txlaw

I'm not so sure that the value of the real estate and brands deteriorate over time. With respect to brands, the value of a Craftsman or Die Hard, for example, actually increases the more widely these brands are distributed and in the mind of the public. Selling only in SHLD stores has actually kept the brands down in terms of optimal value. Lampert is taking action to more widely distribute these brands. With respect to real estate, the realizable value could very well increase with time. We are still in a real estate downturn. Owned properties can probably be sold for much more later rather than sooner. Attractive leases decrease in value over time, but again, the realizable prices may actually increase in a couple of years because of the real estate downturn and because of the shakeout that is going on in the retail sector.

I believe Lampert also issued similar bonds in 2010 to the pension plan. I liked these transactions because it gave Sears pensioners senior rights to the assets that SHLD controls in case of BK. Fair is fair.

It is nice. But the last couple of years have been good for training myself not to get too excited at temporary paper gains or too depressed at temporary paper losses. Now, I only really get excited when I have an opportunity to deploy at crazy cheap price levels. Even selling at fair value after a huge gain doesn't do it for me because I always wonder whether I will be missing out on upside due to Mr. Market's irrational exuberance.

This is interesting. If 2011 had five extra days added to it, I do believe I'd be flat or even up for the year (as of today). Just goes to show how little meaning these annual figures have in isolation. Better to look at a track record over time.

Down about 19%. Main drag on my portfolio was BAC exposure.

All the stores closed are unprofitable or "marginally performing stores." The stated goal is to "accentuate our focus and resources to our better performing stores with the goal of converting their customer experience into a world-class integrated retail experience." Kmart in total is performing, but I don't see the point of keeping this subpar business when you could potentially put all your efforts into transforming Sears and growing the other SHLD businesses, which have some real things going for them. This is a very common business strategy. Sell a performing but "non-core business" for a pretty good price to someone who will optimize that business and capture the upside. Redeploy the new capital you have into fixing your current business and growing new business lines. There are so many of these transformations going on right now in the US. Anyways, I'm signing off for a while. Happy New Years, folks.

I agree with everything you just said. That's my main complaint about Lampert. Of course, maybe nothing that has been suggested is actually in his plans. That would be worrisome.

how? it really just confirms my analysis. what you got up your sleeve ESL? That was in response to sreenr.

Check out the recent Fitch downgrade announcement. That should answer your question.

Sure, many Kmart locations do earn money. But what exactly is the point of Kmart? Is that retail space and traffic really being optimally utilized? Could that square footage support more sales in the hands of better retailers who compete in the same space? I think so. Basically, I'm suggesting that most Kmart locations ought to be bought up by better businesses that compete with Kmart, providing the customers who go to those locations a better shopping experience, giving the better retailers even more scale, purchasing power, and ubiquity and allowing those retailers to capture the upside in better utilizing that square footage, and releasing capital to be deployed into Sears and other SHLD businesses and to bolster SHLD's credit ratings. (This is assuming there won't be cannibalization of sales for the purchasing retailers' nearby competing locations, if there are such nearby locations.) Win-win-win. the market sees a company in utter distress. the market is now pricing the shld bonds at sub .50c on the dollar. if ESL does not do something about this, he won't have time to execute this grand elaborate plan you think he has up his sleeve. He has put this company in a distress situation. His stockholders don't like him and his bond holders don't like him. Not a great position to be in if he has this plan that seems only a few people know about, you apparently being one of them. Yeah, yeah -- we all know you want Lampert to buy up the bonds you hold. Really not a bad idea, actually. I'm telling you what I would do if I were in Lampert's position. We'll see what he actually does when he does it.

