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Sears shareholder meeting notes? Gap and Sears?


schin
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Did anyone goto the SHLD annual shareholder meetings?  I would be interested in any notes.

 

Did you notice that Eddie Lampert has been adding to his Gap position?  Do you think he's going to try to merge Sears and Gap?  Thoughts?

 

I know he's been testing Forever 21 pilot stores in Sears.  Adding Gap to the mix? I would have prefer he went after J.Crew, but I guess he walked away from that.

 

I never got his investment thesis on Restoration Hardware either. Cool store, but way overpriced for any normal consumer.

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Gap Inc is definitely an interesting situation.  It's decently cheap and has good brand recognition.  Zero debt and $1.5B in cash.  I think Lampert's attraction is the shareholder friendly attitude of GPS management.  By my calculations, they've pretty much given almost every dime of FCF over the last 3 years back to shareholders through dividends and buy-backs.  They aren't pursuing a growth-at-all-costs strategy (they've actually reduced square footage.) 

 

But you never know with Lampert.  He can remain inactive for years before pulling a major rabbit out of a hat.  Who knows if there is a plan for Sears/Gap? Not me.

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Just curious but why do you think he'd try to merge them as opposed to just holding positions in 2 separate companies?

 

It's pure speculation on my part, but Gap management has the brand management and retail experience that he wants at Sears. Also, the management is very shareholder friendly and is very cautious with their FCF.

 

Instead of breeding inhouse, he might want to leverage Gap management with Sears' larger footprint and retail coverage.  Gap has been successful segmenting their high end - Banana Republic brand with his normal consumer brand - Gap.

 

It might help me differentiate Sears and Kmart. Just my IMHO.

 

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Sears doesn't attract customers to their stores for clothing...Adding GAP-style products and merchandising might be a terrific assist to Sears and K-Mart...Why try to develop an image and product line when you can integrate and leverage an established brand like GAP...Especially if you can leverage your supply chain and existing distribution services, which are likely under-utilized. Could be his missing link!

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why would he not use FCF from SHLD to purchase GAP or other undervalued retailers?

 

Good question. Only Eddie knows, but through ESL, Eddie can buy Restoration Hardware, Sears, Autozone without an admission that Sears is crap.

 

If Sears would buy any company with its FCF, it would be an admission that they have given up and would need Gap to run the ship. That long bomb would definitely throw even long term shareholders in a spin.  Plus, he has not outward talked about Sears being an investment vehicle like BRK.  He still considers it a retailer with a lot of real estate properties -- not an hedge fund or investment vehicle.

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Could this be the playbook?

 

1.  Acquire a controlling stake in a retailer (Company A) that has significant “hidden” assets (real estate and/or brands).

 

2.  Do not disclose anything about the financial or operating results other than what is required, in doing so there are 2 ways you’ll benefit:

2.a.  Share price is kept low enabling Company A to aggressively repurchase shares at an attractive price.

2.b.  Short interest as a % of “free” float will increase dramatically.

 

3.  Through your hedge fund acquire a meaningful stake in a second company (Company B) that also has significant hidden assets or would make strategic sense if merged with Company A.

 

4.  Sell a small portion of Company A’s hidden assets, which has 2 benefits:

4.a.  Creates a cash windfall.

4.b.  MOST IMPORTANTLY gives investors a glimpse into the true value of Company A.

 

5.  Number 4 above causes the share price to rise dramatically as Company A is re-priced by the market; 2.b. adds fuel to the fire via a significant short squeeze.

 

6.  Use the shares of Company A to acquire Company B, use your clout as a significant shareholder of Company B to make sure the merger is approved.

 

So if you're thinking about how Sears could go about acquiring GAP it looks like Eddie has completed steps 1-3.  Now I'll be the first to admit that on the surface this 6-step process sounds a little bit far fetched and I have absolutely no idea what Eddie's up to.  HOWEVER, with the exception of the buybacks this is exactly how Eddie used Kmart to acquire Sears...

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mevsemt - That's a interesting thought.

 

A couple of questions and thoughts:

 

1) Sears has been a good investment for ESL from bankrupcy. It's just hasn't been an amazing investment post-bankrupcy. But, I see a lot of hatred and negativity in Sears, which I read about for Amazon and Jeff Bezos too.  I still think it's early in the game. I don't think Eddie is doing anything out of desperation. It's not a world-class company yet, but it's not overleveraged and net-net, cash flow positive every year.

