FCharlie

Safeway's interest coverage was at 8.9X this most recent quarter. The second highest of any point in the past twenty years. Safeway's historical debt at year end: 2002: $8.45 billion 2003: $7.82 billion 2004: $6.76 billion 2005: $6.35 billion 2006: $5.86 billion 2007: $5.65 billion 2008: $5.49 billion 2009: $4.90 billion 2010: $4.83 billion 2011: $ 5.41 billion So during the past four years, Safeway has actually decreased their total debt levels while simultaneously repurchasing 40% of their shares outstanding. Prior the the past four years, Safeway spent almost all of their cash flow remodeling stores and repaying debt.

Hi, Here's are a few comments. 1) How am I determining Free Cash Flow yield? I am taking average free cash flow from the past three years, and projected average free cash flow for the next five years, and dividing it per share and then into the stock price. The average for the past three years and the forward projections for the next five average out to about $1.1 billion annually. The beauty here is that Safeway doesn't really need to achieve anything more than status quo to make this investment work. Safeway indeed did "overinvest" in store remodels in the 2004-2007 time frame. This Lifestyle remodeling is nearly all complete. There are only a small percentage of stores that aren't remodeled and many of the remaining ones aren't going to be remodeled as they are close to the end of their leases. Safeway claims to have some of the most updated stores in the industry. I can't actually confirm this, I don't live anywhere near a Safeway store. 2) Gross margins are actually very stable if you strip out the impact from fuel sales and LIFO, which is a non-cash charge. I would either ignore the fuel/LIFO impact, or pay attention to total gross margin dollars, which are very stable and increased last year even as margin rate declined (again due mostly do to fuel shifting the numbers around) Fuel is a good business, It's something that didn't exist not too long ago. It's a multi billion dollar business and it drives huge traffic into the stores. 3) Not sure. The margin rate isn't my concern... It's the margin rate excluding fuel and non-cash LIFO charges. As we've seen in 2011, gross margin rates can decline with a simultaneous increase in gross margin dollars. 4)Dividends are discretionary, Interest payments are not. Interest expense has declined every year since 2003. Even in 2011, a year when Safeway actually increased total debt. 2003 interest expense was $442 million. 2011 was $272 million... Interest rates are so low that the expense is declining as Safeway refinances, even as they have borrowed somewhat to repurchase stock. Last conference call Safeway stated that they are borrowing six month commercial paper for less than 1%, and using the cash to repurchase stock, which has a dividend yield of 2.6%.... a trade off that actually decreases cash out the door because the dividend yield is so much higher than the after tax cost of commercial paper. 5) Don't know about the pension. Pensions are a nightmare for many companies right now. (Sears Holdings) This isn't something I'm terribly concerned with though. Pension accounting is subject to assumptions about the future. Interest rates are at 0% and the future projected obligation could change materially with changes in rates or equity prices. 6) Don't know how to value Blackhawk. I know it's not worth zero though, and with a nearly 20% free cash flow yield, I think there is a negative value being applied to the core business, let alone Blackhawk. Thanks for your comments.. I welcome more. What do you think?

Hi all. I wanted to run an idea by you guys and see what everyone thinks. About a year ago I began buying Safeway, around $21.50. At the time they had 368 million shares outstanding, so we're talking a $7.9 billion market cap. Safeway produced $2.6 billion of cumulative free cash flow in 2009/2010, and at the time they projected $800 million of free cash flow for 2011. I averaged the 2009/2010 free cash flow with the projections for 2011 and realized that Safeway was sitting there with a 14+% free cash flow yield. Safeway also was very actively repurchasing their shares, which excited me as well. One year later, here we are. Safeway ended up on target with their free cash flow. They got even more aggressive with the share repurchase at the end of 2011, so for the year, Safeway repurchased 19.5% of their shares during 2011. Subsequent to the end of 2011, Safeway has further repurchased 9.4% of it's shares this year, only a couple of months in. Today, they authorized a new $1 billion buyback. The current Safeway share count is 268 million, the stock price has barely budged. The market cap is now only $5.8 billion, and Safeway has projected $900 million of free cash flow for 2012, and has projected cumulative free cash for the next five years of about $5.7 billion, almost equal to their current market cap. What does Safeway do with their cash? 1)They pay the dividend, which has been increased at 20% annual rates for many years 2) They repurchase stock in large quantities (Safeway has repurchased 40% of it's shares in the past four years) 3) They have been developing entire shopping centers (currently 32 shopping centers under construction as we speak). Safeway has created a subsidiary for the sole purpose of buying land, developing entire shopping centers, anchoring them with new Safeway stores, and renting the entire shopping center with themselves as the landlord. Safeway by the way currently has $31/share of owned real estate at cost (land + buildings) The attraction here is simple. Hard assets and free cash flow. What's not attractive about a company that sells for $21.70/share with $31.00/share of real estate, generating around $1 billion annually ($3.75/share free cash flow) Around a 17.5% free cash flow yield, repurchasing it's own shares at an astonishing rate, and a share price that is unchanged from 15 years ago?? I can happily discuss further, and will respond to questions/comments.. I'm looking for other opinions here. I think Safeway is one of the best deals out there. Cheap & safe. What do you think?

