SHLDQ - Sears Holdings Corp

[Luke 532]

At the end of the day, given what seems to be extreme asset coverage here with tremendous assets all around, even if there was a bankruptcy it might still mean that Holdings shareholders do extremely well.  Given some of the possible share valuations being thrown around that is probably the margin of safety seen by Lampert and Berkowitz.  Note that the balance sheet of Holdings is consolidated.  It includes all assets and liabilities of these various subs.

 

It would be really good to know if that bolded statement is indeed 100% correct.  Wish we had some corporate and/or bankruptcy lawyers in here (maybe we do?). 

[Kraven]

At the end of the day, given what seems to be extreme asset coverage here with tremendous assets all around, even if there was a bankruptcy it might still mean that Holdings shareholders do extremely well.  Given some of the possible share valuations being thrown around that is probably the margin of safety seen by Lampert and Berkowitz.  Note that the balance sheet of Holdings is consolidated.  It includes all assets and liabilities of these various subs.

 

It would be really good to know if that bolded statement is indeed 100% correct.  Wish we had some corporate and/or bankruptcy lawyers in here (maybe we do?).

 

I once was.  It's common sense though.  The liabilities on the balance sheet are consolidated.  So if the asset value has been figured out correctly then assume everything goes poof, the liabilities (including any leases, as applicable) would be satisfied and last man standing would be Holdings shareholders (almost certainly last in line in any bankruptcy situation) to divvy up all these assets.  As to whether it's 100% correct or what exactly would happen, no one can give that answer or those assurances.  Bankruptcy/restructuring is very complicated and not subject to one line answers.  I feel good though that no matter what happens there is plenty of asset coverage here, more than enough to make this a wonderful investment.  However, this is a going concern and almost certainly will remain one.  The danger is depletion of assets over time as retail sucks it up.  Given billions in excess coverage though I don't see how retail can truly do that.  At some point I have to believe Lampert calls it a day on the strategy, but who knows.  Note Berkowitz's statement that he and Eddie will own one share each and divvy it up.  I don't think there is a LIKELY scenario where all of this excess gets depleted to a level where there could be a permanent loss of capital. 

[krazeenyc]

Which company is underinvesting in stores like crazy and making a huge bet on online retail? Who does not have their head in the sand and is looking to where the puck will be in 5 yrs time? The difference between Eddie and most investors is that he is long term. All you need to do is look at his past behaviour and investments like autozone.

 

I read his annual reports and saw the bit about the huge investment in online retail.

 

However I'm used to shopping at Amazon.  I encourage you to search Amazon for "LED bulbs".  Then search ShopYourWay.com for "LED bulbs" -- you'll have to filter it "for the home".

 

It's jaw dropping.  They suck so bad at online retail it's impossible for me to describe in words -- you just have to witness it for yourself.  And that's after making a "huge bet" on online retail?  What a mess.

 

Oh cmon what do you expect Eddie to say about these things? Amazon is a great retailer, sears a terrible one (at this point). Amazon trades at an insane multiple because it's amazing -- the bull thesis is look at the market cap compared to walmart, it will eventually catch up.  Have you poked around Walmart.com, Bestbuy.com, Target.com, etc. they're all quite terrible. I'm sure each of those retailers have spent many many multiples of what Sears has spent on SYW.  It's a large investment relative to what Sears is spending on their stores.  Also what do you expect him to say about lack of investment and closing of stores, I want to lay off hundreds of thousands of people?

 

Sears' most amazing asset is also its biggest structural flaw. They simply cannot be profitable with such a huge footprint. Sears probably had like 300 million + sq ft of retail space back in 2005. What did people expect ESL to do. Dump it all on the market at once? Even now, I think the footprint is so huge that is a huge challenge to manage shrinking it: Sub-lease some of it (Whole foods, Forever 21, Gyms, etc), sell some of it (GGP CBL), re-purpose some of it (data centers/cell towers), redevelop some of it. These transformations are going to take time.  I think they've made a pretty clear, they want sears/kmart to work in a smaller format and a much smaller footprint.

 

The real question is how quickly and successfully they can bring about this transformation. It appears as though the CBL stores were sold for about $85 million + or so and were carried on the books for $40 million.

Those 2 stores were in 2 of CBL's better malls ($584 and $459 per sq ft of sales) and had 150,000 and 116,000 sq ft.  Both were owned and 1 required ground lease payments.

 

What is disappointing to me is how little progress they've made in signing large sublease deals. I don't view Sears holdings as a retailer. I just hope Sears and Kmart can stem the bleeding as fast as possible. I think for that to happen they need to shrink the footprint at a much faster pace.

[tooskinneejs]

wisdom said: " If you look at most retailers and include HD, etc, they haven't done much better than SHLD over the last 5 yrs."

