SHLD anyone?

[frankhkii]

"Some of these stores have flat rents for the next 40 years @$2-4psf which leaves a lot of room for profitability..."

 

With such low occupancy costs, one should reasonably expect the company to be gushing operating income, right?  Instead, operating margins were 1% for fiscal 2010 and -3% for the 39 weeks ended October 29, 2011.  So despite (supposedly) having very favorable occupancy costs, the company can't even generate decent income from operations?  Is that a sign of a good business?  And what is long term direction of the company's retail profitability when you have six years of continually declining sales and major under-investment in store maintenance?

 

"It makes more sense that Eddie is holding the real estate/leases because of its underlying value."

 

I heard this five years ago.  Everyone was hyped on Lampert 'unlocking' some kind of secret value in the real estate/leases.  Nothing has happened since and I still haven't heard anything that indicates what might happen and when.

 

"I believe that Sears would be able to shrewdly negotiate its way out of leases on most unprofitable stores if they wanted to."

 

Why wouldn't they want to get rid of their most unprofitable stores?  And if they do want to get rid of them and can do so easily, why haven't they?

 

Since you heard this 5 years ago we have gone through the worst economic times since the great depression.  This undoubtedly slowed down the real estate plans.  Commercial real estate has been in a terrible place with incredibly low rents and almost no demand.  Its plausible that Eddie thought rates may improve in the next few years so he continued to run the unprofitable stores as a way to hold the real estate until rates improved...On "big box" spaces such as theirs, typical leases run for 20years+ with options.  A minimum lease would probably run for 10 years with options.  It is prudent to not sign a lease of this length while the market rents are at all time lows.

 

The reason they wouldn't want to get out the unprofitable stores is because of the underlying RE value...See paragraph above. 

[FCharlie]

I heard this five years ago.  Everyone was hyped on Lampert 'unlocking' some kind of secret value in the real estate/leases.  Nothing has happened since and I still haven't heard anything that indicates what might happen and when.

 

I agree.  I have absolutely no clue as to why people think SHLD is going sky high.  There are probably some better vehicles to bet on a real estate bounce.  The only other value driver here seems to be the cash flow from the stores.

 

And what does he do with it?  Buys more SHLD shares.  No, he's not diversifying into better streams of cash flow, he's just effectively dividending it out.

 

So what do you get left with if the cash flow keeps on dwindling? 

 

So basically the only play here seems to be KMart getting up and kicking everyone's butt in retailing.  But it ain't gonna happen unless he invests heavily in the stores, instead of dividending it all out.

 

So I don't understand where the upside is unless you reinvest in the stores instead of returning it all to shareholders.

 

 

I think the upside and the "secret" value lies in the fact that the stores are operating, any cash that can be taken out of them is taken out and shares are repurchased, shrinking the share count to 106 million on inventory and real estate valued at cost of nearly $15 billion.

 

The real estate on the books is also misleading. Kmart entered bankruptcy with $1.5 billion of land and buildings at cost, and exited bankruptcy with $1 million thanks to fresh start accounting. Kmart still owned 135 stores, 3 distribution centers, and HQ. So do the division... $1 million for 139 properties is $7,194.24 per property. Seven thousand bucks. Book value is misleading.  Perhaps real estate values have declined, but shares outstanding have declined more. Real estate values can rise... most likely shares outstanding will continue to fall.

 

I think the income statement would look a lot better with the money losing stores closed, but it may indeed be more strategic to operate them until rent rates rise and then turn them into leased stores. Lampert controls this company. If there were no hope, why repurchase stock? Why not redeploy the cash into external investments?

[hardincap]

I'm no expert in retail, but anyone have a theory why Sears has been performing so terribly this year vs last?

 

39 weeks ending Q3      same in 2010

        (810)           (189)

 

The other retailers dont seem to be hurting nearly as bad - TGT, WMT, HD, L all increased Q3 profit from '10.

 

Is Sears becoming irrelevant quickly?

[alertmeipp]

who would shop at Sears here?

 

who would buy Sears gift card for their friends and relatives?

[Guest Hester]

who would shop at Sears here?

 

who would buy Sears gift card for their friends and relatives?

 

I guess you have never heard of a gag gift?

[BargainValueHunter]

Where I live the Wal-Mart has the lowest prices but is always packed and seems to closely resemble the Costco from Idiocracy.

 

The Target is o.k. but also can be crowded.

 

The Sears is not crowded and the prices aren't too bad. It ain't pretty but it has its purpose.

 

 

[bargainman]

The Sears is not crowded and the prices aren't too bad. It ain't pretty but it has its purpose.

 

Are you sure about this?  Since I own some shares, everytime I want something related to tools or appliances I always check out Sears, and invariably I can find the same thing elsewhere cheaper, sometimes significantly so and sometimes with better terms.  For example I was looking for a deep freezer, and found one cheaper at Costco with it's fabulous no questions asked return policy.  Every time I've read Lampert's letter, I remember him talking about how they don't want to compete on service and the overall experience, not price.  With Walmart, Amazon, Home Depot, and Costco competing on price, I'm not sure what else they are going to compete on.  Target kind of competes on price and convenience.. Not sure about others...

[BargainValueHunter]

The Sears is not crowded and the prices aren't too bad. It ain't pretty but it has its purpose.

