SHLDQ - Sears Holdings Corp

[premfan]

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.

 

Yes the perception and expectations of sears on the street is low. This gets to the point of what is the truth. The truth is objective not subjective. The truth is not hope but results. The truth is reality. Once you find out the objective truth. The story is simple. For the owners of sears ( I was a former owner mostly traded it from 09-12 why not just invest when the story is simple .  Once lampert tells the story that's the truth. The market will revalue and then owners can invest for the long term. Investing currently is just speculation on a short squeeze. Nothing more. 

[merkhet]

A quick mental game on Sears Holding.

 

Let's say, for the sake of argument, that the stores are 50-50 Sears & K-Mart. Let's say, for the sake of simplicity, that Sears is doing great and K-Mart is doing poorly. In fact, Sears makes $1.5 billion and K-Mart loses $1.5 billion. On a consolidated basis, it's a wash.

 

As Sears Holding sells off K-Mart real estate or lets the K-Mart leases expire, eventually, the powerhouse that is Sears will show through to the bottom line.

 

My sense is that this is the primary story for Sears.

 

Priorities:

(1) Run the profitable stores profitably

(2) Repurpose or sell the real estate of the non-profitable stores

(3) If you can't do (2), then let the lease expire or just shut down the non-profitable stores

 

The main problem is that, unlike the BAC situation where you could see how much value Legacy Asset Services was sucking out of the company, it's a little more difficult to quantify just what the drag is at Sears. That said, it's beginning to look like we will soon find out exactly what the underlying earnings of the "good" stores are because Mr. Lampert is taking more aggressive action with (2) & (3).

[Guest hellsten]

To better understand Lampert it's worth reading the following articles:

 

The Next Warren Buffett?

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

 

Lampert has carefully studied Buffett for years. He started reading and rereading Buffett's writings while working at Goldman after college. He would analyze Buffett's investments, he says, by "reverse engineering" deals, such as his purchase of insurance company GEICO. Lampert went back and read GEICO's annual reports in the couple of years preceding Buffett's initial investment in the 1970s. "Putting myself in his shoes at that time, could I understand why he made the investments?" says Lampert. "That was part of my learning process." In 1989 he flew out to Omaha and met Buffett for 90 minutes, peppering him with questions about his investing philosophy.

 

Some other quotes from the same article:

- Thomas J. Tisch, son of Loews's founder Laurence Tisch: "Eddie is one of the extraordinary investors of our age, if not the most extraordinary."

- "Lampert would rather earn a bumpy 15% [return] than a flat 12%."

- "Eddie doesn't waste money -- ever."

- "He will always want to work through, at a pretty high level of detail, what we are going to spend our money on and what the business benefits will be,"

- "Buffett's investments have stood the test of time," he says, noting that the same test will be applied to him.

- In a series of lengthy interviews with BusinessWeek, he makes clear that he also wants to earn respect as a businessman who provides expertise in how a company is run. Like Buffett, he wants chief executives to open their arms and partner with him.

- "There is no question he will turn Kmart into an investment vehicle like Warren Buffett's," says legendary value investor Martin Whitman.

 

The "Shutdown of Textile Business" section in Berkshire's letter from 1985 is probably relevant too:

http://www.berkshirehathaway.com/letters/1985.html

 

Eddie Lampert: The best investor of his generation

http://money.cnn.com/2006/02/03/news/companies/investorsguide_lampert/index.htm

 

The fact that the vehicle of his acquisition was discounter Kmart -- which Lampert had come out of nowhere to snatch control of during bankruptcy -- was only one source of unease. Once their presentations started, Lampert also began poking holes in virtually every idea.

…

The key points on his agenda: Be willing to sacrifice sales for profitability. Ignore Wall Street expectations. Question everything.

…

"What's the benefit of that?" he asked again and again. "What's the value?" He shot down a modest $2 million proposal to improve lighting in the stores. "Why invest in that?"

…

But chief information officer Karen Austin says Lampert is the company's No. 1 user of a computer-based tool to analyze sales, margins, and inventories by store, by region, and by merchandise group. A geek at heart, he spends hours at his Connecticut office drilling down into the data, zeroing in on whatever isn't making money.

…

Just about everybody thought Lampert was crazy in 2002 when he began buying up Kmart debt at around 40 cents on the dollar after the retailer filed for Chapter 11. Crazier still, Lampert loaded up more as the price sank to 20 cents, eventually boosting his total investment to $700 million.

