SHLDQ - Sears Holdings Corp

[BTShine]

T-bone

 

If my history serves me correctly even WEB spent a lot of dough on new upgraded mill equipment for years trying to salvage it. He did think at some point he could bring about efficiency using the upgraded factories but it never happened.

 

Textual, I'll try to find the specific quote I'm talking about.  I believe Buffett had the specific insight that better equipment would ruin the overall business, rather than improve his portion of it - an insight I was initially puzzled by and later very impressed with.

 

Some less helpful references here:

 

"Buffett and his investment partners paid about $14 million in the 1960s for a controlling interest in Berkshire Hathaway, then a New Bedford, Massachusetts-based manufacturer of men’s suit linings, according to biographer Andrew Kilpatrick. Buffett spent less than rivals on improvements to equipment and used Berkshire’s earnings to help fund investments, including the 1967 acquisition of insurer National Indemnity Co."

 

http://www.bloomberg.com/news/2010-10-18/berkshire-the-textile-mill-was-buffett-s-worst-investment-he-tells-cnbc.html

 

Buffett had quietly set his sights on Hathaway and began acquiring stock in the early

1960s.  Ken Chace, vice president of manufacturing, was installed as president with instructions to cut

costs.  Profits would be invested elsewhere – insurance, banking, publishing.  Later Berkshire Hathaway

invested in Coca-Cola, The Buffalo News, The Washington Post, manufactured homes, and furniture

retailing.  Anything profitable but nothing related to textiles.  By 1968, the New Bedford site was down to one

building. 

 

Cotton textile production ended in 1969.  Rayon linings and synthetic curtains continued to run until 1986. 

The company did not close because it continued to make money.  When the plant closed, it was the last

textile mill in the city of New Bedford.

 

http://www.textilehistory.org/BerkshireHathaway.html

 

Liquidating mall and other retail real estate will likely be more enjoyable than liquidating textile assets.  In Buffett's 1985 letter he talks about how equipment that originally cost $13 million, had a book value of $866,000 (after accelerated depreciation) was sold for $163,000 (net of $0 after selling fees, etc.).  On the other hand, mall assets are often times sold at a market price that far exceeds their original cost and carrying cost.  Therefore, SHLD will likely experience a different fate than BRK did when they close operations.

[T-bone1]

+1

[JSArbitrage]

JSArbitrage,

 

I could turn out to be wrong, but I am trying my best to focus on the value, rather than the stock price.

 

It appears that Ron Johnson destroyed a lot of value at JCP.  It does not appear that Mr. Lampert has destroyed much if any value at SHLD.  Sure retail, and particularly mall based discount retail, may be dying . . . but Lampert has preserved as much of the value as possible while spending as little as possible to do so.

 

Current value is almost as irrelevant as stock price in investing.  You can't walk home with your .001% proportion of the balance sheet at fair value.  What matters is can you (as an investor) realize a reasonable return in a reasonable amount of time.  Eddie has SHLD investors down 50 percent over a 9 year span.  The realized IRR will almost certainly be below the S&P500 no matter what Eddie pulls out of his hat at this point.  Do the math.

 

The thesis of "there is $X/share in real estate" or "the brands are easily worth $XXX" is no different than what could have been said in 2004.  Same real estate and same brands (in fact, the were probably more valuable then.)  The question is, will that real estate ever be put into YOUR pocket in a reasonable time frame.  Have you modeled out what a 10 year liquidation (both sides of the balance sheet) will get you and over how long a time frame?

 

This is not unlike what Buffett did with the Berkshire textile mill.  When more efficient looms came on the scene, rather than purchase them and compete in an even more competitive environment, Buffett chose to shut down the mill.  I think Eddie has made the same choice in the face of an arms race of in-store CAPEX.

 

It is certainly not easy to liquidate a business like SHLD quickly, but it does appear that Lampert has been planning for this eventuality for years and has structured the holding company accordingly.

 

Um, no.  It's nothing like Berkshire.  Within 2 years of gaining control of BRK, Warren was diverting the cash-flow into other businesses.  Eddie has had 9 years to do that and he hasn't.  In fact, he has spent about $5.8 billion (with a B) on buybacks since he took over SHLD.  At prices much higher than the stock price (I think someone did the math and the weighted average was like $125/share.  I can't confirm that.)

