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SHLD?


bargainman
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Just curious if anyone has done any work on SHLD since their announcement today?

 

http://www.sec.gov/Archives/edgar/data/1310067/000119312510192639/dex991.htm

 

for the last 26 weeks they reported a loss of 23 million

 

But then have Depreciation/amortization of 442 million...

 

They end up with EBITDA at $558 million after a number of adjustments.

 

They also say:

"capital expenditures of $168 million, and contributions to our pension and post-retirement benefit plans of $122 million."

 

shares outstanding = 112 million...

So about $5/share of EBITDA, vs negative reported earnings.

 

So it looks like they're still earning the cash.. but I'm not sure why Lampert focuses on EBITDA and doesn't talk about owners earnings more.. shouldn't he be backing out the cap ex and maybe even the pension expenses?  I mean those are real no?

 

Any help analyzing this would be appreciated :-)

 

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I think Lampert's thinking on pension costs is conservative but accurate.  6% discount is much more realistic than the 8% that was used in the 2000-2008 period.  Something that Buffett warned against in one of his letters.

 

Looking for purposely hidden value in the pension is no-go for me.

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Guest Bronco

Instead of buying stock, you can sell the $65 2012 leaps and get near $1,700. 

 

Since I sold some leaps already, I am buying a little stock today.

 

However, I do not view this as a asset play.  I view this as a cash flow play.  Relative to the market cap, it is very cheap.

 

Sears Canada is a good asset - they effectively own the whole thing now (over 90%).

 

I do not view this as a real estate play - I believe the FCF (on an NPV basis) is negigible.  In other words, relative to the market cap, the amount of cash generated from real estate sales or other transactions is not a big factor.  Just my opinion.  Regardless, good luck to all S/Hs.

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he's been able to take advantage of his information advantage and buy known dollars for fifty cents... and since he has long term, locked up capital, he doesn't care about stock price moves as long as he can continue to buy in stock/increase his own stake in the company that he knows better than anyone else in the world...

 

i'd be more comfortable believing he had superior info leading to superior understanding of sears value if he didnt also prove to be an optimistic buyer of his own co's shares in size a few years ago at 100 plus per share. otherwise i'd agree with your thesis without reservation.

 

On top of that, I would encourage you to dig into the pension accounting assumptions that lead to the $2B liability they are carrying on their books.  My view is that Eddie is hiding $1-2B+ of capital in his pension fund through egregiously conservative accounting assumptions (6% discount rate for liabilities and an assumed 3.5% growth in this liabilities in perpetuity etc). 

 

these assumptions dont look at all like he's low-balling to me. what would you use for a discount rate & growth assumptions?

 

 

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Eddie was buying stock when it was near $160, so I wouldn't pay much attention to his purchases. I can't understand why anyone would want to own SHLD other than as a book value play. Sears and K-Mart are 2 of the most poorly run retailers in the country and are contnuing to fade at a fast pace. Spend some time walking through K-Mart and Sears stores rather than reading annual reports. Most of their stores are disasters and rarely have any customers. Lampert has done nothing but show he's not capable of managing a large retailer over the last several years.

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Guest Bronco

Valuegeek - I would sugget you are more value than geek.  I like your analysis.

 

I would agree with opposing posters here - the stores suck and there is value in the company.  $60 is cheap IMO.

 

Unless this company generates less than $500m in FCF on an ongoing basis, I don't see how you can lose.  And although the stores suck, you can't knock $10B in quarterly sales as immaterial. 

 

 

That being said, I view this as one of my riskier stocks in my portfolio (one I just bought today). 

 

One thing to remember.  Although I don't buy the Lampert is Buffett comparisions, not at all....Buffett did start his little Omaha company with a now defunct textile business.  So to say there is no potential value in SHLD is not true. 

 

Big difference between Buffett and Lampert is Buffett was infatuated with float, as well as capital allocation to different investments.

 

Other than gift cards, Lampert doesn't fit this bill at all.  But who knows if that will change?

 

 

I still view SHLD as a cash flow generator with crappy stores, declining sales, a steadfast CEO that will continue to buy back shares, as well as a CEO that wants to turnaround the business and modernize the way we shop.  I bought shares today b/c of the cash flow generator part...we'll see.

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Valuegeek,

 

Thank you for your comments!

 

 

Eddie's average cost over the last 3 years was $77 for that $2B repurchase.  Have you never paid too much for a single share of stock?  

 

I believe that superficial conclusions that Sears is just an old, struggling retailer is one of the major reasons why the company is cheap for long-term investors.  Eddie isn't just running a retailer, he's managing the capital deployed in that business, which sometimes means shrinking the business.  It is nearly unfathomable to me how people could really believe that Eddie doesn't know what he's doing.  Look at his history and track record.  

 

To your point, we've had our team walk many stores.  Any idea how much his Santa Monica Sears property or his Astor Place K-Mart are worth?  Our work on the real estate suggests that 5-10% of the properties are worth 100%+ of the value.  