 

"To most people, Kmart looked like a pile of trash," says Al Koch of restructuring advisor AlixPartners, then Kmart's interim CFO. "We were told that this hedge fund guy had bought a huge portion of Kmart and wanted to get it out of bankruptcy fast. None of us had ever heard of him."

 

But Lampert knew exactly what he was doing. He'd spent hundreds of hours analyzing Kmart's financials and reached a simple conclusion: "Kmart's bankruptcy was avoidable," he says. To his thinking, the retailer had frittered billions on unproductive store improvements and excessive inventories.

…

"A couple of friends said to me, 'Stop. Get out of the business. Retire,' " Lampert recalls. "I thought about it -- not for a long time, but it was definitely a consideration."

…

"Do you think I've done something crazy?" Lampert asked Martinez when they sat down. Martinez didn't answer him directly. "You have taken on the most complex retail integration task in history," he replied.

…

"The notion of spending money on the business -- I'm not opposed to it. I just want a return for it," Lampert says

…

Could Sears Holdings evolve into another Berkshire Hathaway? "One of the unspoken secrets about business leaders is that they often have no idea about where they're going to end up," Lampert says coyly. "I know the right direction. Whether we end up at the destination -- rebuilding Sears Holdings into a great company on many dimensions -- I don't know. But we're headed in that direction."

…

In other words, we just have to trust him -- as his hedge fund investors have. (He demands a five-year minimum commitment from them, and refuses to tell them what he's investing in.)

…

He points to three role models that together may say more about where he's going than any retail initiative he might float: Bob Rubin, who claims that the best decision-makers keep their options open until the last reasonable moment; Bill Belichick, the coach of the New England Patriots football team, who befuddles and outwits his opponents by constantly adjusting the game plan; and Warren Buffett, who turned from investor to business builder by acquiring operations at good prices and rearranging the cash flow, in many cases to invest elsewhere. "The entrance strategy is actually more important than the exit strategy," Lampert says.

…

I ask Dolores Lampert what Eddie's greatest insecurity is.…"This is a terrible thing to say, but it's that he won't live long enough to complete all his goals." His mother goes on, saying how Lampert writes his goals on a yellow legal pad, just like his father did before he died. "But Eddie won't die young," she says, not looking at him. "He'll probably live into his 90s."

…

"I want to be known as a great businessman," Lampert had told me earlier. With all he's accomplished, you might think he'd feel like one already. But Lampert has bigger aspirations, even if he's mostly mum about them. Sitting there in the Kmart with his mother, he agrees that he worries about dying young like his dad did.

…

"If you had asked me the question, I wouldn't have answered that way. But that is the right answer."

 

 

How Eddie Lampert picks his stocks

http://money.cnn.com/2006/02/03/news/companies/investorsguide_lampert_stockpicking/index.htm

 

Lampert's stock picking is a "form of immersion," he says. Before he put a penny into AutoZone, he visited dozens of the auto-parts retailer's outlets and had one of ESL's analysts spend six months calling on hundreds of stores, posing as a demanding customer. "It's probably overkill," Lampert says, but he can't resist.

…

Lampert also believes that secrecy is a key advantage for an investor.

…

Media mogul David Geffen, who has invested with Lampert since 1992, recalls insisting to him at one point, "I want to know where the hell my money is." Lampert refused to tell him.

 

The last comment by David Geffen is particularly interesting if you take into account what Geffen said about Lampert in another interview published the same year:

 

Geffen, who gave Lampert $200 million to invest in 1992 (when Lampert was just 29), says that had he not periodically taken money out for diversification, he would have $9 billion today. As it is, says Geffen, "I've made more money from Eddie than from all the businesses I've created and sold."

http://money.cnn.com/magazines/fortune/fortune_archive/2006/02/20/8369159/

 

I would be happy to invest in ESL without knowing what Eddie is investing in. I hope owning Sears is a cheap way of getting into ESL, although I have no clue what Eddie's end game is ;D

 

Wall Street hates secrecy and thinks Eddie is crazy. Lampert loves secrecy and is eccentric. Hmm…

[Luke 532]

To better understand Lampert it's worth reading the following articles:

 

The Next Warren Buffett?