 

Buffett was getting money out of mills and into other businesses like Indian Jones running from the boulder.  Eddie has put ~1.5x the market cap BACK INTO THE RETAILER.  Even if the stock TRIPLES from here, he'd basically be breaking even on that investment.  And that's over 9 years. 

 

From where I am standing, I have not seen sins of omission or commission on the part of Lampert that would suggest he has "lost it".  I don't think a stock price is always a good judge of management.  There are plenty of examples, Henry Singleton most importantly, of smart capital allocators looking stupid in the market for years at a time.  I think these create opportunity, but I certainly agree that timing can be a problem.

 

If you don't think Eddie has made any errors of commission or omission, you just prove my point about battered wife syndrome.  There is no way someone that takes an objective point of view regarding SHLD over the past 9 years can say that there have been no errors.  I mean - come on.  Let's get real.  I am not an LP, you don't have to sell me on your positions. 

 

Will it go from $40 to $80?  I have no idea.  But it's silly to read these SHLD threads and listen to people pretend that the last nine years hasn't been a nose dive for shareholders or SHLD the retailer. 

 

Some people even pretend it was Eddie's master plan all along so he could orchestrate an MBO take-under.  So it creates a perfect argument.  If SHLD does well, it's Eddie's genius, so the jockey bet made sense.  If it does poorly, it's Eddie genius, so the jockey bet made sense.  You win if you win and you win if you lose.

 

 

 

 

[Luke 532]

http://online.barrons.com/article/SB119283873785565563.html

Interesting graphic from 2007 attached.  Note the huge discrepancy in the “enterprise value/avg. square feet” column.  And the implied value was based on a $134 stock price at the time (with more shares outstanding in 2007 then there are now).  Note: the data was provided by Pershing Square so Ackman may have "crunched" the numbers a bit.

"A Screaming Bargain: The implied value of Sears' retail real estate is absurdly low relative to competitors' property."

[alertmeipp]

how does SHLD real estate value compare to JCP's?

[muscleman]

how does SHLD real estate value compare to JCP's?

 

From Credit Suisse analysis:

 

J.C. Penney, in its presentation to potential investors on its debt offering,

includes a detailed real estate valuation prepared by a leading real estate

firm that gives us some insight into valuing Sears’s portfolio. Using that, and

with significant assumptions on the value of leased stores, the mix of the

portfolio relative to JCP, and valuations for Kmart, we have sharpened our

previous sum-of-the-parts analysis for SHLD. Using JCP as a guide, we are

lowering our breakup value to a range of $16 to $60 for the asset value. The

wide range primarily reflects the value of many of the leased properties and

the likelihood that closing stores will cost money.

 

■ In doing the above, we used the dark or closed stores analysis from the JCP

presentation, as that would be the way these stores are valued. Inside we

show our analysis, which we highlight has significant assumptions built in.

 

■ Two clear caveats in applying JCP’s analysis to Sears. First, we believe

Sears has a select number of trophy properties, where the zoning would

allow for redevelopment of the site at a significant profit to Sears. Knowing

how many of these sites exist is the question mark, but there could be as

many as 50 sites at $100+ per square foot. Second, offsetting the above, we

believe the JCP analysis was overly generous in its C and D mall grade

values, as we view those as zero or below, and we believe Sears has more

of those between its two brands than Penney does.

[muscleman]

alertmeipp, I think Sears Canada's Barnaby property is an example of the trophy property.

There is speculation that SHLD has 125 trophy properties. I am guessing they are the 125 ones used as collateral under Sears Re, but I am not sure, but I think if I were the CEO, I would protect the most valuable properties first.

[Luke 532]

Current value is almost as irrelevant as stock price in investing.  You can't walk home with your .001% proportion of the balance sheet at fair value.  What matters is can you (as an investor) realize a reasonable return in a reasonable amount of time. 

 

JSA, all else being equal, which would you choose?

A: a company that has $100B in assets with no liabilities

B: a company that has $1B in assets with no liabilities 

 

If your statement were true they would be indistinguishable.  The value of a business is the key determining factor in value investing.  I don't know what kind of investing I'd call it if you don't try to place a value on the underlying business, but it surely isn't value investing.

