SHLD anyone?

[prevalou]

I don't see run off as a credible option

1) it would put a lot of real estate on the market (at the wrong time)

2) the value of the different brands would diminish due to massive market share loss (kenmore for instance) with stores reduction.

3) if the run off process lasts, remaining staff would be demotivated waiting for his turn to be fired. The same store sales would then nosedive and accelerate the run off process.

 

With 300 000 employees, you have to send positive messages to motivate them. I think it is the dilemna for Lampert: how to shrink reasonnably without sending the run off message.

[mevsemt]

SHLD straw man (please feel free to critique):

 

Real Estate and KCD (Kenmore, Craftsmen, Diehard) are primary sources of value.  Other sources of value include Sears Canada, Hometown, Auto Centers, Home Servicing, and Lands End. 

 

Primary concern is Sears-the-retailer has largely lost relevance with shoppers (clearly reflected in same store sales).  Debt load and pension obligation are worrisome.

 

How can the value of Sears be salvaged to earn best possible returns for shareholders?  A retail turnaround may have been the goal at one point, but the return on investment would likely be very low (and that's assuming a turnaround could succeed, a failed turnaround would likely have resulted in bankruptcy).  I think Eddie quickly realized that a slow liquidation with brand and real estate moneitization would provide the best risk/reward scenario.

 

Why slow?  For one, KCD needs to establish "critical mass" in other distribution channels (online, Ace, Hometown, Costco, with more to come?) to preserve brand value.  Once critical mass is achieved, real estate sales and subleasing can move forward at a faster pace.

 

Question: Can the souce of cash generation (for both Kmart post bankruptcy and Sears Holdings post merger) be considered a function of unprofitable store closures and inventory liquidation/reduction?  For instance, Kmart closed ~600 stores as part of the bankruptcy process, and although same store sales continued to be awful, cash generation was substantial.  In 2004, a small % of Kmart's real estate was monetized (Home Depot - sold 4 properties and assigned 14 leased properties for $271MM.  Sears - sold 4 properties and assigned 45 leased properties for $576MM), adding to Kmart's cash.  Is Eddie about to do something similar?

 

So, here are the questions I've been thinking about:  How quickly can KCD achieve critical mass through other distribution channels, and how profitable will that be?  How much real estate can be monetized, how fast can this happen, and what kind of cash can it generate?  How quickly can Sears shrink their store footprint, and what kind of cash will inventory reduction and the closure of unprofitable stores generate?

 

Lastly, what does Sears look like in 5 years?  Is it too big to do what Vornado did (http://www.fundinguniverse.com/company-histories/Vornado-Realty-Trust-Company-History.html)?  Can it truly be a holding company with 4+ operations (that are much less integrated than they are today): brands, real estate, Hometown/auto/home servicing, retail (much smaller than today), and maybe acquired companies?

[txlaw]

I don't see run off as a credible option

1) it would put a lot of real estate on the market (at the wrong time)

2) the value of the different brands would diminish due to massive market share loss (kenmore for instance) with stores reduction.

3) if the run off process lasts, remaining staff would be demotivated waiting for his turn to be fired. The same store sales would then nosedive and accelerate the run off process.

 

With 300 000 employees, you have to send positive messages to motivate them. I think it is the dilemna for Lampert: how to shrink reasonnably without sending the run off message.

 

To me, this is the best critique of an investment in SHLD -- that Lampert won't be able to salvage the real estate and brands through runoff of money losing stores.  The following is why I disagree.

 

First, note that runoff is different than liquidation.  Liquidation implies putting all the real estate on the market at once, firing a bunch of employees at once, and foregoing future sales and profit for immediate cash.  That's not what I think has been happening or will happen at SHLD.  Runoff of a business, by definition, occurs over time.

 

Regarding point 1: If you will recall, some people have been criticizing Lampert for not shutting things down soon enough.  I think Lampert has the ability to shut down stores that actually burn cash or that are "marginally profitable."  Now, some people might blame him for not having invested in these stores to keep them alive.  But note that this is a zombie store argument, if you think that many of these stores were doomed anyway.  The key is to see whether stores that are shut down provide cash generation in the form of real estate sales and subleases.  For example, let's say that a money losing Kmart in a particular city is shut down.  If that was under a long term lease at attractive rates, the hope is that they sell the lease to another party at attractive rates or sublease the retail space. 