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

 

Lampert has carefully studied Buffett for years. He started reading and rereading Buffett's writings while working at Goldman after college. He would analyze Buffett's investments, he says, by "reverse engineering" deals, such as his purchase of insurance company GEICO. Lampert went back and read GEICO's annual reports in the couple of years preceding Buffett's initial investment in the 1970s. "Putting myself in his shoes at that time, could I understand why he made the investments?" says Lampert. "That was part of my learning process." In 1989 he flew out to Omaha and met Buffett for 90 minutes, peppering him with questions about his investing philosophy.

 

Some other quotes from the same article:

- Thomas J. Tisch, son of Loews's founder Laurence Tisch: "Eddie is one of the extraordinary investors of our age, if not the most extraordinary."

- "Lampert would rather earn a bumpy 15% [return] than a flat 12%."

- "Eddie doesn't waste money -- ever."

- "He will always want to work through, at a pretty high level of detail, what we are going to spend our money on and what the business benefits will be,"

- "Buffett's investments have stood the test of time," he says, noting that the same test will be applied to him.

- In a series of lengthy interviews with BusinessWeek, he makes clear that he also wants to earn respect as a businessman who provides expertise in how a company is run. Like Buffett, he wants chief executives to open their arms and partner with him.

- "There is no question he will turn Kmart into an investment vehicle like Warren Buffett's," says legendary value investor Martin Whitman.

 

The "Shutdown of Textile Business" section in Berkshire's letter from 1985 is probably relevant too:

http://www.berkshirehathaway.com/letters/1985.html

 

Eddie Lampert: The best investor of his generation

http://money.cnn.com/2006/02/03/news/companies/investorsguide_lampert/index.htm

 

The fact that the vehicle of his acquisition was discounter Kmart -- which Lampert had come out of nowhere to snatch control of during bankruptcy -- was only one source of unease. Once their presentations started, Lampert also began poking holes in virtually every idea.

…

The key points on his agenda: Be willing to sacrifice sales for profitability. Ignore Wall Street expectations. Question everything.

…

"What's the benefit of that?" he asked again and again. "What's the value?" He shot down a modest $2 million proposal to improve lighting in the stores. "Why invest in that?"

…

But chief information officer Karen Austin says Lampert is the company's No. 1 user of a computer-based tool to analyze sales, margins, and inventories by store, by region, and by merchandise group. A geek at heart, he spends hours at his Connecticut office drilling down into the data, zeroing in on whatever isn't making money.

…

Just about everybody thought Lampert was crazy in 2002 when he began buying up Kmart debt at around 40 cents on the dollar after the retailer filed for Chapter 11. Crazier still, Lampert loaded up more as the price sank to 20 cents, eventually boosting his total investment to $700 million.

 

"To most people, Kmart looked like a pile of trash," says Al Koch of restructuring advisor AlixPartners, then Kmart's interim CFO. "We were told that this hedge fund guy had bought a huge portion of Kmart and wanted to get it out of bankruptcy fast. None of us had ever heard of him."

 

But Lampert knew exactly what he was doing. He'd spent hundreds of hours analyzing Kmart's financials and reached a simple conclusion: "Kmart's bankruptcy was avoidable," he says. To his thinking, the retailer had frittered billions on unproductive store improvements and excessive inventories.

…

"A couple of friends said to me, 'Stop. Get out of the business. Retire,' " Lampert recalls. "I thought about it -- not for a long time, but it was definitely a consideration."

…

"Do you think I've done something crazy?" Lampert asked Martinez when they sat down. Martinez didn't answer him directly. "You have taken on the most complex retail integration task in history," he replied.

…

"The notion of spending money on the business -- I'm not opposed to it. I just want a return for it," Lampert says

…

Could Sears Holdings evolve into another Berkshire Hathaway? "One of the unspoken secrets about business leaders is that they often have no idea about where they're going to end up," Lampert says coyly. "I know the right direction. Whether we end up at the destination -- rebuilding Sears Holdings into a great company on many dimensions -- I don't know. But we're headed in that direction."

…

In other words, we just have to trust him -- as his hedge fund investors have. (He demands a five-year minimum commitment from them, and refuses to tell them what he's investing in.)