 

Cumulative net income(loss) for the five years ending February 2nd/3rd, 2013:

 

Home Depot    $16,688,000,000

Sears Holdings  $(3,408,000,000)

 

Cumulative operating cash flows for the five years ending February 2nd/3rd, 2013:

 

Home Depot    $28,864,000,000

Sears Holdings  $2,044,000,000

 

 

wisdom said: "Pros that I see: 1) cheap - allows for errors and negates the timeline factor to an extent"

 

I hear this over and over again and yet I still haven't seen anyone articulate the reason it's cheap (other than vague references to "hidden value" or something of the sort).  So the question is: how do you value a company whose revenues are shrinking year after year after year, with negative same store sales for each of the last five years, with cumulative net losses over the last five years, and declining cash flows?  Is it appropriate to estimate a value in excess of book value (as it currently trades) when that same company has a negative return on equity and also has $11,200,000,000 in contractual obligations (both on and off balance sheet)?

 

The amount of attention paid to this company on this message board is quite surprising to me.  I've always assumed that most posters here are (at least loosely) adherants to Buffett's two-step philosophy of (1) finding wonderful companies at (2) fair prices.  In my opinion, Sears doesn't come anywhere close to qualifying as a "wonderful company", as evidenced by both quantitative and qualitative factors.  It also doesn't seem to me to be trading at anywhere near a "cheap" price, based on the direction the company has been and will continue to head.

 

Seeing how much time has been spent paying attention to this company has made me wonder (multiple times) how much fatter everyone's wallets could have been if they had spent the same amount of time and attention over the last few years focused on those wonderful businesses that Warren talks about.

[Luke 532]

Eddie has over $1B in his coffers that he freed up last quarter with the full liquidation of Capital One, Genworth, IStar, and Orchard, and the partial liquidations of AutoNation (liquidated 36% of his stake), GAP (26%), and SHOS (36%).

 

Excluding SHLD, Lampert sold 44% of all shares that ESL owned in other companies... in one quarter.

Shares Q1: 64,747,254

Shares Q2: 36,418,437

Change: 44% drop

 

The $1B does not include any redemptions that he might need to meet (I'm not well-versed on ESL's lock-up period and when investors can get out; I believe it's 5 years but I don't know if it's rolling or not).

 

Note: the attached spreadsheet doesn't include bonds and cash, it only includes equity positions.

Question for the board, would Lampert be restricted in any way of making a tender offer?

SHLD_ESL_holdings.xlsx

[wisdom]

tooskineejs - I am talking about revenue for retailers. Margins are a known issue.

 

HD

http://ycharts.com/companies/HD/revenue_growth

 

If you look at HD revenues from 2008 they haven't moved up much until the last few quarters.

[wisdom]

Here is revenue growth for Lowes over the last 5 yrs.

 

http://ycharts.com/companies/LOW/revenue_growth

 

You can check out most retailers. They have been adding to stores but revenues haven't moved up that much in my opinion.

[constructive]

You really have to reach to find any metric where Sears isn't vastly worse than the competition over the last 5 years.

[ASTA]

well maybe shareholder happiness counts for something swim where others are not :D

[wisdom]

I am talking about the struggles the industry is facing due to the transition online. When comparing the revenues, you also have to account for the stores SHLD is closing. Look at the total sales and the number of stores closed and it gives you perspective.

 

I do not believe that anyone is saying that SHLD has been the best retailer. Putting things in perspective.

[Guest wellmont]

Here is revenue growth for Lowes over the last 5 yrs.

 

http://ycharts.com/companies/LOW/revenue_growth

 

You can check out most retailers. They have been adding to stores but revenues haven't moved up that much in my opinion.

 

yeah but lets focus on profits. the idea of NOT growing was to be profitable. He made a trade off. He makes Zero ebitda.

[CorpRaider]

wisdom said: " If you look at most retailers and include HD, etc, they haven't done much better than SHLD over the last 5 yrs."

 

Cumulative net income(loss) for the five years ending February 2nd/3rd, 2013:

 

Home Depot    $16,688,000,000

Sears Holdings  $(3,408,000,000)

 

Cumulative operating cash flows for the five years ending February 2nd/3rd, 2013:

 

Home Depot    $28,864,000,000

Sears Holdings  $2,044,000,000

 

 

wisdom said: "Pros that I see: 1) cheap - allows for errors and negates the timeline factor to an extent"

 

I hear this over and over again and yet I still haven't seen anyone articulate the reason it's cheap (other than vague references to "hidden value" or something of the sort).  So the question is: how do you value a company whose revenues are shrinking year after year after year, with negative same store sales for each of the last five years, with cumulative net losses over the last five years, and declining cash flows?  Is it appropriate to estimate a value in excess of book value (as it currently trades) when that same company has a negative return on equity and also has $11,200,000,000 in contractual obligations (both on and off balance sheet)?