Sure, many Kmart locations do earn money. But what exactly is the point of Kmart? Is that retail space and traffic really being optimally utilized? Could that square footage support more sales in the hands of better retailers who compete in the same space? I think so. Basically, I'm suggesting that most Kmart locations ought to be bought up by better businesses that compete with Kmart, providing the customers who go to those locations a better shopping experience, giving the better retailers even more scale, purchasing power, and ubiquity and allowing those retailers to capture the upside in better utilizing that square footage, and releasing capital to be deployed into Sears and other SHLD businesses and to bolster SHLD's credit ratings. (This is assuming there won't be cannibalization of sales for the purchasing retailers' nearby competing locations, if there are such nearby locations.) Win-win-win.

Well, we have to separate out Kmart and Sears. All Kmart locations could very well disappear (sold/leased to other retailers or converted to Sears) with all freed up capital deployed into the other businesses under SHLD. Demotivation of employees is not a prime concern for me here because I don't think the Kmart distribution channel is incredibly important for the key SHLD brands. Sears is different. I think that Sears has to continue to exist to maximize the value of the brands and to take advantage of 30% appliance market share plus a housing recovery. Some of the big format stores that are profitable will probably be kept. Some of the big format stores will be closed in their entirety, and capital generated will be reinvested into other Sears stores (particularly new format) and into the other ventures (Sears online, other SHLD brands, PartsDirect, etc.). Some of the big format stores will be rejiggered so that part of the real estate is occupied by other stores, hopefully with the remaining Sears space focused on appliances and tools. And some of the big format stores could be converted into totally new concepts or facilities that Lampert has up his sleeve. There is a line to walk for SHLD in order to maximize the value of its assets.

To me, this is the best critique of an investment in SHLD -- that Lampert won't be able to salvage the real estate and brands through runoff of money losing stores. The following is why I disagree. First, note that runoff is different than liquidation. Liquidation implies putting all the real estate on the market at once, firing a bunch of employees at once, and foregoing future sales and profit for immediate cash. That's not what I think has been happening or will happen at SHLD. Runoff of a business, by definition, occurs over time. Regarding point 1: If you will recall, some people have been criticizing Lampert for not shutting things down soon enough. I think Lampert has the ability to shut down stores that actually burn cash or that are "marginally profitable." Now, some people might blame him for not having invested in these stores to keep them alive. But note that this is a zombie store argument, if you think that many of these stores were doomed anyway. The key is to see whether stores that are shut down provide cash generation in the form of real estate sales and subleases. For example, let's say that a money losing Kmart in a particular city is shut down. If that was under a long term lease at attractive rates, the hope is that they sell the lease to another party at attractive rates or sublease the retail space. Regarding point 2: Massive market share loss in the brands assumes that Lampert shuts down all stores at once, does not open any new Sears locations that more effectively distribute the good brands, and does not distribute the brands more widely. All of these assumptions are incorrect, IMO. First, SHLD is not shutting down all stores at once. Second, Sears has opened up new store formats in the hopes of transferring appliance/tool market share from dying stores to these new stores. Third, Lampert has begun distributing brands through different channels. Kenmore in Costco? It could happen fairly soon. Regarding point 3: This is a good point. The loss of jobs and the effect on the remaining business is probably the hardest part about shutting down these stores. We will have to see how Lampert handles this. For locations that could be replaced by better retailers (I'm thinking Kmart), Lampert could try to transition his employees to these new stores. After all, these stores will need a workforce to run them. The last time I went to a Sears or Kmart, it actually felt that there were very few employees relative to the space. Whether the remaining Sears employees will be demotivated is unclear. It depends on how Lampert decides to treat these folks and whether the remaining folks see a future for Sears in a new form. But this is a wildcard that must be taken into account with regards to preserving brand value, particularly for appliances and tools.