…

He points to three role models that together may say more about where he's going than any retail initiative he might float: Bob Rubin, who claims that the best decision-makers keep their options open until the last reasonable moment; Bill Belichick, the coach of the New England Patriots football team, who befuddles and outwits his opponents by constantly adjusting the game plan; and Warren Buffett, who turned from investor to business builder by acquiring operations at good prices and rearranging the cash flow, in many cases to invest elsewhere. "The entrance strategy is actually more important than the exit strategy," Lampert says.

…

I ask Dolores Lampert what Eddie's greatest insecurity is.…"This is a terrible thing to say, but it's that he won't live long enough to complete all his goals." His mother goes on, saying how Lampert writes his goals on a yellow legal pad, just like his father did before he died. "But Eddie won't die young," she says, not looking at him. "He'll probably live into his 90s."

…

"I want to be known as a great businessman," Lampert had told me earlier. With all he's accomplished, you might think he'd feel like one already. But Lampert has bigger aspirations, even if he's mostly mum about them. Sitting there in the Kmart with his mother, he agrees that he worries about dying young like his dad did.

…

"If you had asked me the question, I wouldn't have answered that way. But that is the right answer."

 

 

How Eddie Lampert picks his stocks

http://money.cnn.com/2006/02/03/news/companies/investorsguide_lampert_stockpicking/index.htm

 

Lampert's stock picking is a "form of immersion," he says. Before he put a penny into AutoZone, he visited dozens of the auto-parts retailer's outlets and had one of ESL's analysts spend six months calling on hundreds of stores, posing as a demanding customer. "It's probably overkill," Lampert says, but he can't resist.

…

Lampert also believes that secrecy is a key advantage for an investor.

…

Media mogul David Geffen, who has invested with Lampert since 1992, recalls insisting to him at one point, "I want to know where the hell my money is." Lampert refused to tell him.

 

The last comment by David Geffen is particularly interesting if you take into account what Geffen said about Lampert in another interview published the same year:

 

Geffen, who gave Lampert $200 million to invest in 1992 (when Lampert was just 29), says that had he not periodically taken money out for diversification, he would have $9 billion today. As it is, says Geffen, "I've made more money from Eddie than from all the businesses I've created and sold."

http://money.cnn.com/magazines/fortune/fortune_archive/2006/02/20/8369159/

 

I would be happy to invest in ESL without knowing what Eddie is investing in. I hope owning Sears is a cheap way of getting into ESL, although I have no clue what Eddie's end game is ;D

 

Wall Street hates secrecy and thinks Eddie is crazy. Lampert loves secrecy and is eccentric. Hmm…

 

Fantastic post!

[tombgrt]

 

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. 

 

In this case I think it can be crucial. Owed leases can be turned to assets if they re-lease them etc. It's still a very important aspect and just looking at combined liabilities won't give you enough detail. You'll miss too much.

 

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. 

 

Believing is something else from knowing but I understand why you put it that way. That said, I think it's likely just better to trust asset valuations done by Berkowitz team instead of making random guesses myself. It's just too hard.

 

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.

 

I agree in part. But I also believe that most of the time the market is actually correct when it's negative about something. It's only occasionally that the market is wrong and it's important to acknowledge that there is a chance that the market is right.

 

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?

Aside from WEB this is an apples and oranges comparison imo. With Jobs and Bezos you knew at least what sector the company was going to be in. It's all a lot more vague with Lampert's SHLD. Also, Jobs was a proven business man by the time he took on his role as CEO. Lampert hasn't proven anything yet. You believe his capital allocation skills in SHLD were above par until now?  ??? About WEB: He was very clear in his letters and turned things around much quicker, smaller or not. Current holders of SHLD actually deserve all the clarity they can get after waiting all these years.

 

It's simple: you just made a comparison with three of the very best business men in the last 100 years and time will have to tell whether Lampert will ever come even close to those geniuses (business wise that is). The truth is that the odds are heavily against him if were are talking about him making Sears the next Berkshire.

 

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. 

 

I'll root for you and others and might at one point even take a position myself. So don't think I'm just trying to be an a-hole with these posts. I'm mainly convincing myself that there won't be such a thing as the next Buffett.

Did you know btw that even after Buffett was widely know, Berkshire sold (far) under book value multiple times? There are no called strikes in investing! 

[ASTA]

I think what Bruce Flatt said in a interview recently really is something that applies to SHLD.

