SHLDQ - Sears Holdings Corp

[Luke 532]

Not sure if it has been mentioned before but ESL owns over half of "Short-Term Borrowings" listed under "Current Liabilities" on the Balance Sheet.

[CorpRaider]

They sure are hitting my market with a TV marketing blitz, or so it seems. 

[merkhet]

 

 

Now, some of the shares trading and/or short may have been rehypothecated by broker-dealers where long-term shareholders place their securities, but it's a strange thing to notice that there are essentially more shares short than float.

 

I guess fishy is a strongly charged word. I merely mean that my spidey-sense is tingling.

 

 

To be conservative we probably shouldn't include all of the institutions/large holders as excluded from the float.  Being conservative the number is closer to 72%-74%, and the shares short does not exceed the float.

 

 

A little more research shows that Horizon Kinetics & Old West Investments have both sold down (the former a little, the latter a lot) into the last quarter, which might be providing some free float. As far as I can tell, all the rest have either held or increased their positions.

 

This is such a strange situation.

[T-bone1]

Here is the rundown (I apologize to any for the fact that this is repetitive, but no one seems to have consolidated this info on the thread and I think it is worth understanding definitively what the float looks like):

 

Lampert/ESL + Tisch and other insiders held steady in the last quarter (59.0% of outstanding shares)

Berkowitz added - as he has every quarter (19.2% of outstanding shares)

Horizon sold less than 1% of their holdings - they are a mutual fund so likely just fund flows (1.9% of outstanding shares)

Fine Capital Partners - $1.1 billion fund that has consistently added for 8 quarters (1.6% of outstanding)

Baker Street - long term investor (through calls) and it's their largest position (1.4% of outstanding)

Old West - has spoken very positively about company in the past but sold 26% of their holdings in the last quarter (0.9%)

Chou - Francis is a long term holder (0.6% of outstanding)

Force Capital Management - long term holder of the stock and added in the quarter (0.6% of outstanding)

Akre Capital Management - $2.2 billion under management, takes concentrated stakes, may add (0.3% of outstanding)

Goodhaven - long term holders (0.3% of outstanding)

 

This adds up to 86.21% of the outstanding shares.  I think it stands to reason that the float is 13.8% or 14.6 million shares.

 

The above group added a net 2.8 million shares in the prior quarter and I would expect they will show a net addition for this quarter (obviously led by Berkowitz, who reopened his fund).  All of them are very publicly long the stock and I would be surprised if any of them would consider selling below $65 - a level where almost all of these holders have made purchases in the last year or two.

 

The stock was more expensive than it is today for all of Q2, trading as high as $60.

 

The short interest is 15.7 million shares and exceeds this "float" . . .

 

There is plenty to argue with in this stock, but I don't think there is much argument that the float is less than 15 million shares and it is almost definitely shrinking in the current quarter - perhaps by as much or more than the 2.8 million this group added in Q2.

 

Sorry to beat a dead horse and thanks for Luke and others for sourcing some details about these holders.

 

-T-bone1

[BTShine]

T-Bone1 -

 

+1

 

That was interesting.  I don't believe in a 'short squeeze' as an investing thesis.  But, it's interesting to see how the company is currently owned.

 

 

[merkhet]

T-bone1, thanks for laying it out on the thread. I think my spreadsheet has it at 14.3 million shares -- curious where you and I differ to have a 300K discrepancy. (https://docs.google.com/spreadsheet/pub?key=0ArX667iB-WCRdFZRMEl4T29EQnRmUTZueE1XY09nSWc&single=true&gid=0&output=html)

 

For those of you that have read the 2Q 2013 10-Q

 

http://www.sec.gov/Archives/edgar/data/1310067/000131006713000035/shldq22013.htm#s0D5F2515EB5571C133C610A534E8E0D7

 

Anyone else notice that starting on page 26 (through 33) you can see a marked increase in the value created by the non-guarantor subs offset by a marked decrease in the value whittled away by the guarantor subs? Pages 32 & 33 are very interesting in this regard.

