ability to invest so that would be a big plus.

 

I agree there are risks, but I think the biggest risk is opportunity cost.  I don't see SHLD ever going to zero, the logic for that case just isn't there at this point.  I could see it languish for the next 10 years and at that point in time trade at where it is today.  I could be wrong, but that's how I see it.

[no_free_lunch]

I don't see SHLD ever going to zero, the logic for that case just isn't there at this point. 

 

I am not sure about zero but I can definitely envision scenarios where you take a big loss, even from these levels.  I mean the company IS losing money in the middle of an economic recovery.  If we were to backslide into recession, they would be in a very uncomfortable situation.  If you were forced to liquidate the real estate during a recessionary environment it could get very ugly.

[CorpRaider]

Yeah, it's a one down and a 5+ up.  Shrinking the size of the enterprise could prove problematic with respect to pension liabilities as well.  You can't have a TESLA trying to pay the legacy liabilities of GM.  That's the main tail-risk I see, but I offset that with positive cash flows from real estate an IP licensing in my mental model. 

[FCharlie]

it is very hard to invest after hellsten listed down the plain facts/observations as it is...

 

What's amazing is that despite all the facts hellsten listed, SHLD is somehow producing cash (Excluding Pension Funding)

 

 

In SHLD's 10K they say that a 1% decrease in the discount rate used for pension liabilities would increase the liability by $814 million

 

They say that a 1% increase in the discount rate used would decrease the liability by $674 million

 

Their discount rate has declined from 7.0% in 2008 to 4.25% today.

 

Despite contributing $1.6 billion to the pension since 2008, the liability is higher today thanks to the discount rate changes.

 

As it appears interest rates on the 10year have bottomed and reversed, it would seem logical that the pain of the pension is at a maximum right now.

 

If interest rates hold here, if the S&P 500 holds here, wouldn't it be possible that the actual return from the pension assets combined with cash contribution and a higher discount rate could remove a huge portion of the pension liability?

 

 

 

 

[ERICOPOLY]

I agree there are risks, but I think the biggest risk is opportunity cost.  I don't see SHLD ever going to zero, the logic for that case just isn't there at this point.  I could see it languish for the next 10 years and at that point in time trade at where it is today.  I could be wrong, but that's how I see it.

 

Flat for 10 years is devastating.  I think value investors tend to emphasize their downside protection too much, believing they are losing nothing if they take a flyer that recovers all their initial investment in the event of a liquidation.

 

That's a 61.4% loss if you otherwise took a more conservative approach and compounded at 10% annualized.

Or it's a 75% loss if you otherwise would have made 15% annualized.

 

[kevin4u2]

it is very hard to invest after hellsten listed down the plain facts/observations as it is...

 

1. The information in that post are opinions or beliefs which may or may not be true or be true in the future.

2. "This person thinks this or that"... who cares.

3. Some of the points listed are not true. "Nobody shops at sears anymore". This is all or nothing thinking and it can lead to incorrect conclusions.

4. Investing based on such "information" is a waste of time. How about some facts like they have x in assets and Y in liabilities. Then we would have something to talk about. Opinions about being a good CEO or not is nonsense that is only there to distract you and invoke an emotional response.

 

Disclosure: no position on SHLD

[ERICOPOLY]

I'm not organized enough to put it in one post (too long anyhow) so I'm going to put them in piecemeal across multiple posts.

 

There are a few tidbits here and there which are making things look worse than they really are.  Here is one (from the Q1 CC) that pertains to the gross margin of Sears:

Edward S. Lampert - Chairman and CEO: I think the important point is that and Rob correct me if I am wrong. We will include the revenue that comes from us selling product to the Hometown and Outlet business at our cost. So that’s really – it's a loss for us, but that's just from accounting convention standpoint what gets included in our revenues and in our margins, it's essentially a zero margin business.

 

Robert A. Schriesheim - EVP and CFO: That's right. As we indicated they had about 160 basis point negative impact year-over-year.