 

"We're very bullish on America—the economy is doing extremely well," value investor Bruce Flatt, CEO of Brookfield Asset Management, said in a "Squawk Box" interview. "Housing is coming back. Retail is coming back. [The] shale gas revolution is doing a lot of things. Manufacturing is coming back."

http://www.cnbc.com/id/100952444

 

I think that SHLD is a real asset play with growing retail cash flow as time goes on. Its something that caught my eye before I invested to recently that has not been discussed here. 

[Luke 532]

Food for thought...

 

Berkowitz is opening up his fund to new investors and new money.  He has been increasing his position each quarter in SHLD for about 2 years now.  This doesn't sound like a guy that has any intentions of stopping this trend: "...and eventually he'll have one share and we'll have one share, and there will only be two shares."

http://www.gurufocus.com/news/123169/answers-from-bruce-berkowitz-of-fairholme-fund-comment-on-banks-insurers-and-st-joe

 

Lampert recently completely closed 5 positions and reduced another 2... he has SHLD and 3 others in ESL.  I would imagine he has some cash burning a hole in his pocket.  Lampert has been increasing his concentration either by buying SHLD shares or by selling other companies and not selling SHLD.

 

Short interest is at 14.1M shares... the highest it has been in awhile.

 

The float is shrinking by the quarter.

 

The stock price is near its 52-week low.

[Luke 532]

Yes the perception and expectations of sears on the street is low. This gets to the point of what is the truth. The truth is objective not subjective. The truth is not hope but results. The truth is reality. Once you find out the objective truth. The story is simple. For the owners of sears ( I was a former owner mostly traded it from 09-12 why not just invest when the story is simple .  Once lampert tells the story that's the truth. The market will revalue and then owners can invest for the long term. Investing currently is just speculation on a short squeeze. Nothing more.

 

http://money.cnn.com/galleries/2008/fortune/0804/gallery.bestadvice.fortune/9.html

Almost every weekend when I was 7, 8, 9, 10 years old, my father and I would toss a football in the yard or play basketball in the driveway. When we played football, he'd say, "Go out ten steps. Turn to your right." The ball would reach me just before I turned, and it would hit me right in the chest. Why would my dad do this? He told me, "If I waited for you to turn, you and the defensive player would have an equal chance to get the ball. Your opportunity is gone."

 

This idea of anticipation is key to investing and to business generally. You can't wait for an opportunity to become obvious. You have to think, "Here's what other people and companies have done under certain circumstances. Now, under these new circumstances, how is this management likely to behave?" The plays my father designed for me helped me learn to think ahead. Lots of days I asked him, "Why can't we just invite kids over and play a game?" In order to do something well, he explained, you have to keep practicing and preparing.

 

[mcliu]

Anecdotal investing is dangerous. I think real analysis and an understanding of how the company works is more important in this situation. It seems like most of the posts have been speculation/"analysis" on what Lampert will do and not enough on the numbers and structure of the business. It's obvioulsy very complicated, but ignoring what's difficult (financial analysis) to focus on what's easy (ESL speculation) does not seem like a recipe for success.

[Luke 532]

Anecdotal investing is dangerous. I think real analysis and an understanding of how the company works is more important in this situation. It seems like most of the posts have been speculation/"analysis" on what Lampert will do and not enough on the numbers and structure of the business.

 

We probably have differing definitions of "financial analysis."  Those that I knew back in my accounting days would tell you that GAAP is always right.  My business school professors taught us that focusing solely on things like current free cash flow would benefit us.  They were wrong.  GGP, AIG, BAC, MBI, SHLD, etc.... I wouldn't have touched a single one of these investments had I been blinded to only look at the here-and-now at the time of investing in those names (some I still own, some I don't), rather than looking at the here-and-now *and* handicapping what might happen in the future.

 

My definition of "financial analysis" is looking at a company's financial situation, figuring out why they are in the given situation, calculating various possibilities of what can happen going forward, assigning a probability of each outcome, and then comparing that future value to what the stock is trading at today. 

 

The bottom-line is that SHLD is very attractive from a financial analysis perspective given the limited downside.  Any discussion of Lampert's acumen is to show the incredible upside.  It's an art, not a science.

 

It's obvioulsy very complicated, but ignoring what's difficult (financial analysis) to focus on what's easy (ESL speculation) does not seem like a recipe for success.