I think the most interesting part of this as it relates to Sears is the idea of having stores within stores... Something Sears has scratched the surface of with Whole Foods, Forever 21, Edwin Watts, etc... JC Penney wants to make their stores more relevant, Sears probably just wants to lease under productive real estate.

Please help me understand better if I am wrong here, but when people say 5% of inventory is $400-500 million dollars, isn't it also fair to say that 55-65% of SHLD's inventory is owned free and clear of any invoices at any given time? In other words, in the event that more suppliers lost financing, the shelves would not at all be empty at the stores. If at any given time over half of merchandise is owned, there is a $3 billion credit line to supply up to 30% of needed inventory, and history shows that Lampert is not afraid to buy SHLD commercial paper into the hundreds of millions of dollars, I don't know that there is a solvency issue the way that perhaps Linen's and Things had. Most retailers don't own as much inventory as SHLD. I also think if push comes to shove, Lampert could and would buy SHLD bonds and effectively refinance SHLD debt, either outright or by converting debt into common stock. I don't think Lampert bought 5 million shares personally for the purpose of inspiring confidence, I think he knows he controls the situation and he's probably got a backup plan at any given time for nearly any possible outcome. Other alternatives could be a credit line from Fairholme Fund, Commercial paper purchases from Fairholme Fund (which has happened in the past), more store closings, or outright liquidation. I don't think SHLD has a solvency issue at all. Someone please argue the other side if you think I am wrong.

I'm amazed at how many people think Kmart should simply liquidate. When 2011's books are closed, Kmart will have an operating profit. Sears won't. When I look back over time at the operating earnings of Kmart vs. Sears, Kmart is consistently a cash generator three quarters out of the year. Kmart has cumulative operating profits over $1.1 billion for the past five years. Remember, Lampert took control of Kmart with only $700 million. I think you could make the case that Kmart would be better off had it never bought Sears at all.

I never said they should borrow now. I said they can't. not such a great situation is it? amgen just borrowed $6b and used every penny to buy back stock. esl would probably love to do that. he can't. point? he has zero financial flexibility. Zero financial flexibility is going too far. SHLD will produce free cash flow this quarter. Next quarter they will close 100-120 stores which will produce $150 million of cash as net inventory is sold. If you go back to Q2 2011, in the earnings release, SHLD announced they were closing about 28 stores and they expected annual savings of $50 million as a result. How much will closing 120 stores help? It won't hurt. They aren't going to close profitable stores. If closing stores produces cash, and then they can later sell the building, or sublease the property, that helps too. It's very possible SHLD has been holding open stores that lose money where they pay $2/foot in rent and could sublease for $5/foot... Perhaps Lampert has been holding on in hopes that with a stronger economy, he could lock in leases for $7/foot. He's a businessman, there has to be a reason why he's kept open loser stores. At the meeting last year he made it pretty clear that there was lots of potential in subleasing stores. Yes. SHLD is doing terribly. Could SHLD fix their problems? I think so. If the problems can be fixed, we'll most likely see share repurchases in the near future. If the problems are too much, we won't. Either way, I think the pessimism on SHLD has hit an extreme here, the same way it usually does with any stock that moves in the same direction for 9 days in a row. At some point, it's priced in.