[Luke 532]

T-bone1, thanks for laying it out on the thread. I think my spreadsheet has it at 14.3 million shares -- curious where you and I differ to have a 300K discrepancy. (https://docs.google.com/spreadsheet/pub?key=0ArX667iB-WCRdFZRMEl4T29EQnRmUTZueE1XY09nSWc&single=true&gid=0&output=html)

 

For those of you that have read the 2Q 2013 10-Q

 

http://www.sec.gov/Archives/edgar/data/1310067/000131006713000035/shldq22013.htm#s0D5F2515EB5571C133C610A534E8E0D7

 

Anyone else notice that starting on page 26 (through 33) you can see a marked increase in the value created by the non-guarantor subs offset by a marked decrease in the value whittled away by the guarantor subs? Pages 32 & 33 are very interesting in this regard.

 

This is a primary reason that Sears was transformed into a holding company (now Sears Holdings).  The structure is designed to control subsidiaries and use operating losses in one subsidiary to offset profits in another for tax purposes.  Wall Street views SHLD as Sears (retail) only, but there is clearly more than that under the hood.

 

The tax-loss carry forward assets they have will be pretty nice once they sell more assets at a profit.

[TwoCitiesCapital]

Hi guys,

 

I'm new to following the Sears story but the case for its real estate is compelling. My understanding is that EL is slowly shrinking the company and focusing online to monetize real estate assets and move to a more profitable retail strategy.

 

My question is as follows: if he's been liquidating properties since 2011, and each property sold results in increased cash and decreased liabilities, then their should have been value accruing to shareholders for the past two years either through increased equity in the co or through dividends. I'm seeing that equity has fallen by 6.3B between Feb 2010 and Feb 2013, mostly from increasing liabilities and continuous operating losses eroding retained earnings. I'm not seeing any build up in cash, massive dividends, or any reason to believe this activity has resulted in profit or value creation for the last two years. Is this just because EL has been reinvesting the proceeds? At what point does he cut losses and liquidate the co?

 

Arguably,  the asset value is there. What argument is there for shareholders ever seeing it if the last two years didn't "pay any dividends?"

[tooskinneejs]

Luke said: "The [holding company] structure is designed to control subsidiaries and use operating losses in one subsidiary to offset profits in another for tax purposes."

 

You don't need a holding company structure to do either of these things.  Subsidiaries are always controlled by their parent company, whether the parent is an operating company or a holding company.  And federal tax losses (not "operating losses") from one subsidiary can be offset against taxable income from another subsidiary under a consolidated federal tax return, whether the parent is a holding company or not.

[T-bone1]

T-bone1, thanks for laying it out on the thread. I think my spreadsheet has it at 14.3 million shares -- curious where you and I differ to have a 300K discrepancy. (https://docs.google.com/spreadsheet/pub?key=0ArX667iB-WCRdFZRMEl4T29EQnRmUTZueE1XY09nSWc&single=true&gid=0&output=html)

 

For those of you that have read the 2Q 2013 10-Q

 

http://www.sec.gov/Archives/edgar/data/1310067/000131006713000035/shldq22013.htm#s0D5F2515EB5571C133C610A534E8E0D7

 

Anyone else notice that starting on page 26 (through 33) you can see a marked increase in the value created by the non-guarantor subs offset by a marked decrease in the value whittled away by the guarantor subs? Pages 32 & 33 are very interesting in this regard.

 

Merkhet,

 

Thanks for the spreadsheet, I must have missed this.  I only count 1,988,155 shares for Horizon because I assume the Kinetics portfolio's that own SHLD are sub-advised by Horizon and I think you may be double counting here.  If you have reason to think that these two 13Fs are distinct, that would be even better.  I also include 477,905 shares for other current insiders (Crowley has 164k, Boire has 65k, Schriesheim has 59k, Mnuchin has 58k etc.)

 

Best,

 

T-Bone1

[merkhet]

 

Merkhet,

 

Thanks for the spreadsheet, I must have missed this.  I only count 1,988,155 shares for Horizon because I assume the Kinetics portfolio's that own SHLD are sub-advised by Horizon and I think you may be double counting here.  If you have reason to think that these two 13Fs are distinct, that would be even better.  I also include 477,905 shares for other current insiders (Crowley has 164k, Boire has 65k, Schriesheim has 59k, Mnuchin has 58k etc.)

 

Best,

 

T-Bone1

 

 

My number is from EDGAR.

 

http://www.sec.gov/Archives/edgar/data/1519418/000151941813000015/xslForm13F_X01/form13fhr-infoTable.xml

[Luke 532]

MSM's inability to calculate short interest as a percentage of float may result in a rude awakening for some.