Baoxiaodao, Some comments below. And thanks for your input, btw. Always good to get viewpoints from other smart investors. I think you are correct. He probably could be doing much better for his investors had he sold at the top and deployed into new opportunities. However, I believe part of ESL's selling point is the strategy of taking huge stakes in public companies and being a super long term owner. At least, that's how he portrayed his strategy in the video where he was on a panel with Larry Summers. He has locked himself into being a SHLD holder for the long run just by virtue of running his hedge fund. I also think Lampert may have an urge to be like WEB, who is clearly a hero to him, and do more than just manage investments. I'm sure Lampert is enamored with the idea of being in charge of a non investment-management business, particularly one with a storied past like Sears. In that respect, he is very much like WEB, who is a scholar of business. There could also be a "tax laundering" strategy involved with SHLD, the kind that is only available to the super wealthy. (See some of the discussions that I have had with Ericopoly in the past about corporate taxation.) I think you are right to criticize Lampert for buying back stock, particularly at the sky high levels that he bought stock. However, not necessarily for the reasons you're thinking, as the buyback of stock is unrelated to salvaging whatever is left of the retail business. The buyback reminds me of when WEB wanted to buy up all of BRK's stock: Berkshire was not worth more than forty bucks as a business. You couldn't have sold the textile mills and insurance business for more. And half the money was in a lousy business. I mean a really lousy business: twenty bucks a share of the forty bucks. And I didn't know what I was going to do, I literally didn't. I mean, I was rich enough already. But in effect, I was betting that I could do something. I was betting on myself. And though it sounds egotistical, anybody who might have though it was worth more than forty bucks was purely paying for me. Because the company was not worth that. Lampert may have been betting on himself when he was buying up stock at nosebleed prices. So the question I have asked myself is this: How much is SHLD worth assuming that Lampert cannot turn the retail ops around and must put the company into runoff? The answer I have come up with is this: Runoff value is more than what SHLD is currently trading at. Every time SHLD has gotten close to what I believe runoff value is, I have always sold it because I was never sure how long Lampert would take to really begin to maximize value. But now I think Lampert will be forced to be the rational person that he is and take appropriate actions to maximize value. That's why I was a bit perplexed at the market reaction when the announcement was made. I have never understood why people valued SHLD based on FCF from retail ops, given the future deterioration I thought was inevitable. SHLD has always been an asset play to me (real estate and brands) plus the optionality of Lampert deploying released capital into other businesses, not the optionality of him turning Sears and Kmart around.

Gary Hoover video, right? Retailing is certainly a tough business. That's why the smart thing to do is to optimize and maintain the Sears appliance/tools retail business, optimize the customer traffic for the Kmart locations as best as can be done for Kmart and then sell to others who can really utilize that traffic, more widely distribute the brands that SHLD has, and utilize the value in the real estate (owned and leased). I agree that Lampert needs to bring in real operators to counterbalance his financial wizardry. But he most certainly should not "quit this game," whatever that means.

John Hempton's take on SHLD: http://brontecapital.blogspot.com/2011/12/sears-holdings-liquidation-sale.html I disagree with him on several accounts. Hempton repeats a misconception that many people have about the SHLD real estate play. They assume only owned stores represent the real estate value in SHLD. That is not the case. Lowest cost leases also represent a chunk of the value in the real estate that, in theory, should provide increasing positive cash flow as cash burning/break even stores are closed and the space is sublet to more productive businesses. Another misconception that Hempton repeats is that the plan was to liquidate the business in its entirety. This is also wrong. Why in the hell would Sears just liquidate a retail business that has 30% share of the appliance market? That makes no sense. The smarter course of action for Sears, which Lampert is trying to take, is to maintain appliance market share by creating these new "specialty store" formats. We all know that full line hasn't been working and has been a negative for the appliance/tool business. However, there is a line to walk with suppliers, as one can't just close up a bunch of sales-generating stores at once. For K-Mart, Lampert has been trying to optimize the cash flow from these crappy stores and keep customer traffic from declining. Hopefully, those K-Mart locations get bought out by good retailers that provide the same services and that will draw much more traffic. Finally, I think it's actually been sort of remarkable that shutting down stores hasn't been an ongoing phenomenon at SHLD with much greater firings over the last few years. We'll see whether it will be difficult to close up these locations. One thing that Hempton ignores is that if Sears space were to be better utilized, that might actually result in net job creation for the location. For example, when a Sears is replaced by a Whole Foods, I'm thinking that's actually a plus in terms of creating jobs. It's also not impossible that some of the Sears employees actually go work at the new place, although I'm not sure about that. Can't help but get the feeling that Hempton is crying crocodile tears for the SHLD employees.