[krazeenyc]

I agree there are risks, but I think the biggest risk is opportunity cost.  I don't see SHLD ever going to zero, the logic for that case just isn't there at this point.  I could see it languish for the next 10 years and at that point in time trade at where it is today.  I could be wrong, but that's how I see it.

 

Flat for 10 years is devastating.  I think value investors tend to emphasize their downside protection too much, believing they are losing nothing if they take a flyer that recovers all their initial investment in the event of a liquidation.

 

That's a 61.4% loss if you otherwise took a more conservative approach and compounded at 10% annualized.

Or it's a 75% loss if you otherwise would have made 15% annualized.

 

I agree with this completely....  And it's part of the reason I haven't been involved in the Sears name over the past few years. But as the various value opportunities drop off and you sell your positions... this is one of the names left that given the relative opportunities out there I believe it makes sense to be involved. But unless you're a magician or very lucky, you can't pick the time when a company decides to explode.

This phenomena has been killing me on my Teva investment which is up only 5% over 2 + years (+ dividends) -- but I still think that it makes some sense to hold some low downside risk investments -- I mean if the market had gone the other way it would be a very different story.

 

Hellsten's reasons for not owning Sears (from a Sears stock holder) are the standard reasons people mention.  But there are a lot of smart savvy investors who I think have avoided Sears b/c even if they see the value they don't necessarily see the valuation creation event/catalyst coming.  I do think that If you manage money -- it's hard to have an investment move 0% for years.  I think one huge reason no big name activist has gotten involved is the current ownership structure. With ESL at over 50% there is no way to agitate for a change and with Berkowitz owning another 20 million shares, there is no way to take a truly large position (at least for large funds).  At the end of the day, the big risk is as Eric says 5 years of no returns (and not even a dividend to help you bide the time).  What is going to change over the next year or 2 that makes Mr Market change it's mind on Sears.  Of course there is always the risk that Eddie has gone mad :D.  I think the one move that people here are hanging their hat on is seeing the pace of store closures ramp up.

 

Personally I see a lot of value in Sears -- probably more than most -- but I'm also skeptical about timing.

[bennycx]

Sometimes I think it is too simplistic to think this is X assets and Y liabilities and the stock trades below that and that's it. Sears is in one of the toughest environment and I don't know how he is going to turn this around / liquidate this / shift to another industry. It's not as easy as BAC where you just need to shed all the toxic assets which you just work down systematically for a few years and you get a good franchise underneath. No one knows what Eddie is going to do and even it seems like he doesn't know what's the best way forward. They are going to incur significant costs when trying to liquidate all these assets and suddenly the supposed margin of safety will be gone. Too hard pile.

[ERICOPOLY]

From the Q1 CC.  In this comment Eddie seems to be saying that they have mistakenly doubled down on the promotional pricing.  However if they fix that problem I don't know what it does to their growth in sales among their ShopYourWay membership. 

 

I added bold to the lines of particular interest.

 

Paul Swinand - Morningstar Investment: I guess, we are all interested and view the online and technology investments positively I guess we are trying to bridge the gap of how we get to a profitably company from where we are today, could you maybe comment on the gross margins generated by the online side of the business, are they above the stores or is there some way that you could see as this grows the profitability will increase?

 

Edward S. Lampert - Chairman and CEO: I don't think we break that out specifically, but I will tell you category-by-category, it varies. There are some categories where online margins can be higher than store margins and vice versa when you consider markdowns – clearance markdowns, promotional markdowns, etcetera. I think that one of the things that we've been very focused on is the sensitivity of our gross margins to small changes in price. A 2% price change, plus or minus, on $8 billion a quarter is $160 million. So, when you are selling product at 40% and 50% off, the opportunity to do better than 40% or 50% off to get 38% off or 48% off is a big variable. And I think that the broad-based 'everybody gets the same deal' marketing that Sears and Kmart and many others have engaged in for a long time will be changing. I'm not predicting that the retail industry will become like the airline industry where 10 people across the row in plane all pay different prices for their seat or five people on the floor of a hotel room all pay different prices for their hotel room. But I do think there's going to be a lot more variability and it tips both ways. Better price realization doesn't mean raising prices. It can mean being more accurate in where you place your inventory, being less general and less long lead time in terms of the promotions. The ability that we have now to target our promotions to specific geographies to specific members, groups of members gives us an opportunity to realize a much better answer. Having said that, and what Rob referenced is, as we run both systems simultaneously, there have been instances, more than – it's instances where we're running, not sure it's promotions, but we're also giving away significant SHOP YOUR WAY point which is real money that has the impact of hurting our margins. And I think that that, bringing a much more heightened awareness to our merchants and to our marketing people about how these things can work together rather than – not being additive, but being substitutional, if that's the word. I think we have an opportunity to do much, much better in terms of price realization. And the leverage there if you run the math, it can be very substantial.