 

Eddie has SHLD investors down 50 percent over a 9 year span.  The realized IRR will almost certainly be below the S&P500 no matter what Eddie pulls out of his hat at this point.  Do the math.

 

When evaluating the merits of an investment today, who really cares what the IRR is since 2004?  You should focus on what you think will be the IRR from August 20th, 2013 and beyond.  Every decision from a value investing perspective should look forward, not backwards.  For the investor the factors that should matter are whether or not at $40 the stock is a solid investment going forward.

 

Even if the stock TRIPLES from here, he'd basically be breaking even on that investment.  And that's over 9 years. 

 

Again, a thesis shouldn't be based on how an investment has performed in the past.  It should look at the facts available today and whether or not it's a good investment going forward.

 

But it's silly to read these SHLD threads and listen to people pretend that the last nine years hasn't been a nose dive for shareholders or SHLD the retailer. 

 

I don't see any posts saying that SHLD hasn't been a horrible investment for those holding almost a decade.

[alertmeipp]

how does SHLD real estate value compare to JCP's?

 

From Credit Suisse analysis:

 

J.C. Penney, in its presentation to potential investors on its debt offering,

includes a detailed real estate valuation prepared by a leading real estate

firm that gives us some insight into valuing Sears’s portfolio. Using that, and

with significant assumptions on the value of leased stores, the mix of the

portfolio relative to JCP, and valuations for Kmart, we have sharpened our

previous sum-of-the-parts analysis for SHLD. Using JCP as a guide, we are

lowering our breakup value to a range of $16 to $60 for the asset value. The

wide range primarily reflects the value of many of the leased properties and

the likelihood that closing stores will cost money.

 

■ In doing the above, we used the dark or closed stores analysis from the JCP

presentation, as that would be the way these stores are valued. Inside we

show our analysis, which we highlight has significant assumptions built in.

 

■ Two clear caveats in applying JCP’s analysis to Sears. First, we believe

Sears has a select number of trophy properties, where the zoning would

allow for redevelopment of the site at a significant profit to Sears. Knowing

how many of these sites exist is the question mark, but there could be as

many as 50 sites at $100+ per square foot. Second, offsetting the above, we

believe the JCP analysis was overly generous in its C and D mall grade

values, as we view those as zero or below, and we believe Sears has more

of those between its two brands than Penney does.

 

 

Thanks!

[JSArbitrage]

  JSA, all else being equal, which would you choose?

A: a company that has $100B in assets with no liabilities

B: a company that has $1B in assets with no liabilities 

 

If your statement were true they would be indistinguishable.  The value of a business is the key determining factor in value investing.  I don't know what kind of investing I'd call it if you don't try to place a value on the underlying business, but it surely isn't value investing.

 

My point was that the balance sheet as of specific date is not the value of the business.  If the US government were to bury $100B in cash on the moon, I wouldn't buy a share even if I could buy it for a penny on the dollar.  Even if the balance sheet said $100B in assets with no liabilities.  You can't get your proportion of a balance sheet at fair value.  It's simply a data point among many other data points.  And sometimes, it's an incredibly misleading data point.  Even Lehman had equity until the day it didn't.

 

When evaluating the merits of an investment today, who really cares what the IRR is since 2004?  You should focus on what you think will be the IRR from August 20th, 2013 and beyond.  Every decision from a value investing perspective should look forward, not backwards.  For the investor the factors that should matter are whether or not at $40 the stock is a solid investment going forward.

 

Again, a thesis shouldn't be based on how an investment has performed in the past.  It should look at the facts available today and whether or not it's a good investment going forward.

 

My argument wasn't about what SHLD will do in the future.  I even said that it might double.  I have no idea and I have no position in SHLD.

 

I don't see any posts saying that SHLD hasn't been a horrible investment for those holding almost a decade.

 

Really? Because you just quoted my response to a person that said Eddie has committed no errors of commission or omission.  You can't have it both ways, that it's been a nose dive for a decade but the person making the decisions didn't make any errors. 

 

But the fact remains: any view of SHLD based upon Eddie's performance as a jockey for SHLD is not based on any historical facts.  It's based on hope in a future event for which there is no historical evidence.  Will that future event occur? It might.  You guys might post about making 5 times your money in the next year. 