 

Regarding point 2:  Massive market share loss in the brands assumes that Lampert shuts down all stores at once, does not open any new Sears locations that more effectively distribute the good brands, and does not distribute the brands more widely.  All of these assumptions are incorrect, IMO.  First, SHLD is not shutting down all stores at once.  Second, Sears has opened up new store formats in the hopes of transferring appliance/tool market share from dying stores to these new stores.  Third, Lampert has begun distributing brands through different channels.  Kenmore in Costco?  It could happen fairly soon.

 

Regarding point 3:  This is a good point.  The loss of jobs and the effect on the remaining business is probably the hardest part about shutting down these stores.  We will have to see how Lampert handles this.  For locations that could be replaced by better retailers (I'm thinking Kmart), Lampert could try to transition his employees to these new stores.  After all, these stores will need a workforce to run them.  The last time I went to a Sears or Kmart, it actually felt that there were very few employees relative to the space.  Whether the remaining Sears employees will be demotivated is unclear.  It depends on how Lampert decides to treat these folks and whether the remaining folks see a future for Sears in a new form.  But this is a wildcard that must be taken into account with regards to preserving brand value, particularly for appliances and tools.

[prevalou]

What is unclear to me: do you think Lampert will close or sell all big format stores in a couple of years (run off) to invest in new format stores or just reposition some of them (close the less profitable, keep the other and invest in new more specialized stores) ?

I just don't believe in the first option as a strategy: too painful and demotivating for remaining employees, big risks for the brands (how much of the brand sales that go through big format stores could be replaced by sales through other retailers ?)

[txlaw]

Well, we have to separate out Kmart and Sears.

 

All Kmart locations could very well disappear (sold/leased to other retailers or converted to Sears) with all freed up capital deployed into the other businesses under SHLD.  Demotivation of employees is not a prime concern for me here because I don't think the Kmart distribution channel is incredibly important for the key SHLD brands. 

 

Sears is different.  I think that Sears has to continue to exist to maximize the value of the brands and to take advantage of 30% appliance market share plus a housing recovery.  Some of the big format stores that are profitable will probably be kept.  Some of the big format stores will be closed in their entirety, and capital generated will be reinvested into other Sears stores (particularly new format) and into the other ventures (Sears online, other SHLD brands, PartsDirect, etc.).  Some of the big format stores will be rejiggered so that part of the real estate is occupied by other stores, hopefully with the remaining Sears space focused on appliances and tools.  And some of the big format stores could be converted into totally new concepts or facilities that Lampert has up his sleeve.

 

There is a line to walk for SHLD in order to maximize the value of its assets. 

[prevalou]

Why make Kmart disappear ? Kmart locations earn money (unlike Sears with all their brands)

[kevin4u2]

Has anyone mentioned the biggest headwind SHLD faces, namely the unfair advantage amazon and other e-retailers have on SHLD?  Sales tax laws are killing the company.  Why buy the big screen from Sears when you can get it 5-10% cheaper online (tax savings).  It's a huge disadvantage and unless it changes, SHLD is toast. 

 

If you look at the big picture retail sales have been strong, so I take the above disadvantage as the reason why. 

 

Here is what Lampert said in his 2010 letter to shareholders:

 

The two leaders in online commerce are Amazon.com and eBay. Despite operating no physical stores of their own, these two companies have built tremendous businesses over the last decade serving millions of customers every day in a broad number of categories. They have taken significant market share from traditional retailers by providing convenience, service, and competitive prices. One has to give each of these companies tremendous credit for their foresight, persistence, and execution through the collapse of the internet bubble, early skepticism, and competition against larger and more established retailers.