[ERICOPOLY]

Personally I see a lot of value in Sears -- probably more than most -- but I'm also skeptical about timing.

 

The more I read the annual report and conference call, the more I see where Eddie believes the value is.  They are growing the membership program ShopYourWay.  They aren't doing this half-assed just to claim they have an online store, but rather they are hanging their hat on this strategy. 

 

Their goal is to have a store where you can go in and try it on, and either take it home or have it shipped to you.  Or if you order it online, you can go pick it up right away from the local store with no hassle.  The advantage SHLD has is they already have the brick-and-mortar side in place.  The membership-based sales are growing, not declining.

 

Then they believe they can manage inventory better (smaller store inventory with backup supplies in fulfillment centers) and marketing costs can be more directed at the individual member.

 

I believe the thing to focus on is the rate at which they can drive their ShopYourWay membership sales growth, and look at their huge retail footprint as the shoes they need this business to fill. 

 

Then ask why they are closing mostly KMarts this year?  Well, from what I understand from the conference call, their Sears shoppers are successfully moving over to the membership model, but their KMart shoppers are not (or to a far lesser degree).

 

So the only thing I believe Eddie is focusing on is the growth rate in ShopYourWay.  Beyond that, they have a ton of assets tied up in the business and they are trying to optimize that (store closures and real estate strategy is part of that).

[CorpRaider]

I agree there are risks, but I think the biggest risk is opportunity cost.  I don't see SHLD ever going to zero, the logic for that case just isn't there at this point.  I could see it languish for the next 10 years and at that point in time trade at where it is today.  I could be wrong, but that's how I see it.

 

Flat for 10 years is devastating.  I think value investors tend to emphasize their downside protection too much, believing they are losing nothing if they take a flyer that recovers all their initial investment in the event of a liquidation.

 

That's a 61.4% loss if you otherwise took a more conservative approach and compounded at 10% annualized.

Or it's a 75% loss if you otherwise would have made 15% annualized.

 

I agree with this completely....  And it's part of the reason I haven't been involved in the Sears name over the past few years. But as the various value opportunities drop off and you sell your positions... this is one of the names left that given the relative opportunities out there I believe it makes sense to be involved. But unless you're a magician or very lucky, you can't pick the time when a company decides to explode.

This phenomena has been killing me on my Teva investment which is up only 5% over 2 + years (+ dividends) -- but I still think that it makes some sense to hold some low downside risk investments -- I mean if the market had gone the other way it would be a very different story.

 

Hellsten's reasons for not owning Sears (from a Sears stock holder) are the standard reasons people mention.  But there are a lot of smart savvy investors who I think have avoided Sears b/c even if they see the value they don't necessarily see the valuation creation event/catalyst coming.  I do think that If you manage money -- it's hard to have an investment move 0% for years.  I think one huge reason no big name activist has gotten involved is the current ownership structure. With ESL at over 50% there is no way to agitate for a change and with Berkowitz owning another 20 million shares, there is no way to take a truly large position (at least for large funds).  At the end of the day, the big risk is as Eric says 5 years of no returns (and not even a dividend to help you bide the time).  What is going to change over the next year or 2 that makes Mr Market change it's mind on Sears.  Of course there is always the risk that Eddie has gone mad :D.  I think the one move that people here are hanging their hat on is seeing the pace of store closures ramp up.