 

But I seriously doubt it. 

[Luke 532]

10 days ago...

http://www.nugget.ca/2013/08/09/sears-unveils-fresh-look

"Gone from the department store are electronics and window coverings – which are still available in its catalogue and online – in favour of an expanded selection of other products including appliances and mattresses."

 

Today...

http://www.postcrescent.com/article/20130820/APC0301/308200292/The-Buzz-Sears-Outlet-open-shortly?nclick_check=1

"The store’s stock will change weekly, but focuses mostly on home appliances and apparel. It doesn’t have TVs or computers."

[Luke 532]

Really? Because you just quoted my response to a person that said Eddie has committed no errors of commission or omission. 

 

OK, my mistake.  There have been some comments about it, but not a ton.  I would imagine many people that have held for 10 years would say it has been a bad investment.

 

You guys might post about making 5 times your money in the next year. 

 

But I seriously doubt it.

 

So do I.  I don't expect a 5-bagger in 12 months.  I have no idea what the stock price will due in the next year.  But value investing isn't about predicting when an event will occur.  It's about pricing.  What you give vs. what you get.  I believe the value of the underlying business will increase as time goes by, and that's why I'm a shareholder.  What will the stock do in the interim?  I don't know and don't really care.  I price, I don't predict (to steal a line from Berkowitz).

[T-bone1]

Buffett was getting money out of mills and into other businesses like Indian Jones running from the boulder.  Eddie has put ~1.5x the market cap BACK INTO THE RETAILER.  Even if the stock TRIPLES from here, he'd basically be breaking even on that investment.  And that's over 9 years. 

 

JSA,

 

It sounds like we will have to disagree on a number of these issues.

 

Most notably, I think if a stock goes down and the value stays the same, I believe it becomes a better buy.  You seem to imply that it makes it likely that it will continue to underperform in the future.  I apologize if I am misunderstanding you somehow.

 

On a SHLD specific note, I think your quote above is indicative of where I think the disconnect lies between the bulls and bears in this situation.  I view SHLD as a conglomerate with a number of businesses; retail, real estate, brand licensing, appliance servicing, etc.  This makes it different than the original Berkshire Mill, which had basically one asset with no higher and better use.

 

Lampert may have paid too high a price for previous share buybacks, but he was never "putting the money back into the retailer" as you imply.  He was buying more of the other businesses, which he viewed as cheap - the real estate, brands etc.  This isn't that different from what Buffett did in my opinion, but you might disagree.

 

As a final point, I would posit that Lampert's past experience and acumen, as well as his wealth of insider information, put him in a much better position than you or I to value the non-retail assets.  He has voted with his wallet a number of times and I think that is worth paying attention to.

[T-bone1]

JSA,

 

Not trying to start an argument, but I would be curious to here what errors you think Lampert has made.  Given that this is a value investing forum, I want to be clear that I am talking about things that affected the value of the business, not the stock price.

 

I may have been exaggerating earlier when I said he hadn't made any errors.  It certainly appears he overpaid for share buybacks, but maybe the real estate is worth more than $125 per share.  I don't see a whole lot else that I think he screwed up . . .

 

t-bone1

[Luke 532]

  JSA, all else being equal, which would you choose?

A: a company that has $100B in assets with no liabilities

B: a company that has $1B in assets with no liabilities 

 

If your statement were true they would be indistinguishable.  The value of a business is the key determining factor in value investing.  I don't know what kind of investing I'd call it if you don't try to place a value on the underlying business, but it surely isn't value investing.

 

My point was that the balance sheet as of specific date is not the value of the business.  If the US government were to bury $100B in cash on the moon, I wouldn't buy a share even if I could buy it for a penny on the dollar.  Even if the balance sheet said $100B in assets with no liabilities.  You can't get your proportion of a balance sheet at fair value.  It's simply a data point among many other data points.  And sometimes, it's an incredibly misleading data point.  Even Lehman had equity until the day it didn't.

 

If I can physically put my hands on an asset that is much different than having cash buried on the moon (although that is a pretty funny visual as I could see the gov't trying to sell stock certificates for the moon to generate some extra income). 

 

Yes, financials can hide the truth.  In SHLD's case it doesn't accurately reflect the vast array of valuable real estate that is undervalued on the books.

