SHLD anyone?

[txlaw]

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.

[schin]

I've read articles about Eddie Lampert being the next Buffett and his success in AutoNation and AutoZone. But, when I look at gurufocus and his purchases ... he's had some real stinkers like CIT Group, Citigroup, Gap, Home Depot,.... The high end home goods store... which escapes me right now, but they've been unprofitable and he tried to buy them out several years back. I really don't see how ESL survives with these types of BS investments.

 

Don't get me wrong, Buffett had some stinkers like the Irish Banks and USG, but... seriously, I wonder about Eddie's batting average.

[T-bone1]

anybody considering selling puts?

 

jan 2012 put strike 35 @ 3.50 looks interesting

mar 2012 put strike 30 @ 4.30 also looks interesting

 

regards

rijk

 

it's a crap shoot just like was $10 higher when people did the same analysis you did.

 

The intrinsic value is very difficult to pin down, but I don't think the intrinsic value is 24% lower today than it was yesterday.  Assuming you agree that IV hasn't fallen by the same amount as the stock price over the last day, then the risk is neccesarily lower and the potential reward higher (for an outright stock purchase).  The January 2012 $35 puts (roughly at the money) are $3.80 bid.  The $45 puts were $3.50 bid on Friday and slightly out of the money at that time. 

 

On a percentage basis, selling the $35 puts today nets you more than 10% of the current stock price (which is 24% lower than Friday).  Comparatively, selling the $45s on Friday would have netted you less than 8% of the stock price.

 

I think that objectively, selling puts today (after bad news is out and the stock is a low lower, with volatility higher) is a much better deal and not just another "crap shoot"

 

I'm not saying this is a great investment, but it is definately a much better investment than was available on Friday . . .

[schin]

I'm starting to wondering if Sardar Biglari might be a better investor than Eddie Lampert. I thought Eddie with this GS pedigree and track record at AZO and AN was a better business person.. but, this SHLD is starting to make me wonder.

[hardincap]

I've read articles about Eddie Lampert being the next Buffett and his success in AutoNation and AutoZone. But, when I look at gurufocus and his purchases ... he's had some real stinkers like CIT Group, Citigroup, Gap, Home Depot,.... The high end home goods store... which escapes me right now, but they've been unprofitable and he tried to buy them out several years back. I really don't see how ESL survives with these types of BS investments.

 

Don't get me wrong, Buffett had some stinkers like the Irish Banks and USG, but... seriously, I wonder about Eddie's batting average.

 

This says alot more about you than Eddie. Eddie has a 22%+ /yr record for 25 years or so. Are you seriously doubting his investment skills?

[txlaw]

I've read articles about Eddie Lampert being the next Buffett and his success in AutoNation and AutoZone. But, when I look at gurufocus and his purchases ... he's had some real stinkers like CIT Group, Citigroup, Gap, Home Depot,.... The high end home goods store... which escapes me right now, but they've been unprofitable and he tried to buy them out several years back. I really don't see how ESL survives with these types of BS investments.

 

Don't get me wrong, Buffett had some stinkers like the Irish Banks and USG, but... seriously, I wonder about Eddie's batting average.

 

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.

[finetrader]

SHLD stock has lost 40% in 3 weeks!

 

where is IV, closer to 60$ or 35$?

 

I find it weird that this compagny is taking debt to buy his own stock.

 

 

[schin]

This says alot more about you than Eddie. Eddie has a 22%+ /yr record for 25 years or so. Are you seriously doubting his investment skills?

 

hardincap -- 22% /yr for 25 years..I am not doubting he did not hit it out of the park early on with a smaller amount of cash. 

 

If you take SHLD at $130pps and where it is now, how does that affect his yearly returns? What was ESL's return the past 5 years? Do you have those numbers?

 

I've been tracking his picks in Gurufocus for the past 2 years and don't see how he can post 20+%YOY numbers with SHLD as an anchor. You tell me.

 

http://www.gurufocus.com/holdings.php?GuruName=Edward+Lampert&sort=position

 

 

[schin]

 

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.

 

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.

[hardincap]

scchin, that is alot of stock prices doing the analysis. do you believe the business value fell 30% in two days as has the stock price? why are you posting in a value investing forum? your temperament makes you a better fit for yahoo message boards.

 

2-3 year performance means little. even 5 years is hard to tell the good from the lucky.

 

instead of focusing so much on the market price, maybe you should start looking more at the underlying business value.  of course people are going to assign pessimistic valuations to a home appliances retailer at the very bottom of the housing cycle. what is it worth when housing recovers?

[schin]

for one thing sec form 13f only captures a small part of what a hedge fund investor can do. it does not capture shorts and it does not capture derivative trades. it does not capture holdings in cash or bonds. it would be best to measure what ESL does over long periods of time, and not just a few years. I assure you that he can raise all the money he desires.

 

True, it does not capture certain trades like Seth Klarman's 13F is deceptive because there's a lot going on behind the scenes. But, his YoY numbers people have shown have noted that. I would be interested in the ball park figures for ESL because SHLD has been one hell of a deadweight.

