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Eddie Lampert in Barron's


OracleofCarolina
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well, you got a few sharp cookies on this board who think the opposite. bruce berkowitz at the fairholme fund likes it too. they seem to think the real estate value alone is worth the stock price & then some, giving a free call option on any successful turn around at the 2 main store chains.

 

maybe so, but i'll pass.

 

but as "iconic" a brand as sears is i cant help but feel the retail world has passed them by. too many lower cost retail chains out there eating sears lunch. no wonder traffic & sales are falling off a cliff. lampert is managing cash flows efficiently, tho i dont know about the wisdom of aggressively buying back stock & carrying the debt load that it has before a turn around has even been established. maybe thats where the underlying real estate values come into play.

 

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Thanks Oldye the "Washed out" tag worked on Google News.  As for the Barrons article and other articles when it comes to EL, they make mention of his bad bets on Citi and so forth, however in doing so they quote the fund having AUM of 15 billion.  When you take a look at the 13-F there are about 7-8 billion worth of stock including Sears, which means there is another 7 billion which is potentially hedged aganist missteps like C.  I recall in a Businessweek article an analyst named Daniel Pike who worked for EL a few years ago said he, just like most of the other value investors on this board is obsessed with protecting his downside which leads me to believe that extra 7 billion is working overtime. LOL.

 

Lastly as a shareholder of SHLD I wasn't very comforted when I seen that EL has not taken advatage of some of the volitility and purchased anything (common stocks or debt of other corps) via SHLD. 

 

Any thoughts from other board members?

 

Cheers

 

Michael

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I wonder about that $14B figure quite a bit.

 

If you go back through the 13F-HR filings, you'll see the fund hit about $14B when Sears traded at much higher levels.So what I'm thinking about is whether they're pegging his entire fund as just that or what. I find it a little hard to believe that his entire hedge fund consists of a huge stake in Sears Holdings plus some large stakes in AutoZone and AutoNation.

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Speaking anecdotally about Sears Canada:

 

- Cashiers are hard to find

- 2/3 of the fitting rooms are closed.

- selection is muted or not available at all

 

We tried to buy a play pen for the new little one and they had one on the floor for about $100.00.  A reasonable price.  The staffer who tried to help us recommended the type that was on the floor.  We said we would like to buy it.  She looked it up and found they had only one left.  She went in the back and couldn't find the one left (presumably it was the floor model).  At this point I am sure Mrs. Blumpkin would have sold us the floor model at half price but we left empty handed from Sears. 

 

We went to Toys R Us and bought the exact same thing ten minutes later at the same price.

 

The Sears in question is one of the anchors at one of the most prestigious malls in Toronto. 

 

In the past year I have tried to buy jeans and not found my size... I am not an awkward size; and had to walk half a mile to find a fitting room and then back to the rack.  Then serching for the cashier.  I almost walked out with the stuff in my hand figuring at least I might get service.

 

Bad scene. 

 

I would not touch Sears Holdings stock with a barge pole if this is indeed the result of Lamperts efforts. 

 

It is perhaps worth its real estate but that is out of my comfort zone. 

 

I also dont like the way he operates his hedge fund.  He is spread to thin.  His best ideas are going to the hedge fund, not into Sears.

 

Then there is the issue of the interim CEO.  The only reason anyone would allow themselves to be called an interim CEO is if they were so concerned about the company going under that they could easily place the blame elsewhere and suggest that they were only caretaking for Eddie.  Bankruptsy's look bad on a resume.

 

The stock buybacks are being financed out of working capital somehow.  My guess is the inventory issues I have highlighted are what is financing the buybacks.  Now it strikes me that in a recession it is very smart to build customer relationships not desroy them, and lacking inventory and staff is a sure way to permanently impair them. 

 

Nuff said. 

 

 

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Thanks Oldye the "Washed out" tag worked on Google News.  As for the Barrons article and other articles when it comes to EL, they make mention of his bad bets on Citi and so forth, however in doing so they quote the fund having AUM of 15 billion.  When you take a look at the 13-F there are about 7-8 billion worth of stock including Sears, which means there is another 7 billion which is potentially hedged aganist missteps like C.  I recall in a Businessweek article an analyst named Daniel Pike who worked for EL a few years ago said he, just like most of the other value investors on this board is obsessed with protecting his downside which leads me to believe that extra 7 billion is working overtime. LOL.