 

JSA, what's your investment style?  It seems to be vastly different than the Graham/Dodd style of value investing.

[bennycx]

I would speculate that Eddie didn't even think about the real estate value when he first bought into it. It is only after "value investors" have suggested a real estate value after a failing retail turnaround that he thought about it.

Also, didn't Buffett said that even he doesn't know how Sears will turn out in the end?

[Guest hellsten]

But the fact remains: any view of SHLD based upon Eddie's performance as a jockey for SHLD is not based on any historical facts.  It's based on hope in a future event for which there is no historical evidence.  Will that future event occur? It might.  You guys might post about making 5 times your money in the next year. 

 

But I seriously doubt it.

 

I agree that the market is very unhappy with the performance of Sears. However, if you go back to 2003, you can see SHLD's performance is not that bad:

http://finance.yahoo.com/q/hp?s=SHLD&a=00&b=3&c=2000&d=07&e=20&f=2005&g=m

 

Dec 1, 2004 103.01

Nov 1, 2004 91.71

Oct 1, 2004 88.04

Sep 1, 2004 76.62

Aug 2, 2004 75.05

Jul 1, 2004 72.00

Jun 1, 2004 52.40

May 3, 2004 44.54

Apr 1, 2004 41.27

Mar 1, 2004 30.00

Feb 2, 2004 27.54

Jan 2, 2004 23.90

Dec 1, 2003 30.55

Nov 3, 2003 28.94

Oct 1, 2003 25.05

Sep 2, 2003 30.60

Aug 1, 2003 23.55

Jul 1, 2003 26.79

Jun 2, 2003 15.90

May 2, 2003 15.00

 

10-year performance according to Google:

SP500 +67%

Dow Jones +61

SHLD +68

 

The price of SHLD is volatile, so the comparison doesn't make sense. Does the underlying value of Sears go up and down as much as the stock, or is it simply the market which is unreasonable?

 

See attached figure for a chart comparing AMZN to SHLD.

 

Between 2003-2006 Businessweek had this to say about Bezos:

Yes, Amazon founder and Chief Executive Jeffrey P. Bezos, the onetime Internet poster boy who quickly became a post-dot-com piñata, is back with yet another new idea. Many people continue to wonder if the world's largest online store will ever fulfill its original promise to revolutionize retailing.

 

http://www.businessweek.com/stories/2006-11-12/jeff-bezos-risky-bet

 

 

Management by the numbers hasn't always translated into success. Bezos was a big believer in the dot-com economy and bought equity chunks of now defunct or struggling companies like Kozmo.com and Pets.com. The investments cost Amazon close to $350 million between 2000 and 2002. The bubble also prompted Bezos to overexpand. Within a year of adding six warehouses and taking the total to eight, Amazon closed two, laid off nearly 1,500 people, and took a $400 million hit in restructuring charges.

 

But Bezos was able to recover and make Amazon grow after the bubble. And it is since then that he has proved himself more than just a visionary. In the tech world, few founders have been able to manage their companies into the promised land. For every Tom Watson, Bill Hewlett, Bill Gates, or Michael Dell, there have been plenty more Sean Fannings.

 

The smart money is just now beginning to consider Jeff Bezos as possibly on par with the first group. Just ask Warren Buffett. He compares Bezos to Fred Smith, the founder of Federal Express. "Here's a guy who took something that is right in front of us--selling books--and put it together with new technology to create in just a couple of years one of the biggest brands in the world.

 

http://money.cnn.com/magazines/fortune/fortune_archive/2003/05/26/343082/

 

There's one thing that Bezos and Lampert share, patience:

 

USA TODAY's Byron Acohido asked company founder and CEO Jeff Bezos about competing more directly against Google and Microsoft, impatient shareholders and what's ahead for e-commerce.

 

Q: Do you consider yourself a patient man?

 

A: (Laughing) I do consider myself a patient man.

…

Q: What's Wall Street's biggest misconception about Amazon.com?

 

A: I think one of the things people don't understand is we can build more shareholder value by lowering product prices than we can by trying to raise margins. It's a more patient approach, but we think it leads to a stronger, healthier company. It also serves customers much, much better.

