SHLDQ - Sears Holdings Corp

[constructive]

Kraven, you have a good point. Why do they need Sears Re? What is the benefit of this self-insurance company to Sears holdings?

 

The primary reason for captive Bermuda insurance companies is to reduce taxes.

[Kraven]

Thanks for the reply Kraven and I apologize that I wasn't more clear.  I don't think anyone who has seriously studied the company is worried about a bankruptcy of SHLD ("Sears Holdings") . . . as you point out, all the assets would be available to creditors of Sears Holdings.

 

However,  most of the liabilities are not liabilities of Sears Holdings, but rather liabilities of K-Mart (the retailer) or Sears (the retailer).  If either of these subsidiaries were to go bankrupt, the creditors to these subsidiaries would not have a claim on a number of valuable assets (basically the non-guarantor assets).

 

This is why I make the point that Lampert is a restructuring expert.  I believe he will meet all of the obligations of Sears (the retailer) and K-Mart (the retailer), including pensions.  However, I think he has covered his downside by structuring the company in such a way that if things really went south, he could let either or both of these subsidiaries slip into Chapter 11 without destroying a lot of the value within SHLD (Sears Holdings)

 

I hope this is more clear.

 

Best,

 

t-bone1

 

If the above analysis is correct, the margin of safety is that much stronger.

 

Parsad hinted at the attractiveness of the guarantor vs. non-guarantor structure in this thread: http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/for-all-of-you-sears-holdings-longs!/msg68797/#msg68797

 

Luke, do you by any chance have a link to that prospectus?  I can find it, but if available that would be helpful.

[Luke 532]

 

Luke, do you by any chance have a link to that prospectus?  I can find it, but if available that would be helpful.

 

No, I didn't save the link when I last read it.

[Kraven]

Kraven, you have a good point. Why do they need Sears Re? What is the benefit of this self-insurance company to Sears holdings?

 

The primary reason for captive Bermuda insurance companies is to reduce taxes.

 

Agreed, but why self insure at all?  Obviously they determined, at least at one point, that there was a cost benefit to doing so.  However it seems to me, at least based on a cursory review, that it is possibly taking up significant capital.  There is likely the funds from the 125 properties in the REMIC and much of the amounts received in respect of KCD. 

 

So given that KCD especially is a "crown jewel" here, how does it get unlocked when the amounts received are being used to pay off the ABS?  And if they collapse the ABS structure, then how are funds replaced at Sears Re?  These would be good things to know if anyone has any views.

[Kraven]

 

Luke, do you by any chance have a link to that prospectus?  I can find it, but if available that would be helpful.

 

No, I didn't save the link when I last read it.

 

For anyone who wants it:

 

Underlying Documents - http://www.sec.gov/Archives/edgar/data/1310067/000119312510230322/0001193125-10-230322-index.htm

 

Looks like the offering was private, so the offering document isn't filed.  If I missed it, I would appreciate someone pointing me to where it is.  But having the underlying documents is good.  Just opening it up, it was interesting to see that Lands End is a guarantor.

[muscleman]

Kraven, you have a good point. Why do they need Sears Re? What is the benefit of this self-insurance company to Sears holdings?

 

The primary reason for captive Bermuda insurance companies is to reduce taxes.

 

Agreed, but why self insure at all?  Obviously they determined, at least at one point, that there was a cost benefit to doing so.  However it seems to me, at least based on a cursory review, that it is possibly taking up significant capital.  There is likely the funds from the 125 properties in the REMIC and much of the amounts received in respect of KCD. 

 

So given that KCD especially is a "crown jewel" here, how does it get unlocked when the amounts received are being used to pay off the ABS?  And if they collapse the ABS structure, then how are funds replaced at Sears Re?  These would be good things to know if anyone has any views.

 

Sears Re is one of the most profitable businesses of SHLD. If you ever got into a sears store and bought something, they would try to get you buy a warranty. This is business with Sears Re.

[muscleman]

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.

 

Let's ignore a bankruptcy scenario for a minute and consider the separation of assets.  It appears that Lampert could sell Lands End tomorrow and either dividend all of the cash to shareholders, or use it to buy back stock.  It appears he could do the same with most of the real estate as well as the brands. 

 

I think this makes bankruptcy very very unlikely.  There are a lot of ways to raise cash if they ever needed it. 

 

That being said, if their was a bankruptcy, I think it is worth bearing in mind that Lampert is a restructuring expert and structured this entire company to his (and other shareholders) advantage.

 

I don't think anyone thinks bankruptcy is likely, at least not anytime soon.  Some posters though were worried about what would happen IF there was a bankruptcy and I was trying to respond to that question.  It never hurts to understand your place in the world and where you stand. 