 

"The number of shares sold short in this once-venerable retailer grew more than 11 percent to around 15.79 million, the highest level of short interest in at least a year, and more than 20 percent of the float. The days to cover was almost 17. Note that short interest has been rising since mid-May."

http://www.benzinga.com/trading-ideas/short-ideas/13/08/3875114/short-interest-in-j-c-penney-and-sears-still-on-the-rise-gme

 

Well, I guess technically they are right.  The numbers we discussed are "more than 20%"  ;)

 

 

[T-bone1]

Merkhet,

 

As far as I can tell you are correct, thanks for pointing this out.  This takes the list of insiders and long-term holders (who have spoken positively about SHLD and have been actively adding) to 92.6 million shares by my calculation. 

 

This leaves an effective float of 13.46 million shares (6.23 million of which are basically permanently owned by Index funds).

 

T-bone1

[FCharlie]

 

 

This leaves an effective float of 13.46 million shares (6.23 million of which are basically permanently owned by Index funds).

 

T-bone1

 

Which index funds??

 

S&P 500 index funds dumped SHLD a while back. I'm thinking the shares probably exist in retail ETF's like Retail Holders RTH but not sure how you arrive at 6.23 million shares.

 

 

[muscleman]

 

 

This leaves an effective float of 13.46 million shares (6.23 million of which are basically permanently owned by Index funds).

 

T-bone1

 

Which index funds??

 

S&P 500 index funds dumped SHLD a while back. I'm thinking the shares probably exist in retail ETF's like Retail Holders RTH but not sure how you arrive at 6.23 million shares.

 

Lots of ETFs contain SHLD.

http://www.etfchannel.com/finder/?a=etfsholding&symbol=SHLD

[T-bone1]

Hi Muscleman,

 

In Index/ETF strategies, the largest holders are:

 

State Street: 2,457k shares

Vanguard: 2,080 shares

Blackrock (ETF/Index portion only): 615k shares

Northern Trust: 249k shares

Legal & General Group PLC: 222k shares

JP Morgan: 200k shares

 

There are 17 smaller index-type holders, not including some large self-indexers like CALPERS and CALSTRS (285k shares between them).

 

-T-bone1

[Liberty]

http://www.shos.com/Files/SHOS_2nd_Quarter_Earnings.pdf

 

SEARS HOMETOWN AND OUTLET STORES, INC. REPORTS SECOND QUARTER 2013 RESULTS AND

ANNOUNCES STOCK REPURCHASE PROGRAM

 

Results for the second quarter included:

• Operating income decreased 54% to $15.4 million compared to $33.7 million in the prior year

• Net income attributable to stockholders decreased 57% to $9.1 million ($0.40 income per diluted share) compared to

$21.1 million ($0.91 income per diluted share) in the prior year

• Adjusted EBITDA decreased 52% to $17.5 million compared to $36.7 million in the prior year

• Comparable store sales increased 1.4% versus the prior year

 

Year-to-date results through the second quarter included:

• Operating income decreased 41% to $40.1 million compared to $68.2 million in the prior year

• Net income attributable to stockholders decreased 42% to $24.1 million ($1.04 income per diluted share) compared to

$41.7 million ($1.80 income per diluted share) in the prior year

• Adjusted EBITDA decreased 39% to $44.5 million compared to $73.5 million in the prior year

• Comparable store sales decreased 1.8% versus the prior year

 

"The Company announced that its Board of Directors authorized a $25 million repurchase program for the Company's outstanding common stock"

 

Down over 12%.

[txlaw]

Initial thoughts on SHOS quarter for SHLD holders, based on the relevant parts of the press release:

 

Bruce Johnson, Chief Executive Officer and President, said, "Second quarter net sales growth of 1.9% reflected comparable store growth of 1.4%, plus the benefit of new store openings. We saw increased sales in most categories, including double-digit growth in lawn and garden and growth in comparable store sales in home appliances. Margins declined, primarily due to an unfavorable product mix in Outlet, our response to an increasingly competitive appliance retail landscape, and lower initial franchise revenues. We are adjusting pricing/promotional plans, enhancing Outlet sourcing capabilities, and focusing on higher margin categories and product lines to improve profitability. Profitability was also affected by $6.4 million of expenses incurred as a result of operating as an independent public company, which expenses were not incurred in the prior year."

 

Growth in appliance comps is good for SHLD.  Double digit growth in lawn and garden is good, but this is misleading because lawn and garden was down last quarter due to weather.