This is an interesting way of looking at it, and it reminds me of early 2009 when SHLD had just finished closing a large amount of stores at the end of 2008. Q1 2009 SHLD made money, even as the economy was at it's worst... With the improved performance (even though it was still mediocre) the stock rallied up to $120 by the day of the 2010 annual shareholders meeting and Lampert made the comment that the average of all buybacks was lower than the current share price. I say this because it would seem to me that if you are a large retailer with unprofitable stores, then the most sensible thing you can do is close stores. The drain on income stops, the inventory is monetized, the real estate can be sold. The end result should be a more profitable business correct? Why is closing 5% of the stores is a bad thing? It's what SHLD should have done a year ago. Isn't it highly probable SHLD has better SSS and better gross margins next year because of this? Even a return to mediocre profitability for a company of this size and only 106 million shares can be a big deal.

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. I think the upside and the "secret" value lies in the fact that the stores are operating, any cash that can be taken out of them is taken out and shares are repurchased, shrinking the share count to 106 million on inventory and real estate valued at cost of nearly $15 billion. The real estate on the books is also misleading. Kmart entered bankruptcy with $1.5 billion of land and buildings at cost, and exited bankruptcy with $1 million thanks to fresh start accounting. Kmart still owned 135 stores, 3 distribution centers, and HQ. So do the division... $1 million for 139 properties is $7,194.24 per property. Seven thousand bucks. Book value is misleading. Perhaps real estate values have declined, but shares outstanding have declined more. Real estate values can rise... most likely shares outstanding will continue to fall. I think the income statement would look a lot better with the money losing stores closed, but it may indeed be more strategic to operate them until rent rates rise and then turn them into leased stores. Lampert controls this company. If there were no hope, why repurchase stock? Why not redeploy the cash into external investments?

What's KMART's likely ROIC then? Something tells me it's less than what Lampert could compound at. I'm sure Lampert could compound at a better rate. Just because he's not doing it now doesn't mean he's not going to do it later. Here's a quote from this years letter to shareholders: "As we have done since we took control of Kmart in 2003, we will continue to evaluate alternative uses of the company’s cash flow and capital resources to generate long-term value for all shareholders. Each year brings with it different circumstances, and we expect to have a variety of opportunities to invest our cash in the years to come. "

Kmart's historical operating income: 2007: $401 million 2008: $172 million 2009: $190 million 2010: $353 million Not sure why you'd shut and liquidate something that produces operating cash flow year after year. It's not a beautiful place, and the shoppers aren't exactly the most beautiful people, but they have cash and they spend it. You could argue that Sears is the laggard here, but then I think Sears is being held back because of housing starts at 600K. Housing starts need to rise 150% just to return to "normal". The pension is the biggest problem here, but the pension is frozen to new employees and eventually will run off. Interest rates being held at 0% are an issue. Lampert thinks every 1% rise in rates = $500 million change in pension liabilities. I think a lot can change w/ Sears over time. Seems like it's priced for near total failure here.

I am both short puts, and long stock at the same time. You are correct it makes no sense to own shares outright, but I too like owning the shares as well. The premium is incredible. Why would the $30 2014 put trade for $10? SHLD would have to drop to below $20 for this to end up profitable for a put buyer. At that price, you're talking $2 billion market value, but also at $20, the company could easily take itself semi-private with cash on hand. They could do that now, but they could EASILY do it at $20.

Every time SHLD gets down to these levels I go through the basic liquidation analysis and find myself shocked at how low SHLD is being valued relative to it's assets. Are there any others out there who still own SHLD, or have all given up hope? Seems like there's only going to be three shareholders left (Lampert, Tisch, Berkowitz) if this pessimism keeps up. Inventory (at cost) net of accounts payable is higher than the market cap. At retail price, owned inventory is significantly higher than the market cap. Real Estate (at cost) is significantly higher than the market cap Pension and mediocre cash flows are the largest problems here, although cash flow is enough to fund the pension even at these high levels. Too many stores are losing money, yet they stay open, even though it would seem the company could make a lot of money if the lagging stores were closed... Shares outstanding keep shrinking. The company has recently put nearly all of it's stores up for lease, sale, or partial lease... A move that would have been very exciting in the past, but today, no one seems to care... Berkowitz, Lampert, Tisch seem to be the only ones left in this one, and judging from their statements in interviews and at the annual meeting, none appear concerned at all. There's huge temptation here to go in big. Is it possible for these three to be wrong?