 

Add it up - stake in Sears Canada is worth almost $3B (and I would make the argument that it is undervalued), Brands that do nearly 12B/year in revenue that are likely worth $3-5B, Sears Home Services that does 120-200m in annual earnings, and one of the largest collections of retail real estate in the country thats worth between $1-5B (roughly 70K SF of owned Sears properties, another 20K SF of KMart properties, the undermarket leases, the HQ on 200 acres in Hoffman estates, the 10K SF of distribution facilities etc)....  all on a 7B market cap.  

 

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Guest Bronco

Do you know if this is a captive insurance co?  I read about this 2 years ago in Business Week I believe.

 

Do they insure against any of Sear's D&O, property, cyber, terrorism, etc?

 

Interesting move.  Here is my 2 cents.

 

1) you mention the potential legal advantages

2) doesn't appear to have tax advantages - the bermuda income is most likely taxable in the U.S.

3) do they plan to really use this as float?  Without expanding the captive status, may be tough to do so.

 

This is really an interesting story - in general, SHLD is so up and down it can make your head spin.  But playing along side Bruce B. and Eddie isn't such a bad thing.

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Is anyone worried about the fact that Lampert doesnt appear to really care about the owners of the company. He wont even let them know what the big plan is and is buying back shares without providing some sort of insight towards intrinsic  value.

 

I think it will work out well for Valuegeek and Bruce.

 

I dont have a team to do the research on this one and Lampert likes to keep everyone in the dark. One thing is for sure, the man has to have some sort of plan.

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I think that is one of the risks you have when you invest in a company where a fund controls so much stock.

 

Maybe the end game is to simply extract cash from the business as it slowly winds down. Right now it is buybacks but maybe when Eddie ends up controlling the vast majority of shares he'll start to pay a dividend to himself.

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I think there are a few risks for external shareholders, not sure how big they are:

- Eddie could take SHLD private.  He owns most of the company I think, so he could just screw everyone who bought above a certain price and take it over.

- Eddie is not completely synonymous with ESL.  I don't know what the lockup period is, but if some partners get antsy and want out, he'd be forced to liquidate and lose control potentially or be forced to sell and drive the price down?  I don't know.. maybe far fetched, but a possible risk I think...

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Bargainman, it is true that ESL is not synonymous with Eddie Lampert but back in 2007 he raised tried to raise an additional 3-5B in AUM at a 5 year lock up. If he was successful (and my guess is he was) -- he could probably use that new capital to fill in for any exiting investors. That could at least allow his ownership to remain stable till 2012.

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KMART and SEARS have been in runoff since ESL bought them.  Every day that passes, WMT takes another bite out of them.  They are almost zombies.  Nothing can save them other than the value of their brands and real estate.  I'm not an expert, but it wouldn't surprise me to hear that their real-estate and brands are worth half as much as some thought they were worth before the real estate crash.

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KMART and SEARS have been in runoff since ESL bought them.  Every day that passes, WMT takes another bite out of them.  They are almost zombies.  Nothing can save them other than the value of their brands and real estate.  I'm not an expert, but it wouldn't surprise me to hear that their real-estate and brands are worth half as much as some thought they were worth before the real estate crash.

 

Totally agree...just talk to anyone that works at Sears Corporate and you realize that there is no leadership and morale couldn't be lower.  A mild example:  a friend recently took a job doing architectural store planning.  When she started, she realized that her work hours would be overnight.  The justification was a cost savings measure that the company was trying (to save on desks, computers, equipment, and to increase productivity during otherwise dead hours).  I admire Eddie's ability to try anything if its cheap, but the business simply needs leadership and money. 

With that said, I am not sure the potential returns justify the costs of spending on the business.  Additionally, I like Eddie's ability to stand up to bureaucracy and its self-perpetuation.  I have been a shareholder for sometime and am often considering adding shares.

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Is anyone worried about the fact that Lampert doesnt appear to really care about the owners of the company. He wont even let them know what the big plan is and is buying back shares without providing some sort of insight towards intrinsic  value.

 

I think it will work out well for Valuegeek and Bruce.

 

I dont have a team to do the research on this one and Lampert likes to keep everyone in the dark. One thing is for sure, the man has to have some sort of plan.

 

Myth,

 

I don't own any SHLD

 

My take (probably not worth more than 2cents) is:

 

i. retail in runoff (stores are terrible, probably a good idea not to try to blow brain out competing against WMT or target)

 

ii. at the end of the day SHLD will be left with Craftsman, Diehard, Lands end brands + will somehow monetize the real estate. While waiting generating free cash flow yield           of ~11%(not bad).   Using cash to buy in shares.

 

Real estate may only be worth half as much as it did 2-3 years ago (did B Berkowitz not say at one pt that real estate itself is worth $100 per share) -so maybe it is worth only $50 per share today. In 3 years once we get thru the deflation fear maybe it will be worth ~$100 or more.

 

At some point  perhaps one of the big retailers may want to buy some of their store.