 

We are dedicated to the notion of, year in and year out, lowering prices and getting more efficient so we can afford to do that.

 

http://usatoday30.usatoday.com/money/industries/technology/2005-07-05-amazon-bezos_x.htm

[fareastwarriors]

holders of SHLD

[Kraven]

I apologize if this has already been posted and discussed, but I found this short presentation to be very helpful with regard to some of the issues that have been raised:

 

http://www.searsholdings.com/invest/docs/Sears_Re_February_2012.pdf

 

-t-bone1

 

What is confusing here is that KCD IP is owned by the sears and KMart retail subs. This means if these two subs go down, the liability holders may claim on the equity interest of KCD IP. Am I wrong here?

 

You are correct that the liability holders have a claim on the equity of KCD IP, but Sears Re has a lien on the assets, which must be paid off before the equity in KCD IP has any value . . .  So in effect, the assets (or at least the portion of them on which there is a lien) are bankruptcy remote.

 

Does the following mean that:

1. SHLD thinks the brands in total are worth at least 1.8 Bn?

2. The Sear Re holds lien to 125 full line stores.

 

Therefore, the other real estates in KCD IP may be acquired by liability holders other than Sears Re?

 

===============================================

Two securitization structures were used to develop asset-backed securities for Sears Re

−Real Estate Mortgage Investment Conduit (“REMIC”) Transaction – November 2003

125 Sears Full-line Stores were contributed to a bankruptcy-remote structure

Sears Re purchased $1.25 billion of mortgage-backed securities issued by the REMIC

−IP Transaction – May 2006

U.S. rights to the Kenmore, Craftsman and DieHard trademarks were contributed to a bankruptcy-remote entity – KCD IP, LLC

Sears Re purchased $1.8 billion of asset-backed securities issued by KCD IP, LLC

 

I have been reading a little about Sears and looking at some of the old posts.  For me, any interest I have would be in (in no particular order) the real estate, Land's End, Craftsman, Diehard and Kenmore.  Anything else, if it existed, would be gravy.

 

I think there is great confusion about their securitizations.  I looked at their latest 10-K, but haven't done anything more than that with respect to this issue.  It's all an internal transaction right now.  It's just mixing things up.  While they have the option at some point in the future of selling the securities resulting from the securitizations to 3rd parties, they have not done so.  Therefore, nothing is off balance sheet.  It's not nonconsolidated as far as I can tell.

 

In terms of the questions above, Sears Re doesn't hold the lien to any assets.  They bought securities from the REMIC and KCD IP.

[muscleman]

 

 

In terms of the questions above, Sears Re doesn't hold the lien to any assets.  They bought securities from the REMIC and KCD IP.

 

But the securities from REMIC and KCD IP are supposed to use the assets to back them up. So that means Sears Re hold the lien to these assets.

[Kraven]

Luke5:32, since you have done so much research on SHLD, could you please share with us some of your anaylsis on the guarantor and non-guarantor subs, and outline what would happen to the assets in a nightmare scenario?

 

I am still working on this myself.  This is arguably the toughest part of any analysis on SHLD as it involves what would happen in the case of bankruptcy and how that plays out from a legal perspective.  I would be interested if anybody on this message board has experience in bankruptcy law that might be able to chime in on this. 

 

Until that time of what would happen becomes clear (if it ever becomes clear), I would imagine that Lampert structuring the company in this manner is beneficial to us (Lampert and shareholders interest being aligned).

 

I am fairly certain that from the standpoint of equity holders the guarantor/non guarantor structure means nothing in the event of a bankruptcy.  If Holdings went bankrupt all of the subs would almost certainly be collapsed into Holdings (as far as I can tell), that is they would be consolidated.  So from the standpoint of a debt holder, all of this is of the utmost importance in that it will result in who is standing where in relation to the assets, from the standpoint of equity it doesn't really matter I don't think (all I have read is what is in the 10-K). 

 

It appears to me that they set up their securitizations in order for some regulatory reason for their insurance sub.  Perhaps holding securities is better than the assets themselves.  I don't know about that.  But the fact that the securitized assets were simply dumped into subs and securities issued and held by other subs means that from the standpoint of an equity holder I don't think anything has changed.  While all of this matters (maybe) in a situation where Holdings is an ongoing concern, in a bankruptcy I think it's moot. 