 

Lastly as a shareholder of SHLD I wasn't very comforted when I seen that EL has not taken advatage of some of the volitility and purchased anything (common stocks or debt of other corps) via SHLD. 

 

Any thoughts from other board members?

 

Cheers

 

Michael

 

 

DB, what made you think that SHLD would become an investment vehicle like BRK? Sorry if that sounds challenging--not my intention--but I am truly curious because Martin Whitman of Third Avenue suggested the same thing here: http://www.businessweek.com/magazine/content/04_47/b3909001_mz001.htm.

 

"There is no question he will turn Kmart into an investment vehicle like Warren Buffett's," says legendary value investor Martin Whitman. He runs Third Avenue Management LLC, which teamed up with Lampert when Kmart was in bankruptcy court and now owns a 4.6% stake in the retailer. "That's what I am valuing into the stock."

 

That article is from 2004 and SHLD has not diverged from its role as a retailer.

 

 

 

 

 

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Lastly as a shareholder of SHLD I wasn't very comforted when I seen that EL has not taken advatage of some of the volitility and purchased anything (common stocks or debt of other corps) via SHLD.

 

i could be wrong cause i dont follow shld too closely, but the impression i get is that lampert has no intention of making shld his brk-like investment vehicle. one has to have alot of confidance in ones abilities to build the long term intrinsic value of a co you control & own a big chunk of using it as a major investment vehicle like brk, & which might also compete with his ESL hedge fund along with those juicy 2 & 20 fees.

 

i'm sorry. i've always been skeptical on shld & lampert. thats despite the fact that i very much enjoy his shareholder letters & his fanatical focus on cash flows. it has always seemed to me that while he attempts to maximize the cash flows at sears here & NOW, its at the expense of balance sheet optimization, & FUTURE cash flow strategy optimization, which can only be safeguarded by an equally fanatical focus on your customer.

 

i'm in uccmal's camp when he says in his anecdotal report below:

 

<<The stock buybacks are being financed out of working capital somehow.  My guess is the inventory issues I have highlighted are what is financing the buybacks.  Now it strikes me that in a recession it is very smart to build customer relationships not desroy them, and lacking inventory and staff is a sure way to permanently impair them.>>

 

and, btw: when sears closes underperforming stores, what have they been doing with do the the property afterwards? you'd think they would sell them & realize a big chunk of change, given the much balley-hooed underlying real estate values. i've clearly missed something as someone who only sporadically keeps an eye on shld. 

 

 

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According to this AGM write-up, Eddie mentioned that Sears would be sold at one point.

http://www.valueplays.blogspot.com/2009/05/sears-holdings-meeting-notes.html

 

"At one point in a discussion with a shareholder, Eddie Lampert referred to himself as "a professional investor", which i found very interesting because he could have claimed to be a merchant, or a retail guy. He also said that "At some point ESL will sell shares of Sears Holdings", although they have not sold any since taking K-Mart out of bankruptcy."

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DB, what made you think that SHLD would become an investment vehicle like BRK? Sorry if that sounds challenging--not my intention--but I am truly curious because Martin Whitman of Third Avenue suggested the same thing here: http://www.businessweek.com/magazine/content/04_47/b3909001_mz001.htm.

 

"There is no question he will turn Kmart into an investment vehicle like Warren Buffett's," says legendary value investor Martin Whitman. He runs Third Avenue Management LLC, which teamed up with Lampert when Kmart was in bankruptcy court and now owns a 4.6% stake in the retailer. "That's what I am valuing into the stock."

 

That article is from 2004 and SHLD has not diverged from its role as a retailer.

 

When EL gained control the BOD filed with the SEC that it gave EL the ability to invest surplus cash as he sees fit, just like the BOD gave WEB that ability when the BRK as we know it today was established and more recently the BOD has given Sardar this ability.  At one point he enaged in total return swaps when for a period of time made money on.  From what I can see in the 8-k that was filed there was no mention of these swaps.  We will have to wait for the full 10Q before we know for sure.