 

2) Sears is Eddie's largest position (ESL). He was the next "Buffett" prior to his Kmart/Sears merger. His returns were 20%+ a years? Is that true? Also, post-merger, do you know how ESL has performed?

 

Anyone have that info? Is he still beating the market?

 

3) The Gap report must have hurt him.

 

 

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Todd Sullivan put forth a similar argument for Sears Automotive and Autozone about three years ago. It's possible that redemptions or the like interrupted those plans, but it could also be that Lampert recognized a stable business model run by a profit focused team.

 

Perhaps the GAP investment is similar in that he is focused upon management's handling of margins and cash allocation rather than the revenue trend.

 

EDIT: Oops, I basically repeated JSArbitrage's comment.

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Could this be the playbook?

 

1.  Acquire a controlling stake in a retailer (Company A) that has significant “hidden” assets (real estate and/or brands).

 

2.  Do not disclose anything about the financial or operating results other than what is required, in doing so there are 2 ways you’ll benefit:

2.a.  Share price is kept low enabling Company A to aggressively repurchase shares at an attractive price.

2.b.  Short interest as a % of “free” float will increase dramatically.

 

3.  Through your hedge fund acquire a meaningful stake in a second company (Company B) that also has significant hidden assets or would make strategic sense if merged with Company A.

 

4.  Sell a small portion of Company A’s hidden assets, which has 2 benefits:

4.a.  Creates a cash windfall.

4.b.  MOST IMPORTANTLY gives investors a glimpse into the true value of Company A.

 

5.  Number 4 above causes the share price to rise dramatically as Company A is re-priced by the market; 2.b. adds fuel to the fire via a significant short squeeze.

 

6.  Use the shares of Company A to acquire Company B, use your clout as a significant shareholder of Company B to make sure the merger is approved.

 

So if you're thinking about how Sears could go about acquiring GAP it looks like Eddie has completed steps 1-3.  Now I'll be the first to admit that on the surface this 6-step process sounds a little bit far fetched and I have absolutely no idea what Eddie's up to.  HOWEVER, with the exception of the buybacks this is exactly how Eddie used Kmart to acquire Sears...

 

He can't just Buy the Gap...it is controlled by the Fisher family...and they have a pile of money outside of GPS that they can throw at this thing if it gets hostile...

 

 

 

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Even if Eddie has no plans on merging Gap and Sears (which at this point is nothing more than idle speculation) I would encourage people to take a look at what's happend over the last 15 years at Autozone. 

 

Basically, in 1997 Eddie began building his AZO stake through ESL and acquired enough shares to get himself elected to the Board.  Between 1997 and 2001 AZO's stock bounced around madly, going back and forth between 20 and 40-ish.  During this timeframe Eddie used share repurchases to shrink Autozone's share count from 150 to 100 MM (and I'm sure there were plenty of people saying things like "he was buying back shares at 38, and now they're at 20 today, so clearly he doesn't know what he's doing...")

 

Fast forward to today and the stock trades at $290+.  In fact, if you look at the 15 year chart there's almost nothing like it.  So, even if Eddie has no plans to merge SHLD and GPS, the AZO story gives me some confidence that the Sears story will turn out OK...

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Even if Eddie has no plans on merging Gap and Sears (which at this point is nothing more than idle speculation) I would encourage people to take a look at what's happend over the last 15 years at Autozone. 

 

Basically, in 1997 Eddie began building his AZO stake through ESL and acquired enough shares to get himself elected to the Board.  Between 1997 and 2001 AZO's stock bounced around madly, going back and forth between 20 and 40-ish.  During this timeframe Eddie used share repurchases to shrink Autozone's share count from 150 to 100 MM (and I'm sure there were plenty of people saying things like "he was buying back shares at 38, and now they're at 20 today, so clearly he doesn't know what he's doing...")

 

Fast forward to today and the stock trades at $290+.  In fact, if you look at the 15 year chart there's almost nothing like it.  So, even if Eddie has no plans to merge SHLD and GPS, the AZO story gives me some confidence that the Sears story will turn out OK...

 

I agree that AZO is probably the right template for thinking about ESL and SHLD.  How good an operation was AZO before ESL got control?  Because right now, SHLD is sucking wind as a retailer and it's hard to see how/when that improves in the near-term.  I guess I see a repeat of AZO as a best case scenario, of which I'm a little less certain now than I was 12 months ago.

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