 

Perhaps there is other information out there I haven't seen.  If so, it would be interesting to consider.

[Kraven]

 

 

In terms of the questions above, Sears Re doesn't hold the lien to any assets.  They bought securities from the REMIC and KCD IP.

 

But the securities from REMIC and KCD IP are supposed to use the assets to back them up. So that means Sears Re hold the lien to these assets.

 

No, they don't.  They hold securities issued by an entity that owns those assets.  They hold debt securities issued by a special purpose vehicle, but don't hold any direct interest in the assets.  At the end of the day in this case (given one or more captive holders of securities), it's kind of the same thing, but not technically.

[Grenville]

The reason I thought the guarantor/non guarantor structure was interesting is that it gives you some insight into how the company could be divided. When you look at the cash flow statement from operations in the 10Ks, you see 1bln in cash flow consistently from the non guarantor sub while the non guarantor guarantor has most of the losses.

 

This could be interesting if in some scenario you split off the guarantor sub into its own entity. It also looks like a majority of the pension liabilities are in the guarantor sub. However, it's hard to determine how much of the 1bln number is dependent on the guarantor sub. In addition, when the company was buying back stock, it was doing it through the guarantor sub.

 

In my mind, its hard to see a split of the two. People have pointed to the split financials as a source of value that resides hidden.

[Kraven]

The reason I thought the guarantor/non guarantor structure was interesting is that it gives you some insight into how the company could be divided. When you look at the cash flow statement from operations in the 10Ks, you see 1bln in cash flow consistently from the non guarantor sub while the non guarantor has most of the losses.

 

This could be interesting if in some scenario you split off the guarantor sub into its own entity. It also looks like a majority of the pension liabilities are in the guarantor sub. However, it's hard to determine how much of the 1bln number is dependent on the guarantor sub. In addition, when the company was buying back stock, it was doing it through the guarantor sub.

 

In my mind, its hard to see a split of the two. People have pointed to the split financials as a source of value that resides hidden.

 

You mean most of the losses in the guarantor, right?

 

But yeah, it's a way of seeing where the value perhaps resides. On the one hand you have all the retail in the guarantor while the non guarantor has some trophy properties (maybe), but has Kenmore, Craftsman and Diehard. Now that I think of it though the guarantor would seem to have Lands End, tons of other real estate plus about $27/share in DTAs with a valuation allowance against them.

 

I think at the end of the day it won't really matter how they are split up.

 

The interesting thing to me would be to start with TBV and work from that to come up with some kind of baseline valuation. Add in the DTAs, Lands End, KCD, real estate, etc and its quite possible there is good value here.

[ScottHall]

The reason I thought the guarantor/non guarantor structure was interesting is that it gives you some insight into how the company could be divided. When you look at the cash flow statement from operations in the 10Ks, you see 1bln in cash flow consistently from the non guarantor sub while the non guarantor has most of the losses.

 

This could be interesting if in some scenario you split off the guarantor sub into its own entity. It also looks like a majority of the pension liabilities are in the guarantor sub. However, it's hard to determine how much of the 1bln number is dependent on the guarantor sub. In addition, when the company was buying back stock, it was doing it through the guarantor sub.

 

In my mind, its hard to see a split of the two. People have pointed to the split financials as a source of value that resides hidden.

 

You mean most of the losses in the guarantor, right?

 

But yeah, it's a way of seeing where the value perhaps resides. On the one hand you have all the retail in the guarantor while the non guarantor has some trophy properties (maybe), but has Kenmore, Craftsman and Diehard. Now that I think of it though the guarantor would seem to have Lands End, tons of other real estate plus about $27/share in DTAs with a valuation allowance against them.

 

I think at the end of the day it won't really matter how they are split up.

 

The interesting thing to me would be to start with TBV and work from that to come up with some kind of baseline valuation. Add in the DTAs, Lands End, KCD, real estate, etc and its quite possible there is good value here.

 

Good posts, Kraven. I've been trying to explain the guarantor/non-guarantor myth for a while, but I'm mostly just ignored.

 

I am watching SHLD but I currently have no position in any of the securities. I do think that some of the people on this thread have an irrational bias in favor of the company.