 

There remains, however, one advantage that the major online retailers retain that is both unfair and problematic, for competition and for communities and jobs as well. For customers in many states, Amazon and other online retailers are not required to collect sales taxes on purchases made by their customers. Since the 1992 Quill Supreme Court decision, businesses without a local “nexus” have sold goods through the mail or online without being required to charge and collect the related sales or use tax. Amazon, in particular, has argued that when it doesn’t have a physical presence in a state or local jurisdiction, it is not benefiting from police, fire protection, and other local services and therefore shouldn’t be forced to pay for them. Analyses by others suggest that the real issue is competitive advantage, more than other explanations put forward in the past.1

 

The real story here is that it is not the payment of taxes or the charging of taxes that is at issue. It is the collection of taxes on behalf of local governments from purchasers of goods and services from stores in a locality or for use in such locality. It is the latter fact that is often ignored. A person who buys products from Amazon.com is required by law to pay sales or use tax to their local jurisdiction. In practice, almost nobody does so. The cost and unpopularity of enforcing such laws has allowed customers to avoid paying sales or use taxes, even though they are required in many states and localities. If you buy a work of art or piece of jewelry in NYC, for example, and have it shipped to New Jersey or California, the seller does not collect sales tax on that purchase but the buyer would be required to pay sales or use tax on the purchase where they receive the merchandise and use the merchandise. So, a piece of jewelry shipped to California would require the buyer to pay California sales or use tax.

 

Amazon’s domestic business has grown to $12.8 billion in revenues for the year just ended. If you were to apply a 6% sales tax to this revenue (reflecting a rough average of sales taxes across multiple jurisdictions), that would amount to almost $800 million in sales and use taxes owed to state and local governments that is likely not being paid. The good news is that it is $800 million that remains in the hands of the purchasers of products from Amazon, but at the cost of jobs and new fees and taxes required to make up for lost revenue. Having delayed a level playing field for as long as they have already, Amazon has been able to build relationships with many customers that give it an advantage, even playing under the same rules as those it competes against.

 

I would propose that there be a leveling of the playing field for e-commerce merchants. Either we all collect taxes or nobody collects taxes. If state and local governments are going to require retailers like Sears and Kmart to collect sales taxes and not retailers like Amazon.com, they should recognize that over time their sales tax base will erode significantly and that they place companies who have chosen to locate stores locally at a competitive disadvantage. This will lead to a loss of revenues, the closing of local businesses, the loss of tax revenue, and ultimately to the increase in other types of taxes to compensate for the lost jobs and revenues. Alaska, Delaware, Montana, New Hampshire, and Oregon are states that currently charge no sales tax at all. Let me be clear, we have no issue with continuing our current practice of collecting tax on behalf of state and local governments. We just don’t believe that the current set of rules is sustainable without severe competitive and community damage over time.

[txlaw]

Why make Kmart disappear ? Kmart locations earn money (unlike Sears with all their brands)

 

Sure, many Kmart locations do earn money. 

 

But what exactly is the point of Kmart?  Is that retail space and traffic really being optimally utilized?  Could that square footage support more sales in the hands of better retailers who compete in the same space?  I think so.

 

Basically, I'm suggesting that most Kmart locations ought to be bought up by better businesses that compete with Kmart, providing the customers who go to those locations a better shopping experience, giving the better retailers even more scale, purchasing power, and ubiquity and allowing those retailers to capture the upside in better utilizing that square footage, and releasing capital to be deployed into Sears and other SHLD businesses and to bolster SHLD's credit ratings.  (This is assuming there won't be cannibalization of sales for the purchasing retailers' nearby competing locations, if there are such nearby locations.)

 

Win-win-win. 

[oldye]

Amazon agreed to start charging sales tax in California sometime in 2012.  I think a bigger headwind is the fact that their customer base is old and I'd guess is dying at a rate >1.5% a year. 

 

Online sales are currently about 2% of total sales...even growing at 20% a year its going to take a long time to become significant, maybe it wouldn't be a bad idea to double down and try a bid for overstock...I hear they're pretty good at liquidating inventory! 

[txlaw]

Why make Kmart disappear ? Kmart locations earn money (unlike Sears with all their brands)

 

Sure, many Kmart locations do earn money. 

 

But what exactly is the point of Kmart?  Is that retail space and traffic really being optimally utilized?  Could that square footage support more sales in the hands of better retailers who compete in the same space?  I think so.

 

Basically, I'm suggesting that most Kmart locations ought to be bought up by better businesses that compete with Kmart, providing the customers who go to those locations a better shopping experience, giving the better retailers even more scale, purchasing power, and ubiquity and allowing those retailers to capture the upside in better utilizing that square footage, and releasing capital to be deployed into Sears and other SHLD businesses and to bolster SHLD's credit ratings.  (This is assuming there won't be cannibalization of sales for the purchasing retailers' nearby competing locations, if there are such nearby locations.)