 

I am not sure the point about Eddie being a restructuring expert matters at all in the context of this discussion.  I am telling you that from my reading of just the 10-K it seems clear that in the event of a bankruptcy of Holdings (the parent co) that the 2 structured subs would be collapsed in and their assets made available to creditors of Holdings. 

 

Why do I think this?  The assets have never gone anywhere outside of the family.  Real estate was dropped into a REMIC and securitized, the securities "sold" to Sears Re.  How was Sears Re initially capitalized?  I am sure some on this board know this better than I (all I know is what was in that paragraph), but these properties are not free and clear.  They were mortgaged and I have to assume that those funds were dropped into Sears Re somehow (perhaps dividended back to Holdings who then dropped them into Sears Re, I don't know.  I assume these amounts were used to pay for the KCD securities too.).  So REMIC issues securities.  Those securities are sold to Sears Re and the payments on those securities are made from payments received by the REMIC from amounts in respect of the properties - leases, etc.  In terms of KCD, asset backed securities were issued and sold to Sears Re.  Payments in respect of them are derived from royalty payments both from Sears entities and 3rd parties. 

 

But in terms of the assets (real estate and brands), they never left the Sears family.  It's all contained and those assets would almost certainly be available to creditors of Holdings.  In any case, I don't see how they benefit shareholders in the event of a bankruptcy.

 

Absent a bankruptcy where Sears remains as a going concern, we are not talking about restructuring in the same sense.  It would seem that this arrangement makes it much more likely that certain of these assets could be sold, although at least in the case of the real estate it's already been mortgaged so I don't know how much gain there is in excess of that.  Note too that Sears Re needs to remain funded.  So how much of any sale of these 125 properties and KCD would need to make it's way to Sears Re to cover it's obligations?  I have no idea.

 

Thanks for the reply Kraven and I apologize that I wasn't more clear.  I don't think anyone who has seriously studied the company is worried about a bankruptcy of SHLD ("Sears Holdings") . . . as you point out, all the assets would be available to creditors of Sears Holdings.

 

However,  most of the liabilities are not liabilities of Sears Holdings, but rather liabilities of K-Mart (the retailer) or Sears (the retailer).  If either of these subsidiaries were to go bankrupt, the creditors to these subsidiaries would not have a claim on a number of valuable assets (basically the non-guarantor assets).

 

This is why I make the point that Lampert is a restructuring expert.  I believe he will meet all of the obligations of Sears (the retailer) and K-Mart (the retailer), including pensions.  However, I think he has covered his downside by structuring the company in such a way that if things really went south, he could let either or both of these subsidiaries slip into Chapter 11 without destroying a lot of the value within SHLD (Sears Holdings)

 

I hope this is more clear.

 

Best,

 

t-bone1

 

SHLD parent only has this $1 bn note as the liability. I don't think there is much chance for the parent to go bankrupty at all.

 

However, KCD IP is 80% owned by Sears Retail sub and 20% owned by Kmart retail sub. So if one of these gets into bankruptcy, KCD IP will have a problem.

I haven't figured out which sub owned the valuable real estates, but I felt like they are under the Sears retail sub.

 

I think Sears retail has a much better chance to survive than Kmart, so if the real estates are under Sears retail sub, it is probably going to be fine.

[krazeenyc]

There is obviously a lot of self-dealing here.

 

The reinsurance entity was set up back in 2001.  It was set upto deal with risks associated with service agreements, workers comp, casualty, and property insurance.  They set it up to be able manage all their insurance risks under 1 umbrella, and they needed to have dedicated assets that were separated out for insurance obligations.  The original investment that it held was all their credit card receivables -- they owned all the securities of the receivables.

 

In 2003, they sold the CC business, and Sears needed new investments for Sears RE to hold. So  they created REMIC -- they put 125 inline stores into a special entity, mortgaged them for $1.25 billion, the mortgage pass through certificates were bought by Sears RE. The special entity leases these store back to Sears and Kmart -- the lease payments fund the mortgage pass through certificates.

 

In 2006, they securitized KCD IP, put it in a special entity. That entity issued Asset backed notes for the IP ($1.8 billion) bought by Sears RE -- the collateral for the notes is the IP, and royalty income. Payments on the asset backed notes are paid to Sears RE from the royalty income from the brands.

 

Hope this helps.

[Kraven]

I'm on vacation at the beach and what do I do?  I think about Sears.  I find it very interesting.  It's like a puzzle with pieces in various different places and if only one can put them together they will see the entire picture.  I am not sure that is possible, but it seems worth a try.

 

I am generally an asset based investor.  I like buying things below BV and preferably below TBV.  I thought it would be worthwhile to come up with a back of the envelope asset based valuation.