 

The comparable store sales increase of 1.4% was comprised of a 0.4% decrease in Hometown and a 8.2% increase in Outlet. The 1.4% increase was primarily driven by increased sales in lawn and garden and home appliances partially offset by consumer-electronics comparable sales that were down over 50% (following a planned exit of the business in the majority of Hometown stores), and lower apparel sales in Outlet.

 

Again, pretty good news for SHLD holders.

 

These decreases were partially offset by lower occupancy costs resulting from the conversion of Company-owned stores to franchisee-owned stores, a favorable impact on the overall gross margin rate resulting from increased protection agreement revenues, and the pass-through by Sears Holdings of higher cash discounts on Sears Holdings' purchases of merchandise sold to us.

 

Reference to protection agreement revenues increasing is interesting because of SHLD's statements that they might sell their protection agreement business.

 

Higher cash discounts on SHLD merchandise, generally, is bad for SHLD.  Essentially, they continue to have to heavily discount their inventory to get rid of it through the SHOS channels.  It would have been nice to get a breakdown on whether discounts were primarily focused on soft line goods.

 

Merchandise inventories increased primarily due to (1) planned higher inventory in home appliances, (2) an increase in the number of stores, (3) assortment expansion in tools and mattresses, (4) higher air conditioner and dehumidifier inventory resulting from softer sales in the second quarter of 2013, (5) seasonal purchases of mowers and patio furniture along with late-season tractor receipts in lawn and garden and (6) an increase in the cost of KENMORE® and CRAFTSMAN® merchandise purchased from Sears Holdings resulting from a post-Separation change in the treatment of warranty costs.

 

Appliance inventory build is good for SHLD if that is in anticipation of better sales. 

 

So not such a bad quarter for the purposes of SHLD holders.  Not great either, though, especially given the fierce competition from the likes of HD and LOW.

 

And it's unclear whether positive appliance and lawn and garden comps are sustainable given the problems at SHLD.  The longer the Sears brand languishes as a terrible full-line retailer, the worse that Hometown stores will do in the most important categories -- appliances and lawn and garden.

[muscleman]

Hi Muscleman,

 

In Index/ETF strategies, the largest holders are:

 

State Street: 2,457k shares

Vanguard: 2,080 shares

Blackrock (ETF/Index portion only): 615k shares

Northern Trust: 249k shares

Legal & General Group PLC: 222k shares

JP Morgan: 200k shares

 

There are 17 smaller index-type holders, not including some large self-indexers like CALPERS and CALSTRS (285k shares between them).

 

-T-bone1

 

Nickles and dimes do add up. These ETFs hold permanently in total of at least 5 Million shares.

[muscleman]

At the risk of being one of the people that's viewed as harping on the same thing over and over again, I've put together some more numbers in my spreadsheet -- and there seems to be something fishy going on here.

 

(https://docs.google.com/spreadsheet/pub?key=0ArX667iB-WCRdFZRMEl4T29EQnRmUTZueE1XY09nSWc&single=true&gid=0&output=html)

 

---

 

I added Fine Capital Partners, Akre Capital Management & GoodHaven Capital Management.

 

Fine Capital Partners -- looks like Debra Fine managed money for Laurence Tisch and began accumulating shares in Sears starting in 3Q 2011 and has added to it every quarter since then -- http://whalewisdom.com/filer/fine-capital-partners-l-p#

 

Chuck Akre sounds like a long-term holder as well -- http://www.akrefunds.com/media/pdfs/042612_AKREX_Transcript.pdf

 

I think people are pretty familiar with GoodHaven here.

 

---

 

Anyway, this struck me as incredibly interesting, so I thought I would share it with you fine people...

 

Add the ETFs which do not sell SHLD. They adds up to at least 5 Million. You get 97 Million long term holders.

[CorpRaider]

Thanks for the comments Txlaw, much appreciated.

[Luke 532]

Thanks for the comments Txlaw, much appreciated.

 

+1  great work, txlaw.

[AZ_Value]

Hi all,

 

I apologize in advance for the lengthy post.

I've been off the grid for quite a while as I had taken a hiatus from active investing to get an MBA and then travel the World for a bit. It's quite amazing how the SHLD thread has exploded recently; it's taken me the better part of 2 days to fully catch up with everything that's been discussed.