 

I don't know about others on this message board, but my home office is chalked full of financial text, documents, as well as SHLD-focused research.  One doesn't take such a large position without doing so.  mcliu, you should also study the jockey and not just the horse.  This is what most investors don't do.  This is why most investors are not successful.  There is an element of art in value investing.  It is very easy to train yourself to be able to read financials, it is much more difficult to learn the craft as only experience can provide that.  That is the art, that is what makes value investing so rewarding.

[nkp007]

Windshield vs rear view mirror.

 

Luke - how concentrated are you in Sears?

 

What other things do you hold? I like the way you think and use logic. I don't think I'll be convinced on Sears, but maybe on something else.

 

Do you invest full time?

[Luke 532]

Windshield vs rear view mirror.

 

Luke - how concentrated are you in Sears?

 

What other things do you hold? I like the way you think and use logic. I don't think I'll be convinced on Sears, but maybe on something else.

 

Do you invest full time?

 

I invest full-time.  I typically own 5-6 companies... anything more than that would leave me with too little time to pour through financials, conference calls, etc.  BAC warrants, AIG warrants, and SHLD make up the vast majority of my portfolio, all roughly equal-weighted.  I also own a few small positions in other companies.  I spend about 35% of my time studying behavioral investing as I think it is a discipline that is over-looked by far too many people.

[ERICOPOLY]

They are actually very clear about what their strategy is for SHLD.  I think they keep saying it again, and again, and again, and again, and yet people still say "investors want Eddie to stop being secretive".

 

From the 2012 Q3 conference call:

 

We are rapidly moving to a member-based business model. Our investments are focused on our members and their experience. This is why we are investing several hundred million dollars this year alone in Integrated Retail and SHOP YOUR WAY membership program.

 

More than half of our revenues at Sears and Kmart now come from SHOP YOUR WAY members.

 

 

Pretty straightforward.  SHLD owns businesses, and they plan on running them.

 

 

 

William Reuter - BOA Merrill Lynch: You guys really focused on the value of your assets here, I was wondering if you could provide a little more color on some of the assets that you guys are going to plan on trying to monetize last year and generate the $500 million?

 

Robert A. Schriesheim - EVP and CFO: Bill, consistent with our prior comments, we are obviously focused on creating long-term sustainable value through operating performance. As we continue with our evolution we're moving to a more, as we describe, nimble, less asset intensive business model and as we move through this process we are continuously evaluating on asset structure and whether specific assets and/or businesses are better managed within the current Sears Holding asset configuration or outside of it.

 

[Luke 532]

From the 2012 Q3 conference call:

 

We are rapidly moving to a member-based business model. Our investments are focused on our members and their experience. This is why we are investing several hundred million dollars this year alone in Integrated Retail and SHOP YOUR WAY membership program.

 

More than half of our revenues at Sears and Kmart now come from SHOP YOUR WAY members.

 

And quotes like the following, yet Wall Street still whines "he doesn't spend anything on capex."

 

http://investorplace.com/2013/05/sears-thinks-its-membership-program-is-key-to-turnaround/

“We are becoming a company focused less on products and less on stores and much more on members,” Lampert told the supportive crowd.

 

The program — which Lampert says has tens of millions of members — saw strong growth last year, both in membership and in sales per member.

 

And he still has that huge real estate portfolio, brands, and inventory to work with which serves as the margin of safety in this investment.

 

[Luke 532]

Further, he says the following...

 

"We can't deny that we're, one, a real estate company, and two, a customer company," Lampert said.

 

“We are becoming a company focused less on products and less on stores and much more on members,” Lampert told the supportive crowd.

 

Priorities (in order of importance):

Members

Real Estate

Customers/Products in their existing form

 

And how did Lampert come up with this order of priorities?  He didn't just pull them out of a hat, his meticulous research has lead him in this direction.  One would have to imagine (or, I'm sorry, "speculate") that it's working quite well as he is getting more aggressive in closing all positions other than SHLD over at ESL. 

 

Wall Street focuses *solely* on Customers/Products... and they are missing the point of what Lampert is doing.

[ERICOPOLY]

Also from the Q3 2012 CC:

 

 

Robert A. Schriesheim - EVP and CFO:

 

...

 

Companies moving to transformations make decisions all the time about how to allocate and reallocate capital as they execute on their strategic vision and certainly history in business is replete with examples on the retail world and outside of the retail world of companies going through transformations who choose to remove capital from older business models and reinvested to promote their strategic vision, which is basically what we're doing.