 

I'm assured he can get extra capital if he needs/wants. I'm just saying in the pantheon of investment gods - is he in the same category as Buffett, Klarman, Prem Watsa since there is so much Lampert worship on this thread.

[schin]

scchin, that is alot of stock prices doing the analysis. do you believe the business value fell 30% in two days as has the stock price? why are you posting in a value investing forum? your temperament makes you a better fit for yahoo message boards.

 

2-3 year performance means little. even 5 years is hard to tell the good from the lucky.

 

instead of focusing so much on the market price, maybe you should start looking more at the underlying business value.  of course people are going to assign pessimistic valuations to a home appliances retailer at the very bottom of the housing cycle. what is it worth when housing recovers?

 

hardincap - One, what is your valuation of SHLD then other than Lampert is a God and it'll go up? Two, I'm just asking what his returns are for ESL since you threw out the 25% YoY for the last 25 years. I thought you would have a spreadsheet or something.

 

Lastly, emotionally the stock market is valuing 30% lower today than 2 days ago. I agree it may not reflect the value of the business.

[txlaw]

 

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.

 

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.

[link01]

I mean things like SHLD where it is nearly impossible to know the manager's true motives because he or she ain't talkin'.

 

Perhaps Lampert is looking more and more Biglarian?

 

unlikely, imo. i think lampert really thought he could turn around the stores from the beginning with the help of a stabilizing economy, that he saw more value & better odds in that, & only now has come to the realization that much more drastic measures are needed to place their retail ops on a more competitive foundation first thru more aggressively weeding out the weaker stores.

[prevalou]

What does it mean:

"Close 100 to 120 Kmart and Sears Full-line stores.  We expect these store closures to generate $140 to $170 million of cash as the net inventory in these stores is sold and we expect to generate additional cash proceeds from the sale or sublease of the related real estate."

 

What are these 140 to 170 m$: the proceed from inventory liquidation, or the profit from inventory liquidation? Or the net proceed from inventory liquidation (inventory less payables and debt from the stores). Does someone have an idea? Moreover There is  real estate from the closed stores. How to value it ?

 

[SharperDingaan]

Keep in mind that Sears has 4 main assets & 1 major liability.

 

Real Estate. The asset is the selling space, not the land. Most of the stores are dirt cheap leases for anchor tenancy in the traditional mall - & as long as Sears stays open, the mall operator will basically give them the mall. Quality or crap, they get paid to fill the store - & Sears gets ongoing brand awareness, for essentially no cost.

 

Product Lines.  3-4 lines already mentioned - but aside from HomeSense, there is really no need for storefront. Selling Mastercraft, etc. under licence, & directly on-line, will do the same thing without the headcount & overhead. The art is in doing it slow enough that the real estate continues to at least break even during the transition.

 

Cards. Biggest & best asset. Retailing exists almost solely to drive card balances. Higher pricing exists almost solely because Sears will give you the credit. Higher run-rate write-offs offset with higher pricing; but the game stops if everyone suddenly cannot pay – at the same time. Not that likely if Sears is the only store giving you credit.

 

Retailing. The asset is the rent spread between what a brand name pays & what Sears pays the mall. Put bluntly the stores are upscale flea markets - the booths just don’t have walls, & are a little bigger, brighter, & more glam. As long as they can still make the minimum spread, what they fill the store with is largely irrelevant.

 

Brand. The department store that your parents &/or granny goes to - & primarily because that is what they grew up with; every other generation goes to the boutique &/or big box. No real future when much of your clientele is either getting rid of stuff (down-sizing) or too immobile to even get through the door. 

 

Summary:  Sears is really nothing more than a finance company that is being asset stripped. Card income slowly being converted to royalty income, & assets being set-up for liquidation at opportune prices. A very tough & uncertain way by which to make a $.   

 

SD

 

[maxprogram]

Does anyone else think that Eddie Lampert would do well to execute one of Bill Ackman's REIT spin-off ideas in the context of Sears Holdings?  (See the presentations on McDonald's, Target -- possibly J.C. Penney in the future.)

 

I see no reason why he can't spin off a REIT-type company for the real estate and set some long-term lease rates with inflation-indexed rent increases for the OpCo.

 

This is the problem with Sears, and the problem with the real estate thesis in general. If the real estate was owned by a separate REIT with their own profit motivations, they would immediately jack up rent to market rates. Why? Because the alternative to leasing to Sears at $5/sqft is to lease to Costco/HD/Lowes at $12/sqft.

 

So, Sears' options would be:

 

(1) Realize RE value by closing down all their retails stores that can't be profitable at market rent rates -- this has to be done slowly, and is costly in $$ terms and laying off hundreds of thousands of employees. Not easy.

(2) Don't realize RE value and turn stores around, making them worth more than the real estate they're on top of. You can see how hard this would be at this stage.

 

Target makes EBITDAR (store earnings before D&A and rent) well above market rent, so spinning off a REIT would make sense and have little impact on their retail ops. JCPenney is in a similar real estate situation to Sears, but their retail ops are in much better shape and they have smartly opted for option (2).