txlaw - you're right on all the counts above. Restoration Hardware is the company I was thinking of. I think his investment thesis is right. I just don't see how those investments have return the "gawdy" 20% YOY numbers most people talk about ESL? HD and GPS have been dead money for quite some time. Although, they are cash flow positive and I expect it'll turn out okay in the future and add SHLD to this YOY return. I don't see how AZO (which has been a good investment the past couple of years) and AN been keeping his returns up there. I've never seen his returns, past letters, or prior investments that are non-public. I'd also be interested in hearing from folks who have followed him for a while and have had access to his investment process.

Restoration Hardware is the store you're referring to. I believe he made money on that because there was a management LBO that had to go through Lampert. HD and GPS are interesting because they represent the underlying reasons for Lampert's belief in SHLD. Home Depot is a retailer that faces less competition from online retailers due to the nature of the product sold. They are in an oligopoly retail market. They own a lot of real estate. Finally, they're suffering from a depressed environment for the sector that that they serve the most. GPS is a collection of All-American brands plus some new brands that they're trying to get off the ground. Clearly, Lampert believes that his circle of competence includes the retail industry. Also interesting that Ackman has essentially provided an alternative to Lampert. He is taking control at JCP and trying to revitalize the retailer. He has also put a lot of money into LOW, recognizing the value of the real estate in a way that is similar to Lampert's prior investment in HD.

I don't believe they can turn around the retail ops as they currently exist. I never did. The notion that there was optionality in Eddie Lampert being able to turn around Sears/Kmart like Apple was farfetched, IMO. I personally have seen how crappy Sears and Kmart are, and the majority of people I know would never shop at either store. Moreover, Sears has definitely lost mindshare in the appliance market due to the crappy stores. My parents, for example, have refused to go to Sears for a long time now, even for appliances -- they only go to HD and LOW. They did recently go to a franchised Hometown store that opened up a few years ago after the mall location closed to buy a bare minimum appliance for a rental property. But even that store was depressingly empty. This is why I have always traded with my SHLD position -- and always made money on the trades. Now I might be interested in owning for the long run if I can see SHLD really concentrating on transforming the company into a real estate company, brand company, and appliance/tool/parts retailer. Like I said before, it's not about turning around the retail ops as they currently exist. For me, it's about monetizing real estate and brands. Sell off/sublease Kmart locations to people like Target, Walmart, and Costco who can actually give consumers value. Kmart shouldn't exist. Sell off/sublease Sears locations in malls that are keeping those malls from performing to full potential if they had a better anchor in place. Convert the remaining store base to appliance and tool only format and sell off/sublease real estate that is currently underutilized. Shift to Hometown franchising format for small markets that don't have HD or LOW. I agree with Myth though -- I really hate that Lampert was constantly buying Sears shares without spelling out for shareholders a credible transformation plan. He has hinted at it in his shareholder letters, but he has never come out and explained it. I mean, if Sears somehow would have been competitively disadvantaged by disclosing its plans, I might be okay with Lampert's opacity. But this is a dying retail op! This is why I have said in the past that Lampert's personality may have been the thing keeping SHLD down. It's one thing to be an investment manager for accredited investors and keep things close to the vest. It's another thing to run a public company and not explain yourself. I'm actually giving him the benefit of the doubt by saying this. The alternative explanation is that he will screw minority shareholders who don't see the hidden value that may or may not be there. So I totally get why some people won't touch SHLD.