 

and, btw: when sears closes underperforming stores, what have they been doing with do the the property afterwards? you'd think they would sell them & realize a big chunk of change, given the much balley-hooed underlying real estate values. i've clearly missed something as someone who only sporadically keeps an eye on shld. 

 

Thats a great point Link.  At the annual meeting EL it was mentioned that the one field that SHLD is hiring is in real estate.  When I went on the corp. site the following populated, which will answer your question.

 

https://sjobs.brassring.com/EN/ASP/TG/cim_jobdetail.asp?SID=^WSO9McAVyJ5tncVEfKGq9z3VTyCRK/FMl9Ktiv/6Oj1iBA6pLopT7tNutxNuqvMxmcS7KkQo37ZK_C_R__L_F_QcV/epZmoeynRUtyMALnm33TN_slp_rhc_CyS_slp_rhc_0=&jobId=663470&type=search&JobReqLang=1&recordstart=1&JobSiteId=185&JobSiteInfo=663470_185&GQId=0

https://sjobs.brassring.com/EN/ASP/TG/cim_jobdetail.asp?SID=^WSO9McAVyJ5tncVEfKGq9z3VTyCRK/FMl9Ktiv/6Oj1iBA6pLopT7tNutxNuqvMxmcS7KkQo37ZK_C_R__L_F_QcV/epZmoeynRUtyMALnm33TN_slp_rhc_CyS_slp_rhc_0=&jobId=674328&type=search&JobReqLang=1&recordstart=1&JobSiteId=185&JobSiteInfo=674328_185&GQId=0

 

However, I would like to see how this is eventually executed.

 

Cheers

 

Michael

 

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Barron's feels SHLD could go down 50%, can't say that

I would argue with them. It is going to be interesting

to watch though.

 

Barron's also said that SHLD breakup value is perhaps $300 per share... and it hasn't even been two years since they said that

 

Two years from now I wonder what they will say.

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When they have $2/ft. leases rolling off I would be shutting stores also.  They have been trying to get bought out of below market leases from their landlords so the landlords can potentially get greater rent from a new tenant at today's rates.  I don't know how many owned and how many leased have been shutting down though.  They have had gains on R.E sales of $59M in the last 26 weeks which, I believe, is much greater than when I looked last year.

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Bruce from Fairholme has often said that they researched all the real estate.  Back then he said they ended up *conservatively* with around $100 per share in real estate.  Then he said he adds the brands, plus what you'd pay for the largest appliance servicer in the US, plus the other bigs and pieces, and you get a reasonable amount more than what it is today.

 

Personally I'm starting to think that SHLD is closer to a cigar butt than a BRK investment.  There probably could be downside in the stock price in the near term, but in the end the company has a pretty good downside floor in liquidation.  I don't think EL will be able to mess that up. Actually my guess is that there are a few more puffs left actually..  Buy when it drops and everyone is maligning it, sell when it jumps...

 

Also, and this is purely my opinion and speculation, I don't think EL is suited to be a Buffet.  The managers who work for Buffet generally praise the man to no end.  I don't think I've heard a single good thing said about EL from his operations staff.  Also EL was talking about running experiments in many different Sears and Kmart stores to make sure that the concepts work before rolling them out on a larger scale.  That works to a degree, but not when you lose staff, and not when it paralyzes the business.  Anyway, that's my 2 cents :-)

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The other thing of interest that the Barron's article mentioned was the effect of closing a Sears on a mall.  A mall with a run down, or closed anchor store very quickly starts to lose its caveat.  This in turn will get reflected in the real estate values of the mall based stores.  What if Sears has to constantly buy out multi-decade leases at substantial losses?  The net result in a landscape of excess real estate space and a CRE recession is that the value of Sears real estate is probably alot lower than many pre-recession estimates.  I would say EL has a real conundrum on his hand.

 

The Buffett quote about bad business; good management probably applies.  With Sears a case could be made for bad business and bad management under EL.  As mentioned above being a great investor does not make one a good manager or even a passable manager. 

 

There is definitely value in the repair franchise that can be calved off but I am dubious about the other brands or the real estate. 

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Bruce from Fairholme has often said that they researched all the real estate.  Back then he said they ended up *conservatively* with around $100 per share in real estate.  Then he said he adds the brands, plus what you'd pay for the largest appliance servicer in the US, plus the other bigs and pieces, and you get a reasonable amount more than what it is today.