[ERICOPOLY]

I signed up for ShopYourWay last night.

 

My impression is that the website is NOT very easy to use as a shopping tool.  Not compared to what I'm used to anyway.

 

Suppose for example you want to purchase LED Light Bulbs.

 

Start your search with "LED Bulb" as the text.  Then when the results come up, try to filter on "For the Home".

 

They show you lamps mixed in with the bulbs.  It's rather a horrible online experience.  The results are not sorted well.

 

Next, go to www.homedepot.com and search for "LED Bulb".  The results are terrific -- they only show you what you asked for, and they are sorted well.

 

[wisdom]

Eric - while your point is valid I would point out that you are describing what a search engine does.

 

My understanding of a membership program is that it would use your past behaviour to recommend other products that you would like to increase sales or have higher margins.

 

I am not saying that the search engine could not be better as your experience shows it is not good enough.

[wisdom]

If I had a retail business I would ideally want a combination of Costco (membership/high margins and sales/sq ft) + amazon (online and lots of data analytics, etc)

 

If I could build a integrated retailer which combines the 2 - I might have a shot because it would be so difficult to build and thus, replicate.

[tombgrt]

I signed up for ShopYourWay last night.

 

My impression is that the website is NOT very easy to use as a shopping tool.  Not compared to what I'm used to anyway.

 

Suppose for example you want to purchase LED Light Bulbs.

 

Start your search with "LED Bulb" as the text.  Then when the results come up, try to filter on "For the Home".

 

They show you lamps mixed in with the bulbs.  It's rather a horrible online experience.  The results are not sorted well.

 

Next, go to www.homedepot.com and search for "LED Bulb".  The results are terrific -- they only show you what you asked for, and they are sorted well.

 

 

Is this really a surprise Eric? This is all new for Sears and Lampert is just trying things out hoping something will stick. They are years behind the competition even if they do things half right. The only thing ShowYourWay really has going for it is the existing customer base that they can convert. Problem is that the customer base won't be very sticky if you give them a lousy experience.

 

This isn't going to make Sears worth a multiple of the current market cap overnight, if it ever will. Maybe efficiency and customer experience and satisfaction will be so great that margins will explode upwards over time, idk... I guess I'm just a skeptic when it comes to Lampert's business acumen.

[hyten1]

guys i  have a small token/short term/squeeze position in shld

 

i have also recently sign up for shopyourway, i have the same experience as eric.

 

can anyone else share their experience on shopyourway, how should it be used? what type of customer is it best for? it doesn't seem like it good for specific item shopping need? meaning if you are looking for X and you go to the site and type in X and hopefully you will get  the best deal for X.

 

I guess as a shopper i usually do:

 

1. i know what i want (a specific item), so i go and look for that item, usually looking for the best deal (price, tax, shipping etc.) - how do i go about this usually? I usually either search using a search engine, or i go to amazon. once i find the item, i'll prob search around to find the best deal.

 

2. i know what i want a general area or topic (for example, i am looking currently for home security system, but i have no idea what is good or not). obviously i start with a search engine and go from their, i read article, blogs, etc. this is very time consuming etc.

 

3. some site/entity recommend something for me out of the blue? this is something everyone tries to do, but its very difficult. i have had only sucess with amazon. since the merchant needs a lot of information about you to provide you with good recommendation. so far no one has been able to provide me with what i wanted or might want base on my past history. the closes thing is amazon with books.

 

where/how would shld position itself?

 

 

hy

[BTShine]

Respectfully, I disagree on some of the negative reviews of Shop Your Way. 

 

Over a year ago I joined Shop Your Way.  The point was, and still is, to see what it's like.  And, to understand how it's being used by SHLD. 

 

My take it that SYW Rewards is being used to influence, or manipulate, past/potential shoppers of Sears.  SHLD is using human psychology to its advantage.  Specifically using the emotions/quick thinking of humans (often the least rational thinking of humans) to their advantage. 

 

The best example I have of this is the messages they send me saying 'Congratulations!  You have been awarded $4 worth of surprise points (4,000 points).' 