 

What is even more amazing is the fact that not much has changed from what we were discussing a couple of years ago. This whole thing is still hanging on the fact that some believe EL is onto something great (even though he still won’t spell it out for his investors to know what he’s up to and decide whether or not they want in) and this belief has to be held despite the company itself being anchored by money losing stores that have done nothing but deteriorate further and show no sign of recovery at all.

 

The real estate story for has been the same story for quite some time now and if history is any indication it looks like it will take Eddie a loooong time to see it through while shareholders sit and wait for it to hopefully materialize, in the meantime they’re stuck with a very crappy retail operation to manage.

 

And just like so many times when people invest in something they force themselves to make sense out of the investment by adding other reasons, this time is a short squeeze. The short interest vs the float is very high indeed and this could be a plausible scenario but so far SHLD has been a money losing operation for many many quarters. This might very well work out as you guys predict (and I wish for you all that it does) but wouldn’t it be even better if the shorts were betting against a money making business?

 

On top of that seems to have been added fantasy stuff like Lampert and Berkowitz share the same zip code, it is obvious they are going to form the next WEB -  Munger combo, therefore we have the next BRK. Oh boy… How about diversifying away from a money losing retail operation into other sources of cash as a clue that the WEB template is the case here.

 

It seems to me many people have substituted hope and wishful thinking for actual analysis to come up with their thesis on this. So what Eddie has decided to invest in online retailing etc? What exactly is there to tell us that a very successful hedge fund manager will suddenly have what it takes to go against Jeff Bezos and Amazon from scratch? IMO This is very similar to BBRY longs spending their time over the last couple of years wishing that BB10 / QNX would magically come to dethrone Apple and Samsung etc…

 

All being said I would echo the sentiment of many that very little substance has been added in the last X number of pages and as the thread moves on less and less useful analysis is provided, instead we have some wishful general statements that have no basis in facts.

 

[AZ_Value]

Perfect example of the wishful general statements that I mentioned above is this that tooskinneejs recently pointed out:

 

Luke said: "The [holding company] structure is designed to control subsidiaries and use operating losses in one subsidiary to offset profits in another for tax purposes."

 

You don't need a holding company structure to do either of these things.  Subsidiaries are always controlled by their parent company, whether the parent is an operating company or a holding company.  And federal tax losses (not "operating losses") from one subsidiary can be offset against taxable income from another subsidiary under a consolidated federal tax return, whether the parent is a holding company or not.

 

I know some like to pretend that Lampert reinvented the wheel with the SHLD structure but come on… Before and after the current structure the parent company and all its subsidiaries filed a consolidated tax return and offsetting of one sub’s taxable income vs another’s loss was already the case. And it’s the case for every other corporation you look at that has subsidiaries and is nothing magical, it’s just the way consolidation works.

 

 

Another example of what I mean is this:

 

The tax-loss carry forward assets they have will be pretty nice once they sell more assets at a profit.

 

I spent the day looking at SHLD’s latest filings to bring myself up to date so by no means have I been following as closely as some here but even a brief overview of their filings will show you that:

 

In 2011, we recorded a non-cash charge to establish a valuation allowance against substantially all of our domestic deferred tax assets.

 

I know some of us users of financial statements like to tell ourselves that we know much more than accountants and their stupid rules but at the end of the day a Deferred Tax Asset is only as good as the taxable income that the business will generate to take advantage of it. That is not some phony accounting thing; that is the law.

And the concept of a valuation allowance is a very real thing meant to tell investors that the company’s auditors don’t think the company will be able to generate enough taxable income to take advantage of all its previous tax losses, so those assets are not as valuable as we want to believe.

 

Also, I am not sure about this as I can’t yet find it in the disclosures, but won’t the majority of the gains generated from asset sales be capital gains? If that is the case, DTAs from the net operating losses that the company has been accumulating over the years can’t be used to offset capital gains and the company needs to generate operating income to do that. Now who’s to say that Sears will be able to achieve that from what we can see?

 

I wish all the longs the best of luck and this might very well be the home run you describe but 90% of what is discussed here doesn’t really hold water.

 

[tombgrt]

Enough already with the talk about the short squeeze. ;) The chance of a major short squeeze is quite rare.On the other hand, I'm sure we're now having squeezes on a daily basis. They are just too small to really notice.

 

That said, I doubled my options position after earnings. Pure speculation.

 

 

edit: I started reading & posting when SHLD was at around $42.50, I swear I didn't do anything.  ;D