 

The amount of attention paid to this company on this message board is quite surprising to me.  I've always assumed that most posters here are (at least loosely) adherants to Buffett's two-step philosophy of (1) finding wonderful companies at (2) fair prices.  In my opinion, Sears doesn't come anywhere close to qualifying as a "wonderful company", as evidenced by both quantitative and qualitative factors.  It also doesn't seem to me to be trading at anywhere near a "cheap" price, based on the direction the company has been and will continue to head.

 

Seeing how much time has been spent paying attention to this company has made me wonder (multiple times) how much fatter everyone's wallets could have been if they had spent the same amount of time and attention over the last few years focused on those wonderful businesses that Warren talks about.

 

I'm still a newbie but it seems more follow the pure Ben Graham, "buy it cheap" philosophy.  Of course that is probably a lot easier to replicate.

[wisdom]

I do not know when or if SHLD will be a profitable retailer.

 

I know Eddie will give it a decent shot and if not I have margin of safety.

 

I am ok with this uncertainty as I don't know how things will play out. I do not believe Eddie knows it either. He will adapt to the situation and at the same time has committed to moving SHLD to membership based integrated retail.

[muscleman]

Which company is underinvesting in stores like crazy and making a huge bet on online retail? Who does not have their head in the sand and is looking to where the puck will be in 5 yrs time? The difference between Eddie and most investors is that he is long term. All you need to do is look at his past behaviour and investments like autozone.

 

I read his annual reports and saw the bit about the huge investment in online retail.

 

However I'm used to shopping at Amazon.  I encourage you to search Amazon for "LED bulbs".  Then search ShopYourWay.com for "LED bulbs" -- you'll have to filter it "for the home".

 

It's jaw dropping.  They suck so bad at online retail it's impossible for me to describe in words -- you just have to witness it for yourself.  And that's after making a "huge bet" on online retail?  What a mess.

 

Oh cmon what do you expect Eddie to say about these things? Amazon is a great retailer, sears a terrible one (at this point). Amazon trades at an insane multiple because it's amazing -- the bull thesis is look at the market cap compared to walmart, it will eventually catch up.  Have you poked around Walmart.com, Bestbuy.com, Target.com, etc. they're all quite terrible. I'm sure each of those retailers have spent many many multiples of what Sears has spent on SYW.  It's a large investment relative to what Sears is spending on their stores.  Also what do you expect him to say about lack of investment and closing of stores, I want to lay off hundreds of thousands of people?

 

Sears' most amazing asset is also its biggest structural flaw. They simply cannot be profitable with such a huge footprint. Sears probably had like 300 million + sq ft of retail space back in 2005. What did people expect ESL to do. Dump it all on the market at once? Even now, I think the footprint is so huge that is a huge challenge to manage shrinking it: Sub-lease some of it (Whole foods, Forever 21, Gyms, etc), sell some of it (GGP CBL), re-purpose some of it (data centers/cell towers), redevelop some of it. These transformations are going to take time.  I think they've made a pretty clear, they want sears/kmart to work in a smaller format and a much smaller footprint.

 

The real question is how quickly and successfully they can bring about this transformation. It appears as though the CBL stores were sold for about $85 million + or so and were carried on the books for $40 million.

Those 2 stores were in 2 of CBL's better malls ($584 and $459 per sq ft of sales) and had 150,000 and 116,000 sq ft.  Both were owned and 1 required ground lease payments.

 

What is disappointing to me is how little progress they've made in signing large sublease deals. I don't view Sears holdings as a retailer. I just hope Sears and Kmart can stem the bleeding as fast as possible. I think for that to happen they need to shrink the footprint at a much faster pace.

 

This is true. What is confusing to me is that in their 10-Q, they did not disclose anything above revenue from subleasing, redevelopment and repurposing. I would like to see the progress there.

[stahleyp]

tooskin, did you read the bishop report?

 

[ERICOPOLY]

Here is revenue growth for Lowes over the last 5 yrs.

 

http://ycharts.com/companies/LOW/revenue_growth

 

You can check out most retailers. They have been adding to stores but revenues haven't moved up that much in my opinion.

 

yeah but lets focus on profits. the idea of NOT growing was to be profitable. He made a trade off. He makes Zero ebitda.

 

That's why I thought of the oil analogy.  If the profit comes from asset sales, then value it on that income stream (rather than a sum of all assets less liabilities).  You effectively have a real estate mine.

[wisdom]

The mine analogy works for the real estate that will be sold as it will never be replaced.