 

Win-win-win.

 

the market sees a company in utter distress. the market is now pricing the shld bonds at sub .50c on the dollar. if ESL does not do something about this, he won't have time to execute this grand elaborate plan you think he has up his sleeve. He has put this company in a distress situation. His stockholders don't like him and his bond holders don't like him. Not a great position to be in if he has this plan that seems only a few people know about, you apparently being one of them.

 

Yeah, yeah -- we all know you want Lampert to buy up the bonds you hold.  Really not a bad idea, actually. 

 

I'm telling you what I would do if I were in Lampert's position.  We'll see what he actually does when he does it.

[Grenville]

Enjoying the discussion. I read the 2010 10K over the weekend and the annual letter. I had a question if you guys could share your insight.

 

Does Sears breakout absolute $ of online sales or sales from home services which includes home improvement?

 

It would be nice to get a better feel for what parts of the business are doing good, they do provide commentary about comparables but its hard to get insight from those figures.

[Munger_Disciple]

Does the holding company guarantee the debt of Sears domestic & Kmart? From what I can tell, the domestic credit agreement and the LT bonds are asset backed by the inventories of Sears dom & Kmart only.

 

 

[prevalou]

I did not read In the 10 K a mention that the facility and the bonds were non recourse to the holding.

 

[txlaw]

Check out the recent Fitch downgrade announcement.  That should answer your question.

[txlaw]

Check out the recent Fitch downgrade announcement.  That should answer your question.

 

how? it really just confirms my analysis. what you got up your sleeve ESL?

 

That was in response to sreenr.

[AZ_Value]

Reading through the thread I couldn't help but tell myself "I hope Lampert reads this board". Because some of you guys seem to have much more detailed action plans than Eddie, or I should say than what he has communicated to shareholders so far.

 

Which begs the question, why? Why is it that his investors have to spend all this time guesstimating what's next? Why not just say exactly what he intends to do so that investors can decide whether they want in or not?

 

I don't think this is a situation where you need to keep all your cards close to the vest because someone might undercut you.

[prevalou]

I don't see the point In closing the performing business (Kmart) to concentrate on the less profitable (Sears). Lampert seems to do inverse: close marginally profitable or no profitable stores, be it Kmart or Sears, and concentrate on the more profitable.

The 100 to 120 closes stores are about In the same proportion Kmart and Sears.

[txlaw]

Reading through the thread I couldn't help but tell myself "I hope Lampert reads this board". Because some of you guys seem to have much more detailed action plans than Eddie, or I should say than what he has communicated to shareholders so far.

 

Which begs the question, why? Why is it that his investors have to spend all this time guesstimating what's next? Why not just say exactly what he intends to do so that investors can decide whether they want in or not?

 

I don't think this is a situation where you need to keep all your cards close to the vest because someone might undercut you.

 

I agree with everything you just said.  That's my main complaint about Lampert.

 

Of course, maybe nothing that has been suggested is actually in his plans.  That would be worrisome.

[BargainValueHunter]

Of course, Lampert can just be getting back at the world for that kidnapping... :)

[biaggio]

Have enjoyed discussion here.

 

I own a small Walter Schloss amount of SHLD (now a much smaller mini schloss position)

 

I invested for the same reason as Txlaw:

"SHLD has always been an asset play to me (real estate and brands) plus the optionality of Lampert deploying released capital into other businesses, not the optionality of him turning Sears and Kmart around."

 

Has the thesis been effected by recent developments? Would we feel differently if stock was still at $66 (with the recent announcements).

 

I am re evaluating my holding- hold on? sell? or average in?

 

What bothers me is:

 

i the timing of the announcement--- x mas time (I am sure it bothers the poor employees even more)---this should be the most profitable quarter.

 

ii the need to tap lines of credit.

 

iii the background of CEO (not a retail, real estate, or consumer brand guy)

 

iv value of assets probably losing value as we speak. Poor operations-No moat, etc. Potential subleasers or buyers of real estate may be waiting for SHLD's liquidation (on the other hand maybe he is in deep negotiations with potential suitors + closing of stores are part of the deal-probably wishful thinking).

