theando

I am still on the road. I will try to get some detailed notes together. The first thing I would note was the security at the meeting was very tight. I would estimate at least 50 guards stationed throughout the meeting. Overall, I think Eddie and the team are trying to transform the stores and business. Liquidation is not the focus. The marketing focus going forward seems to be the Shop Your Way Rewards program. If that gains traction then I think it is possible for sales to stabilize and possibly even turn. They would certainly benefit from a turn in housing as well. I asked about the deterioration at Sears Canada from $400M in ebitda to 0. Eddie did not have an answer as to the cause or potential for rebound. That answer scared me art SCC was a great asset as recently as 12 months ago and the deterioration came without much warning. He did answer a question related to taking the company private at the expense of existing shareholders. He noted that he has operated public companies like AZO etc and always wants their investors to profit along with them. I do not think he would take it private at the expense of existing shareholders unless he was forced into a really tough situation.

One more quick note. I will be attending the Sears meeting this year in Hoffman Estates. If anyone has reasonable questions I would be happy to try and ask them. I don't know what type of response we will get, but it never hurts to ask.

I have tried to like Sears and own a small amount. Eddie is thinking through capital allocation for you. He has not always been right, but I don't think he has made errors in an effort to lose money for himself or his investors. Sears is an interesting conundrum due to its size. Even though the media would make yo think no one goes there they still have $40B in sales. Then comes the confusion for me...Sears still has lots of sales, but sales are down materially and costs have risen on a relative basis. Store closings as leases run out should generate cash. The question becomes is there a core of stores that can be profitable. I think this is an extremely hard question to answer. In my opinion they need a turn in housing sooner rather than later to keep the stores viable. If not we need to see Eddie start cutting to the bone. I think to date he has tried to preserve jobs and the company. They are able to sell assets and close stores to generate cash. Selling one store (effectively) for $270M is an indicator that Sears probably has a lot of asset value (80/20 rule). At the same time selling assets implies that Eddie likely thinks cash flow will be sub par for at least another year. Now we come to the one portion operation that has taken me off of a bullish stance currently, Sears Canada. This was the hidden gem of the company. It was consistently generating $450M+ in EBITDA. There has been a rapid decline in sales and especially in profitability. Canada may have a bit of a housing bubble. My other concern are the statements by Target and WalMart that they are pushing aggressively into Canada. Sears' ownership of Cantrex may be a cushion as this is an independent distributor model. This would seem to give them an advantage in sparsely populate rural areas, but with WalMart you always need to be leery. If Sears Canada doesn't revert to generating significant cash flow, I would become less optimistic on the ability of even Eddie Lampert to do much more than liquidate. I also believe that liquidating a company of this size/reach may be profitable, but also quite painful. This is less financial analysis, but more a framework of how I currently view Sears. My view on the stock price is probably similar to others. The limited float and fluctuating short interest drives the stock price all rapidly up and down and to extremes. My other belief is that this is now a very levered call option on an economic recovery/turnaround and the leverage implied may actually make the large swings in price more understandable.