 

As of the last 10-Q, TBV is -329 mil, so -$3.10/share.  Let's start from there.

 

KCD:  If correct, it appears to be doing about $600 mil/yr in FCF.  Let's put a conservative multiple of 8 on it.  So that's $4.8 bil or $45.28/sh.

 

Lands End:  Looks like it's worth somewhere in the neighborhood of $1-2 bil.  Let's just say $1 bil.  That's $9.43/sh.

 

DTAs with a valuation allowance against them: $2.7 bil or $25.47/sh.

 

That's $80.18-3.10 = $77.08/sh.  That's without giving effect to any value in the real estate.  Estimates provided on the board are that it's worth somewhere between say $80-160/sh.

 

On the negative side, we have retail operations that keep knocking a few hundred mil here and there plus pension obligations that do the same.  An increase in interest rates will take care of the pension obligations.  In terms of the retail, monetizing the real estate will correspond with decreasing the footprint and perhaps leaving it with only profitable stores.  But it's a concern.  It's not for lack of trying as they try various things from the data centers to real estate development, etc. 

 

So pursuant to this quick and dirty valuation, I come up with a BV of somewhere between $157.08-237.08.  There is no pride in authorship here.  I would be interested in others tinkering with the numbers and perhaps we can come up with something better.

 

Edit:  Obviously there is a lot of estimating here and the retail provides a lot of negatives.  Perhaps there is still a very large MOS here and I am beginning to see the value that Lampert and Berkowitz see.  I can't exactly put an "exact" valuation on it, but perhaps this man is overweight.

[constructive]

I think you are in danger of double counting if you capitalize the KCD earnings at 8x and also count them as part of earnings. SHLD earnings ex-KCD would be terrible, and KCD is probably too integral to SHLD to actually monetize.

 

For SHLD to be successful long term, they will need to sell non-core assets, and get back to profitability. Figuring out the value of core assets which won't be sold isn't that useful.

[Kraven]

I think you are in danger of double counting if you capitalize the KCD earnings at 8x and also count them as part of earnings. SHLD earnings ex-KCD would be terrible, and KCD is probably too integral to SHLD to actually monetize.

 

For SHLD to be successful long term, they will need to sell non-core assets, and get back to profitability. Figuring out the value of core assets which won't be sold isn't that useful.

 

No double counting intended.  I am not sure where I referred to earnings unless you mean the losses I mentioned.  Fair enough.  Think of what I did more as a snapshot in time.  What would things be worth today if they monetized them in some way.  KCD may be integral to Sears if it intends to be a going retail concern, but it could still be monetized.  Maybe it's spun off or there is a rights offering.  They could enter into agreements guaranteeing that nothing changes from the standpoint of the retail stores.  Just thinking out loud. 

[Kraven]

I spent some time looking through the Indenture and Security Agreement for the 2010 debt offering.  If anyone has the offering document, I would be interested in seeing it.

 

Everything is straightforward pretty much, but I have to admit to being a bit impressed by a couple of features.  The distinction between guarantor and non-guarantor entities is clever.  The dividing line is which subs have credit card receivables, thus it's limited to retail.  This is why Lands End is a guarantor, but (certain) real estate and KCD is not. 

 

In addition, there doesn't seem to be any direct limitation on the sale or disposition of a guarantor (i.e. Lands End).  It seems as if they can do it as they wish.  The limitation on doing so is a coverage test which requires that their borrowing base (as defined) be equal to as much as their debt (all of it, not just this issuance).  If they don't have enough coverage they're required to buy back this note issuance until the coverage is met.  Given their huge borrowing base which is far in excess of their debt, I don't see any problem with them selling Lands End if they wanted.

[Redskin212]

Does anyone know what happened to Sears 13% interest in Restoration Hardware from about 5 or 6 years ago?  I just checked RH's proxy and there in no mention of it, so I presume that it was sold along the way.

 

 

[stahleyp]

Does anyone know what happened to Sears 13% interest in Restoration Hardware from about 5 or 6 years ago?  I just checked RH's proxy and there in no mention of it, so I presume that it was sold along the way.

 

Restoration went private a in June of 2008 taken by pe firm catteron partners.

[rogermunibond]

RH ipo'ed in November 2012 and has done quite from its offer price of $24.

 

Luxury home furnishings apparently doing very well.

 

http://www.bloomberg.com/quote/RH:US

[muscleman]

I'm on vacation at the beach and what do I do?  I think about Sears.  I find it very interesting.  It's like a puzzle with pieces in various different places and if only one can put them together they will see the entire picture.  I am not sure that is possible, but it seems worth a try.