 

SHLD's ongoing operations has to be (at least a small) pain in the a$$ for its competitors---SHLDs has a lot of sales that can be eventually absorbed by WMT, Loews, Target etc--- I am sure these competitors will be happy to see SHLDs demise. It appears SHLD trying to hold out til either the economy picks up + raises all boats or a deal is made with their competitors.

 

What is interesting is what he has done inside the Bermuda insurance subsidury. Will the share holders end up with ownership of Bermuda insurance co. owning real estate, brands, etc? This would be up ESL's alley as an expert in financial engineering.

 

Peter_Burke_CEO may be right-It does seem that bonds at <50 cents on the dollar may be best buy (though bond holders apparently not able to claim assets within Bermuda insurance company---I am not sure how that works-but have read that here  + elsewhere.) Peter_Burke_CEO -how do I buy these?

 

It will be interesting + instructive to see what ESL does next.

[txlaw]

I don't see the point In closing the performing business (Kmart) to concentrate on the less profitable (Sears). Lampert seems to do inverse: close marginally profitable or no profitable stores, be it Kmart or Sears, and concentrate on the more profitable.

The 100 to 120 closes stores are about In the same proportion Kmart and Sears.

 

All the stores closed are unprofitable or "marginally performing stores."  The stated goal is 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." 

 

Kmart in total is performing, but I don't see the point of keeping this subpar business when you could potentially put all your efforts into transforming Sears and growing the other SHLD businesses, which have some real things going for them.

 

This is a very common business strategy.  Sell a performing but "non-core business" for a pretty good price to someone who will optimize that business and capture the upside.  Redeploy the new capital you have into fixing your current business and growing new business lines.  There are so many of these transformations going on right now in the US.

 

Anyways, I'm signing off for a while.  Happy New Years, folks.

[Munger_Disciple]

Thanks Txlaw. The last quarter 10-Q says that credit facility expires in 2016 & the 1.25B LT debt issued in 2010 matures in 2018. And these are carried at favorable rates. So it seems like SHLD still has a reasonable time window if they decide to put most of the retail business into runoff mode and become a real estate play. But Lampert has to act fast.

 

My guess is that 2011 Q4 to date sales at Sears are bad because of their emphasis on home appliances in addition to the fact that not many people go to Sears anymore for clothing & electronics. If (and this is a major if) the housing recovers in 2012, it may finally help Sears' appliance sales.

[compoundinglife]

Enjoying the discussion. I read the 2010 10K over the weekend and the annual letter. I had a question if you guys could share your insight.

 

Does Sears breakout absolute $ of online sales or sales from home services which includes home improvement?

 

It would be nice to get a better feel for what parts of the business are doing good, they do provide commentary about comparables but its hard to get insight from those figures.

 

Long time reader, first time posting...

 

To get an idea of revenue attributable to online sales I did some crawling through linkedIn profiles and found a Sears Ecommerce manager/director that said they were responsible for around 1.5 Billion in ecom revenue. Being a tech person myself I have spent a lot of time reading through linkedin profiles for SHLD people and also reading job descriptions for the positions they have open on the Sears Holdings website. For me it helps paint of picture of whats going on behind the scenes with the online strategy. 

[given2invest]

Amazon agreed to start charging sales tax in California sometime in 2012.  I think a bigger headwind is the fact that their customer base is old and I'd guess is dying at a rate >1.5% a year. 

 

Online sales are currently about 2% of total sales...even growing at 20% a year its going to take a long time to become significant, maybe it wouldn't be a bad idea to double down and try a bid for overstock...I hear they're pretty good at liquidating inventory!

 

You're off by a factor of 3x on how big online sales are.

 

http://techcrunch.com/2010/03/08/forrester-forecast-online-retail-sales-will-grow-to-250-billion-by-2014/

[twacowfca]

Great video, and its mostly true:

 

http://www.huffingtonpost.com/grant-cardone/sears-real-problems-caugh_b_1174661.html

 

However I don't use this sort of thing to 'invest' - but it gives me a good idea why they don't have positive quarters for same store sales. I don't even shop there and I visit the stores on occasion and am surprised at why ESL didn't close more underperforming stores when he knew it would be advantageous to run fewer stores profitably.

 

Most retail store closings happen after the EOY holiday sales surge as the big sales decline begins in January.