[tooskinneejs]

A few observations:

 

1.  Based on today's press release, shareholders' equity will be cut by $2.2 to $2.4 billion in the 4th quarter due to asset impairments (deferred tax assets and goodwill).  This means approximately 32% of shareholders' equity has vaporized.

 

2.  In addition, it appears the Company expects a large 4th quarter operating and net loss even before these asset impairments.  So equity will shrink even further.

 

3.  The company says its plan is as follows: "We intend 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."  Does anyone really think they can transform their stores into a world-class retail experience?  While not investing in them?  Or even if they did invest billions into them?  I'd give this only slightly better odds than Montgomery Wards making a comeback.

 

4.  I have no horse in this race.  But one mistake I think many are making is relying on an 'authority's' perceived investment/management accumen.  I keep reading statements like "Eddie must know something," or "Lampert wouldn't still be invested in this if he didn't have a good plan."  The fact is, even the experts make mistakes.  Running a retail operation is extremely difficult.  Reviving a dying one is next to impossible.  Being a good investor doesn't make one a good merchant.

 

5.  From fiscal year 2006 through October 29, 2011, the company has spent $5,365,000,000 of shareholders' money buying shares at an average cost of $101.60 per share.  Today's price is approximately $35 per share.  That's a 65% loss on over $5 billion of investors' money.  An awful lot of things are going to have to go very right just to make up for this loss, let alone the ongoing operating losses and periodic asset impairments.  Maybe the price is right now, but I'm skeptical.  To me, this looks like a classic 'value' trap.

[tooskinneejs]

"What are these 140 to 170 m$: the proceed from inventory liquidation, or the profit from inventory liquidation? Or the net proceed from inventory liquidation (inventory less payables and debt from the stores). Does someone have an idea?"

 

I assume its the cash proceeds from the sale of the inventory net of any payables to suppliers.

[S2S]

Good post, tooskinneejs.

 

1.  Based on today's press release, shareholders' equity will be cut by $2.2 to $2.4 billion in the 4th quarter due to asset impairments (deferred tax assets and goodwill).  This means approximately 32% of shareholders' equity has vaporized.

 

2.  In addition, it appears the Company expects a large 4th quarter operating and net loss even before these asset impairments.  So equity will shrink even further.

 

What I found interesting (or appalling, depending on who you ask) is the timing of the operating losses. 4Q is typically the peak cash flow period for retailers (before the bills for Christmas shipment come due), yet SHLD actually had to use its credit facility during the quarter.

[Parsad]

They are moving way too slow.  This was the problem in the past and remains now.  They need to close 600-800 stores, not 100-120.  Their footprint is way too big in this market, and they need to shrink to compete.

 

They've made a few good steps...subleasing space, spinning out brands to other retailers...but far more mistakes...not closing or selling stores, buying back shares at ridiculous prices, not bringing in actual quality retail experience, blowing cash on maintaining stores that should have gone long ago, not rapidly revamping their number of products and merchandising.

 

Frankly, I'd be far more intrigued in Sears if they had closed 600-800 stores.  Closing 100-120 means that they are going to continue to blow cash on stores that over time will continue to produce decreasing sales.  And geez, why the hell do they still have the catalog business?  The only catalog they should produce is the Christmas catalog.  All the others are a waste of time and money, and they should have long ago moved their customers to online shopping.  Cheers! 

[FCharlie]

 

5.  From fiscal year 2006 through October 29, 2011, the company has spent $5,365,000,000 of shareholders' money buying shares at an average cost of $101.60 per share.  Today's price is approximately $35 per share.  That's a 65% loss on over $5 billion of investors' money.  An awful lot of things are going to have to go very right just to make up for this loss, let alone the ongoing operating losses and periodic asset impairments.  Maybe the price is right now, but I'm skeptical.  To me, this looks like a classic 'value' trap.

 

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.

 

 

[moore_capital54]

Anyone else think this would be a great time for OSTK and SHLD to merge :)

[ragnarisapirate]

SHLD is getting closer and closer to tangible book... I never thought it would ever get there again.

 

Also, how much are we thinking is going to get bought back? It isn't like the company has a ton of float.

[dwy000]

Keep in mind that Sears has 4 main assets & 1 major liability.

 

Cards. Biggest & best asset. Retailing exists almost solely to drive card balances. Higher pricing exists almost solely because Sears will give you the credit. Higher run-rate write-offs offset with higher pricing; but the game stops if everyone suddenly cannot pay – at the same time. Not that likely if Sears is the only store giving you credit.

 

 

Summary:  Sears is really nothing more than a finance company that is being asset stripped. Card income slowly being converted to royalty income, & assets being set-up for liquidation at opportune prices. A very tough & uncertain way by which to make a $.   

 

SD

 

Sharper - Sears sold its US credit card business to Citibank in 2003 and its Canadian credit card business to JP Morgan in 2005.  They get a small fee from the banks for origination but they don't provide the financing.