 

I am generally an asset based investor.  I like buying things below BV and preferably below TBV.  I thought it would be worthwhile to come up with a back of the envelope asset based valuation.

 

As of the last 10-Q, TBV is -329 mil, so -$3.10/share.  Let's start from there.

 

KCD:  If correct, it appears to be doing about $600 mil/yr in FCF.  Let's put a conservative multiple of 8 on it.  So that's $4.8 bil or $45.28/sh.

 

Lands End:  Looks like it's worth somewhere in the neighborhood of $1-2 bil.  Let's just say $1 bil.  That's $9.43/sh.

 

DTAs with a valuation allowance against them: $2.7 bil or $25.47/sh.

 

That's $80.18-3.10 = $77.08/sh.  That's without giving effect to any value in the real estate.  Estimates provided on the board are that it's worth somewhere between say $80-160/sh.

 

On the negative side, we have retail operations that keep knocking a few hundred mil here and there plus pension obligations that do the same.  An increase in interest rates will take care of the pension obligations.  In terms of the retail, monetizing the real estate will correspond with decreasing the footprint and perhaps leaving it with only profitable stores.  But it's a concern.  It's not for lack of trying as they try various things from the data centers to real estate development, etc. 

 

So pursuant to this quick and dirty valuation, I come up with a BV of somewhere between $157.08-237.08.  There is no pride in authorship here.  I would be interested in others tinkering with the numbers and perhaps we can come up with something better.

 

Edit:  Obviously there is a lot of estimating here and the retail provides a lot of negatives.  Perhaps there is still a very large MOS here and I am beginning to see the value that Lampert and Berkowitz see.  I can't exactly put an "exact" valuation on it, but perhaps this man is overweight.

 

If KCD IP is a direct sub held by SHLD parent, I would be happier in the valuation number here based on the earning power.

Unfortunately, it is held by the retail subs, which means the earning power here is mostly from self dealing. With a strike of a pen, I can make KCD IP's earning power twice as much as today, and make the retail subs lose more money correspondingly. Does  that make you feel like KCD IP is worth more in a sudden?

 

[Redskin212]

Thanks for the history on Restoration Hardware and Sears.

[Kraven]

Numbers out.  Based on a quick glance they are brutal as usual.  Retail continues to just suck the blood out of what seems to be great assets.  That's the problem here.  How to reconcile a group of great assets with the albatross that is a sucky retail operation.  Mano a mano, who wins that fight?  That's the eternal question.  Do assets get monetized and value unlocked or do they exist simply to support a retail operation that saw better days a long time ago?

[krazeenyc]

is there a quarterly conference call? and does anyone have a link doesn't seem to be on SearsHoldings website.

[ERICOPOLY]

Declines in appliance sales at Sears.  Must be the rebound in housing that is driving this?  Just kidding...  I jest...

 

[alertmeipp]

it's not that bad, just not any better. Wonder how many of those 65% members are new shoppers vs. existing. i.e. Does shopyourway attracting new customer base or simply retaining existing ones?

 

One piece of good news us cost will be down 200millions, they just need to improve another 2% margin to be profitable.

[CorpRaider]

Declines in appliance sales at Sears.  Must be the rebound in housing that is driving this?  Just kidding...  I jest...

 

That's discouraging. Lowes knocked the cover off the ball with appliances.

[ERICOPOLY]

Wonder how many of those 65% members are new shoppers vs. existing. i.e. Does shopyourway attracting new customer base or simply retaining existing ones?

 

I feel like they would be seeing sales growth if they were new customers.

[Luke 532]

http://searsholdings.mediaroom.com/index.php?s=16310&item=137219

“We made meaningful progress this quarter in our transformation to a member-centric company. Shop Your Way members represented over 65% of our sales and they redeemed rewards points at a significantly higher rate than last year. While the increase in Shop Your Way promotional activity and member redemptions resulted in a meaningful increase in our costs, it demonstrates that our members are deepening their engagement with our program which will allow us to further accelerate our transformation,” commented Eddie Lampert, Sears Holdings’ Chairman and Chief Executive Officer. “At the same time, we recognize how important it is to improve the profitability of our company and I am disappointed that we did not deliver a better result.”

 

"65% of our sales" is up from 60% last quarter.  And it allows them to "further accelerate our transformation."  Sounds like Lampert is gaining confidence in ShopYourWay.  Further accelerate?  Maybe more store closings, quicker liquidation of non-SHLD holdings in ESL, etc.

 

[nkp007]

The tone of the letter kind of makes me feel like he is just grasping at straws and hoping something works. I don't think Shop Your Way creates any sort of enduring competitive advantage. It sounds like a fancy give-away.