 

It turns out these points expire in about a week after issuance.  Even though I am an investor, I'm still subject to the emotions that come along with being human.  So, initially I get these points and have no intentions of using them.  But, after a couple days I'll think "hmmm, may I should use those points before they expire...I don't really want to see $4.00 of value go to waste"  As we all know, the $4 is not really value, it's bait to get me into the store, but it works!!!  Even though my rational thinking prevails (I don't use the points), they've still made me much more likely to shop with them.  Also, Sears knows based upon my history that I spend at a certain level, so I'm confident they know how much they make on a typical trip by BTShine.  So, this $4 reward is more like an investment by them.  The relationship is becoming more 'sticky', similar to Costco's model. 

 

 

[BTShine]

With that, I don't think the real value of SYWR is in the experience on shopyourway.com.  Though SHLD want's us to look on SYWR, click on some of their polls, comment on the posts of others, etc. to become more engaged and comfortable, I think that the highest value of SYWR is in the Rewards.  Once people feel like they have invested in a business (as a customer, not an investor), such as those that use airlines rewards programs (Delta Skymiles anyone?), people make less rational purchasing decisions and pay less attention to the price they're paying(this is exploited by salesmen that take customers/purchasing managers out to dinner).  The decision to buy from Company A has pretty much been made before the negotiating ever starts.

 

My parents are a great example.  They travel often, and somehow have settled on Delta as their carrier of choice.  I don't think they had plans to choose just one airline for flying...but, now that Delta has made them Gold Elite, etc. they're set on keeping this status to gain some small perks when flying.  BUT, they don't scrutinize the price of plane tickets anymore!!!  Delta gets to charge them more than other carriers!  This is huge.  In my opinion, my parents are so set on getting points, or SkyMiles, that the goal of attaining points has trumped the goal of saving money :). 

 

Fascinating stuff.  I think Sears is using the same game plan as Delta Skymiles.

[BTShine]

To better understand Lampert it's worth reading the following articles:

 

The Next Warren Buffett?

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

 

Lampert has carefully studied Buffett for years. He started reading and rereading Buffett's writings while working at Goldman after college. He would analyze Buffett's investments, he says, by "reverse engineering" deals, such as his purchase of insurance company GEICO. Lampert went back and read GEICO's annual reports in the couple of years preceding Buffett's initial investment in the 1970s. "Putting myself in his shoes at that time, could I understand why he made the investments?" says Lampert. "That was part of my learning process." In 1989 he flew out to Omaha and met Buffett for 90 minutes, peppering him with questions about his investing philosophy.

 

Some other quotes from the same article:

- Thomas J. Tisch, son of Loews's founder Laurence Tisch: "Eddie is one of the extraordinary investors of our age, if not the most extraordinary."

- "Lampert would rather earn a bumpy 15% [return] than a flat 12%."

- "Eddie doesn't waste money -- ever."

- "He will always want to work through, at a pretty high level of detail, what we are going to spend our money on and what the business benefits will be,"

- "Buffett's investments have stood the test of time," he says, noting that the same test will be applied to him.

- In a series of lengthy interviews with BusinessWeek, he makes clear that he also wants to earn respect as a businessman who provides expertise in how a company is run. Like Buffett, he wants chief executives to open their arms and partner with him.

- "There is no question he will turn Kmart into an investment vehicle like Warren Buffett's," says legendary value investor Martin Whitman.

 

The "Shutdown of Textile Business" section in Berkshire's letter from 1985 is probably relevant too:

http://www.berkshirehathaway.com/letters/1985.html

 

Good points.  Relating to the Berkshire Textile Mill shutdowns.  Berkshire's Mills were worthless when WB had to shut them down.  But, SHLD's real estate has some value...much, much more value when you consider some of their mall space.  Today's newspaper printing shops seem similar to Buffet's textile mills of the 70s and 80s.  Retail Real Estate, although is a relative slump, has retained most of it's value and does not need to be scrapped in most cases. 

 

[BTShine]

Whoops.  The formatting on the last post didn't work out.  Here's the post:

 

Good points.  Relating to the Berkshire Textile Mill shutdowns.  Berkshire's Mills were worthless when WB had to shut them down.  But, SHLD's real estate has some value...much, much more value when you consider some of their mall space.  Today's newspaper printing shops seem similar to Buffet's textile mills of the 70s and 80s.  Retail Real Estate, although is a relative slump, has retained most of it's value and does not need to be scrapped in most cases.