 

Also I would think it is a good idea not to blab your big plan if you want to sell...If everybody thinks you want to sell your real estate it will be hard to get the price you want.

 

Myth is there any specific examples of Eddie not caring for the shareholders other than withholding info, just in case I decide to take the plunge?

 

Am I oversimplifying a more complicated scenerio?

 

I believe that share cut in half over the last few months because of the scare of deflation (which would not be good for SHLD)          

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to add to above, I  am interested in SHLD, as Fairholme owns  8.7% of the company for a number of years- I believe he purchased holdings  at a higher price. Mind you I realize he can change his mind any time, but his comments seem to indicate that it is a long term holding

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Watching Lampert's capital allocation skills at Autozone was a thing of beauty. When Lampert moved into AZO, I worked at a buyside shop and our retail analyst totally missed the '01 move. What Eddie was doing didn't fit into his major mental model. He lived in the standard retail paradigm--comps, square footage growth and over-investment in stores. The false god of growth (growth with low ROIC).

 

biaggio: Interesting comments. The tight fisted capital allocation to stores and the importance of the brands (vs. retail) confuse many retail analysts. Autozone has great store economics.... Sears doesn't, but maybe this doesn't matter because the brands could go elsewhere in a full or partial wind-down!? Plus, there is the current FCF and the RE.

 

Thanks for the discussion... especially on valuation!

 

 

 

 

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Thanks for all the great comments and help analyzing this company.  I've heard Bruce from FAIRX talk about this a number of times. He's said that his idea is basically just an asset play.  As mentioned, he analyzed all the real estate and valued it at "conservatively..  Conservatively" (yes he said it that way, in an accent only Bruce could muster ;-) ), at above $100 a share.  (before the RE crash).  Then he adds in the value of the brands, and the largest appliance servicer in the country..  He's basically said that he's valued the company dead, and if Lampert fixes it, so much the better, but he's not relying on that to make his investment case.  It's interesting how the emotions swing on this stock.  Last quarter I remember things being quite upbeat.  I think there was mention of making Diehard more available, and talk of a new service network, and focus on internet retailing and service etc.. Now it's all doom and gloom again.  Still at $60 it's pretty cheap.  The other thing Bruce said which I remember, is that he couldn't understand how anyone could short the stock.  Lampert just needed to keep buying back shares and they'd be in big trouble.

 

Thanks everyone, and future comments certainly welcomed and appreciated!

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As it relates to the real estate portion of the discussion on SHLD, I found it interesting to read in the WSJ that Costco is looking at mall space to expand. 

 

Certainly would be an interesting buyer in this area of commercial real estate.

 

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Guest Bronco

Anyone here think that SHLD and AZO will merge one day? (sorta like a SNS and Western deal).

 

I think I heard chatter of this a while ago but nothing recently.

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Wow, great thread.  

 

Some things that haven't yet been mentioned:

 

-Right now, I believe the IP-backed notes are carried at $900 M, but one has to wonder how much they would be worth if the brands are distributed in other channels in the US.  It will be interesting to see how the ACE Hardware deal changes the royalty stream going forward.  Does anyone know if Craftsman and the other Sears brands are sold outside the US, Canada, and Mexico?

 

-Apparently, Sears has one of the most conservative ways of valuing inventory in the retail industry.  I got this from a Bruce Berkowitz interview where he mentioned that he talked to a well-respected industry inventory consultant.

 

-Bruce Berkowitz also mentioned in an interview that the tax value of the real estate was $80 to $90 per share prior to the bust.  That was at 122 M shares outstanding.  So that gives you an interesting number to adjust downward as you see fit.

 

 

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Wow awesome thread!

 

I'm fairly new to the sears story but, after some research its hard for me to come up with a scenario long term where this stock is a loser. I think Mr. Lampert is handling this situation the best way possible by not throwing extra capital in a losing business. He doesnt have stock options or salary. The company is buying back shares at a fast pace. The cash flow is still flowing in a bad ecomony. Even if the economy gets worse as many of you are fearing the company still will have  enough cash flow to buy back shares. The uncertainty with the company is not the shitty sears  retail business. We all know that blows, its the end game plan by Mr. Lampert. What is his plan after the float is essentially non existent.  Bascially, Bruce B. and Lampert will own the entire company. Two of the greatest capital  allocators in the last two decades essentially owning a company that creates excess fcf. Besides, taking the company private which seems extremely unlikely i see no reason in 5 years for this company/stock to underperform. I would appreciate any feedback on the sears story. i find this to be a extremely unique  potential investment. One last thought most people are looking for the next warren buffet/berkshire hathaway. Stop looking there is only going to be one warren/berkshire. Sorta like there is one Michael Jordan. Remember Harold Miner's nickname was Baby Jordan ( aka biglari). I think just cause Eddie is buying back stock and doing it the non berkshire way people dismiss him as a fake/wanna be buffet. Using basketball references Eddie is more like a Kobe. He's never going to be jordan but he is still great.

 

 

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