It's about time. Now we get to see whether the real estate under the crappiest stores is worth anything. We'll also see if SHLD management has woken up and realized that they need to try to keep appliance market share by transitioning from a depressing full line experience at Sears to a more appliance-and tool-oriented store base. We'll see what they do with Kmart -- I still think they should all be converted to Targets, Walmarts, and Costcos. It's also time to really push to monetize the Lands' End brand. Interesting that sales actually went up despite the crappy Sears experience. Now is the time for us value guys -- even those who wouldn't touch SHLD with a 10-foot pole -- to really pay attention to what SHLD does. I bought some more today. Wouldn't be surprised to see it tank even further.

Happy holidays, folks.

I also think that BAC becoming more of a utility is much better in the long run and that this is what will happen, at least with respect to the commercial banking side. In fact, I actually think that the hardcore focus by regulators has been great because it has forced companies like BAC to divest non-core assets and focus on the best businesses they have in their portfolio. I really hope that BAC's commercial banking side becomes more like WFC. Focus on cheap, sticky deposits, sound lending, and cross selling. And then on the ML side, I hope that they become more like a GS. I agree with with Peter Burke on the big banks being valued on earnings power. Ultimately, the thing that makes well run finance companies (key words -- "well run") attractive businesses is the intangible economic goodwill that WEB refers to in his letters. Finance companies are weird because the liabilities are the assets, and the assets are the liabilities. Value add comes from intangibles like the organizational structure, sticky deposit base, brand power, business relationships, underwriting discipline, etc. TBV/share is a decent way to determine runoff value or recapitalization value, but only assuming that the regulators will not seize the problem operating subsidiaries or that there is no "run on the bank." Further, if you do care about TBV, you should keep in mind that TBV before the financial crisis was comprised of a good proportion of toxic sludge. TBV after the financial crisis, on the other hand, is comprised of much sounder assets than we have seen in a long time in the US banking sector, no matter what fear mongers might have you believe. The pig is almost through the python.

Second largest position for me after MBI. Both positions dwarf my other holdings, although JEF comes a distant third.

Cardboard, did you buy common or the TARP warrants?

I agree. I have absolutely no clue as to why people think SHLD is going sky high. There are probably some better vehicles to bet on a real estate bounce. The only other value driver here seems to be the cash flow from the stores. And what does he do with it? Buys more SHLD shares. No, he's not diversifying into better streams of cash flow, he's just effectively dividending it out. So what do you get left with if the cash flow keeps on dwindling? So basically the only play here seems to be KMart getting up and kicking everyone's butt in retailing. But it ain't gonna happen unless he invests heavily in the stores, instead of dividending it all out. So I don't understand where the upside is unless you reinvest in the stores instead of returning it all to shareholders. Okay, well, I know I'm not going to make any headway on convincing you that this is not a mere return of capital. But assuming that runoff value is well above market price, it makes sense to cash out existing shareholders who want liquidity, though I would prefer Lampert be less opaque about his plans prior to doing so. Regarding real estate value, of course, Lampert has been unable to monetize the real estate as of yet. We just survived the worst financial crisis since right before the Great Depression. The US is over-retailed, and the stronger retailers have to figure out where and when to best allocate capital in an environment that is unsure, to say the least. Online retailers such as Amazon are starting to beat down on traditional retailers, squeezing margins and making it even less likely for the retailers to invest without really thinking things through. So instead of taking over US leases from SHLD, people like Target go to places where the long term economic trajectory is more clearly upward like Canada (see Zellers deal). Lampert has to bide his time and try to maximize the value of the existing store base, while things get sorted out in the US. Whether his strategy is correct will be known in a couple of years. I tend to think that Sears in its current incarnation is hopeless. Sears should only exist in the hometown format, being the alternative to Lowe's and Home Depot. Kmart shouldn't exist at all, to be frank. They suck. They should all be turned into Walmarts, Targets, or Costcos. The brands should be distributed more broadly, and Lampert has begun to do that. Patience, I guess.