 

But, unlike a miner SHLD has various cashflow streams (services business, etc) and other options. The real estate could be leased to generate recurring revenue for an indefinite period with minimal capex. What could those cashflow streams be worth. The leases could also rise in line with inflation over the long run.

 

A mine would deplete its resources and most likely have to spend $s on buying, exploring and extracting the resource.

[Guest hellsten]

Maybe a more apt analogy is that Sears is like Centralia:

http://en.wikipedia.org/wiki/Centralia,_Pennsylvania

 

Centralia is a borough and a near ghost town in Columbia County, Pennsylvania, United States. Its population has dwindled from over 1,000 residents in 1981 to 10 in 2010,[2] as a result of a mine fire burning beneath the borough since 1962. Centralia is the least-populated municipality in Pennsylvania.

 

Sounds a lot like Sears.

[CorpRaider]

http://www.seritage.com/leasing.aspx

[stahleyp]

Here is revenue growth for Lowes over the last 5 yrs.

 

http://ycharts.com/companies/LOW/revenue_growth

 

You can check out most retailers. They have been adding to stores but revenues haven't moved up that much in my opinion.

 

yeah but lets focus on profits. the idea of NOT growing was to be profitable. He made a trade off. He makes Zero ebitda.

 

That's why I thought of the oil analogy.  If the profit comes from asset sales, then value it on that income stream (rather than a sum of all assets less liabilities).  You effectively have a real estate mine.

 

I like the analogy, Eric.  Quick question though. If the oil company has $120 billion of oil in the ground, it it rational for the market to value it at $5 billion? Maybe it does and, like you smartly pointed it out, the market counts what oil brings to the market.

[Luke 532]

Interesting article explaining a little bit about the relationship between Sears and Simon property.

Could help defining Sears's real estate IV.

 

http://www.ibj.com/sears-closings-shouldnt-be-big-problem-for-simon/PARAMS/article/31649

 

I never paid much attention to Berkowitz's argument of SPG being $50B market cap and SHLD $5B (at the time).  I think it's apples and oranges, but this is interesting...

 

Simon has Sears as a tenant in 137 of its 190 malls, while competitor General Growth Properties Inc. has Sears in 110 of its 167 malls, said Andrew Johns, an analyst at Green Street Advisors Inc. in Newport Beach, Calif.

“Generally, when Sears decides to close, it’s the lower-productivity stores with lower sales per square foot,” Johns said.

 

[Luke 532]

http://www.seritage.com/leasing.aspx

 

Anything new?  Or were you just posting that for people that hadn't seen the site before?

 

"Seritage ramps-up National Road Show with Angie Comstock leading portfolio reviews with national retail chains." 

 

Eddie might be done messing around.

[CorpRaider]

Nothing much new, just highlighting they they're focused on being the landlord where it makes sense. 

[constructive]

Maybe a more apt analogy is that Sears is like Centralia:

http://en.wikipedia.org/wiki/Centralia,_Pennsylvania

 

Centralia is a borough and a near ghost town in Columbia County, Pennsylvania, United States. Its population has dwindled from over 1,000 residents in 1981 to 10 in 2010,[2] as a result of a mine fire burning beneath the borough since 1962. Centralia is the least-populated municipality in Pennsylvania.

 

Sounds a lot like Sears.

 

Not quite: "The news story reported that the town's highest bill at the meeting reported on came from PPL at $92 and the town's budget was "in the black"."

 

 

[JSArbitrage]

I like the analogy, Eric.  Quick question though. If the oil company has $120 billion of oil in the ground, it it rational for the market to value it at $5 billion? Maybe it does and, like you smartly pointed it out, the market counts what oil brings to the market.

 

It absolutely does.  As an example, if you take Apache's proved reserves only (not even counting any P2 or P3) as of 12/31/2012 and multiply those reserves times spot price as of 12/31/2012, you get something like 5.5x enterprise value.  Why is this? Because Apache's reserves might have a weighted average life of like 35 years. 

 

This is why I stressed the time factor so much in my previous posts.  At a 7.0% discount rate, your 10 year PV factor is ~50%.  Meaning that $100/share you get 10 years from now is really $50/share. 

 

I vaguely recall (and maybe someone else can jump in) but Buffett once used the example of buying a REIT at less than book value as being a horrible investment because you couldn't force a liquidation and were you essentially became stuck in an illiquid situation.

 

Like I said before, you can't take your proportion of net assets of a balance sheet at fair value home with you.  You either (a) trust management to get an adequate ROE to compensate you for your equity investment or (b) liquidate the balance sheet in a timely manner to secure an IRR greater than your opportunity cost.  If you can't come up with a reasonable explanation as to how either of these can be achieved, then you're not investing.  You are speculating.