 

Personally I see a lot of value in Sears -- probably more than most -- but I'm also skeptical about timing.

 

I hear you.  My potential catalyst is/was the real estate exposure.  At least that is the one I'm noodling around whilst thinking about buying more than a placeholder position.  I think one would be hard pressed to find another company that is more exposed to the real estate market with the appliance division and the massive commercial RE portfolio, especially one thats not valued richly.

[tombgrt]

it is very hard to invest after hellsten listed down the plain facts/observations as it is...

 

Bennycx, remember that our job on this board as investors is to ultimately try to (1) figure out if we can kill the company (can we lose money?), and (2) try to figure out why the market is pricing a security the way it's being priced.

 

Nearly all of the items Hellsten mentioned are headlines and give the average investor an excuse to not look deep into the company to truly understand it.  Every single investment I've ever made has had similar headlines.  And all of my current investments have similar headlines.  It just goes with the territory of value investing. 

 

The problem with shld is that we don't know what lampert is doing and whether there is any chance that he will succeed. For example like ericopoly said, BAC had the same kind of heavy headlines at $5, but one could see what they could earn in the end. Here you are trusting that lampert and berkowitz know what they are doing. The business is just a big question mark.

 

You speak of truly understanding the company yet can't tell me how much of the liabilities approx. come from the leases. Don't take this the wrong way, but if you can't answer that, then how do you know how to value anything asset wise concerning sears?

[Luke 532]

it is very hard to invest after hellsten listed down the plain facts/observations as it is...

 

Bennycx, remember that our job on this board as investors is to ultimately try to (1) figure out if we can kill the company (can we lose money?), and (2) try to figure out why the market is pricing a security the way it's being priced.

 

Nearly all of the items Hellsten mentioned are headlines and give the average investor an excuse to not look deep into the company to truly understand it.  Every single investment I've ever made has had similar headlines.  And all of my current investments have similar headlines.  It just goes with the territory of value investing. 

 

The problem with shld is that we don't know what lampert is doing and whether there is any chance that he will succeed. For example like ericopoly said, BAC had the same kind of heavy headlines at $5, but one could see what they could earn in the end. Here you are trusting that lampert and berkowitz know what they are doing. The business is just a big question mark.

 

You speak of truly understanding the company yet can't tell me how much of the liabilities approx. come from the leases. Don't take this the wrong way, but if you can't answer that, then how do you know how to value anything asset wise concerning sears?

 

When I say "truly understand the company" I don't mean knowing every single detail, I just mean having a good understanding of the balance sheet and their assets vs liabilities.  We all know the book value of the assets, we also know the listed liabilities.  Do I *need* to know which liabilities are from leases vs another source?  No.  Do I need to know the exact value of their real estate?  No, but I believe the value easily eclipses what they show on their books.  Do I need to know the exact value of the brands and inventory net of payables?  No, but I believe they are both far above zero. 

 

My point is that the media parades around with "Sears stinks," "Lampert is an idiot," etc. and those are subjective.  Valuing the assets (as best we can) against the liabilities (as best we can), while factoring in a degree of subjective opinion to Lampert's abilities to extract value, I believe that is where an investor needs to do his analysis instead of relying on the subjective headlines.

 

To a certain degree, yes, an investor needs to trust what Lampert is doing.  I think he has made progress and although many here would disagree with me, I believe he has been more clear than not on where he intends this company to go.  That last sentence is subjective and I understand the other line of thinking in that he has not laid out step-by-step his plan.  Why does he need to?  Did Steve Jobs do that?  Did Warren Buffett do that?  Did Jeff Bezos do that?  Even if the answers were 'yes' to those, how close did the end-product mimic the plan?  I like Lampert.  I like him a LOT.  I believe the assets exceed the liabilities by a large margin.  I believe Lampert is an excellent capital allocator and will keep liabilities as low as he possibly can while maximizing the assets.  And I believe we get Lampert for free with an investment anywhere sub-$50.