 

Personally I'm starting to think that SHLD is closer to a cigar butt than a BRK investment.  There probably could be downside in the stock price in the near term, but in the end the company has a pretty good downside floor in liquidation. 

 

 

I trust Berkowitz's valuation of SHLD's liquidation value (I own quite a bit of FAIRX), but I really wish he had spoken to Eddie Lampert before investing in SHLD.  I am afraid that it will in fact turn out to be a cigar butt investment, which is not generally the type of thing I like FAIRX getting into.  It would be okay if liquidation would be fairly soon, but it could take a very long time to liquidate SHLD.

 

I wonder if ESL's letters are more instructive as to whether Lampert will, in fact, turn SHLD into a BRK-like vehicle.

 

Also, and this is purely my opinion and speculation, I don't think EL is suited to be a Buffet.  The managers who work for Buffet generally praise the man to no end.  I don't think I've heard a single good thing said about EL from his operations staff.  Also EL was talking about running experiments in many different Sears and Kmart stores to make sure that the concepts work before rolling them out on a larger scale.  That works to a degree, but not when you lose staff, and not when it paralyzes the business.  Anyway, that's my 2 cents :-)

 

Good point.  He's no Buffett. 

 

Berkowitz has noted that Lampert was clearly not as brilliant as everyone hyped him to be, though he is clearly a very smart man.  And Lampert appears to be too involved with the retail operations.  He should really get a good operator in there, as Buffett did with the BRK operations back in the day.  I also think he needs to monetize/liquidate some brands (Lands End and K Mart) and focus on SHLD as a competitor to LOW and HD versus being a competitor to WMT and TGT.

 

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I just think Lampert is overconfident in his ability to manage such a large company.  Buffett taking over tiny Berkshire and running it "from scratch" is one thing.  Wrestling with $50B in sales is another.  That's just a monster to try and manage via video conferencing from an office in Greenwich, CT.  Even Sardar had to roll up his sleeves in Indianapolis for 14 hour days with a company a mere fraction of SHLD's size.

 

Yeah, that's the main problem I have with Lampert.  I have no idea whether he's a brilliant investor, but he does seem to be a really great investor based on what I've seen that's public, not withstanding the Citigroup purchase.  I just wish he would get some real operators into Sears who will optimize the existing business, if at all possible.

 

I also can't believe that he bought back Sears stock at such high levels.  Did he really believe that it was worth that much?  I suspect he was really just making a huge bet on himself, which would be okay if were using his own money.  But he was using company cash, which really bothered me.  

 

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"Berkowitz has noted that Lampert was clearly not as brilliant as everyone hyped him to be,"

.

nor is Berkowiz as brilliant as he seems to think he is.

jmho (and it is worth exactly what it cost you)

 

I'm not sure where this comes from.  In every interview/call I've heard Bruce speak, he's usually quite humble, saying others are smarter than him (or at least Buffet and the LUK guys).  I don't think I've ever heard him trumpet himself in a boastful way at all.

 

Bruce saying that Lampert wasn't as brilliant as hyped was just a statement of fact.  He still says EL is very smart, and obviously thinks so otherwise he wouldn't have 5%+ of his fund in there.  I mean people were hyping Lampert like he was some god who was just going to turn the giant Sears/Kmart conglomerate on a dime.  The fact that he didn't live up to the hype is kind of anticlimactic I think.  Turning a company that size takes a great operator who attracts great talent.  Lampert is a great investor, not a great operator.  Everything I've read says he's aloof and painful to work for and painful to even talk with.  Some article/interview with a guy who worked with him at his hedge fund for years said that the guy never got to know Lampert, EL just had a personal shield around him.  That's not the kind of person who is going to attract top talent to turn around a giant company like Sears and Kmart.  If EL was hard core he would have liquidated SHLD, selling the real estate and brands etc.  But I think EL ran into the same problem that Buffet did with Coke and other large positions.  At some stage doing these giant scale liquidations is just too taxing on the human side.  Liquidating SHLD would have meant putting 10s of thousands of people out of work for profit, and I don't think he wanted to do that without giving the turn around a go.  Unfortunately for him, in the middle of the turn around came the largest recession in decades.

 

Or that's what I think :-)

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