 

Are you sure about this?  Since I own some shares, everytime I want something related to tools or appliances I always check out Sears, and invariably I can find the same thing elsewhere cheaper, sometimes significantly so and sometimes with better terms.  For example I was looking for a deep freezer, and found one cheaper at Costco with it's fabulous no questions asked return policy.  Every time I've read Lampert's letter, I remember him talking about how they don't want to compete on service and the overall experience, not price.  With Walmart, Amazon, Home Depot, and Costco competing on price, I'm not sure what else they are going to compete on.  Target kind of competes on price and convenience.. Not sure about others...

 

YMMV

[Uccmal]

Sears Canada has massively deteriorated in the past two to three years.  I used to shop there all the time.  Now I don't even set foot inside.  They don't stock anything I needor want and I am hardly a virtuoso shopper.  Lands End QC is abominable, as are all their proprietary products.  If I want to buy this garbage I can pay a fraction of the price at Walmart.

 

However, the Sears Homesense here seems to do better, with furniture and appliances.  But the markup on this stuff is tight. 

 

IMHO, management out of Illinois, whatever their agenda, has destroyed a former cash cow in Sears Canada.  It was their battle to win, but they ruined it through their aggressive cutting, at the staff, and product levels.  In effect, Eddie has ruined a very successful company.  You couldn't pay me to invest with him in this monster. 

[hardincap]

Uccmal, can you elaborate on the decline of Sears Canada over the past two years?

 

Comps fell 8% in Q3.. quite ugly.

[mevsemt]

SHLD just announced they're closing up to 120 Kmart and/or Sears full line stores.  http://finance.yahoo.com/news/Sears-close-120-Kmart-Sears-rb-4129537619.html?x=0. 

 

Could get interesting... thoughts?

[mevsemt]

Here's the link from the company: http://searsholdings.com/pubrel/pressOne.jsp?id=s16310_item98114

[Uccmal]

Uccmal, can you elaborate on the decline of Sears Canada over the past two years.

 

Only anecdotally.  Sears used to be my first stop for small appliances, christmas gifts, and clothes for myself.  About 3 years ago, coincidentally as sears us was consolidating control, I went through the coffee maker debacle.  Went through three coffee makers before giving up and buying one elsewhere.  Then cam the clothing problem.  I was trying to buy pants and couldn't find a change room - they were all taped up, and once I found one a couple of hundred yards away, then I couldn't find an open cash desk.  Then the shirts that shrank dramatically after washing the same way I had always washed.  This Christmas I wanted to buy a Jewelry box as a gift.  Sears website had stuff on it but when I went into the Sears store, there was nothing, and the Jewelry section had shrunk to about three small desks.  Now correct me if I am wrong but Jewelry and clothes are fairly high margin items.  Oh, and there was the bassinet two years ago.  Sears has a substantial baby section.  There was a nice bassinet for sale on the floor.  We told the sales person we wanted to buy one, she checked inventory and couldn't find one - now there was this one on the floor.  A retailer on the ball, such as Nebraska FM would have sold me that one at a discount - but not Sears.  They wanted to keep it on display to show everyone a product they didn't stock.  Went to toys r us and bought it for the same price. 

 

The store I go/went to is an anchor of one of the premier indoor malls in Toronto.  I don't know what has happened but I suspect it has to do with inventory and management 'savings' edicts coming

from Hoffman Estates.

 

To me, it looks as though SHLD has accidentally killed their company in their zeal to generate free cash flow and buy back shares.  In the brief recession of 2009 while other retailers were investing in their futures Sears was busy killing the company.  Anyone who thinks the label brands have value at this point, under present management outside of Sears, is nuts.  Gross incompetence is what has happened. 

 

What good is owning SHLD shares if the company is ever shrinking?  The worst part is that ESL may take it private one day, and freeze out those who have waited all these years for Eddie to make his

big profitable moves to turn it into the next Berkshire. 

 

Eddie is not Warren.  WEB quickly deployed Brk cash into unrelated, cash generating industries.  WEB also signaled his intent by closing his outside partnership and focusing on BRK and it's subs.  ESL has not.  As I said above, I think he is going to take this monster in house eventually, and holders who bought the stock along the way will be frozen out. 

 

Have held SHLD stock in the past and read a couple of annuals.  Gave up years ago.

[JEast]

From someone who likes Sears as I have spent around $6k there just in the last couple of months, and going again this week - I guess the option market did know something after all.

 

Now might be the time to sell the puts for a calculated speculation given that the news is out.

 

 

Cheers

JEast

[Myth465]

Sears sucks. I have not liked it as an investment for a few years. Lampert isnt acting like he is running a public company and gives investors or shareholders few clues to whats the plan. You just have to hope he is the smartest guy in the room. In everyone of my investments I know what Management wants. They may feel to execute but I know where the ball is meant to go.

 

This should be a private company and I wouldnt buy it at any price until management becomes much more transparent....

[BargainValueHunter]

Sears sucks. I have not liked it as an investment for a few years. Lampert isnt asking like he is running a public company and gives investors or shareholders few clues to whats the plan. You just have to hope he is the smartest guy in the room. In everyone of my investments I know what Management wants. They may feel to execute but I know where the ball is meant to go.

 

This should be a private company and I wouldnt buy it at any price until management becomes much more transparent....

 

Is there another example of a lauded asset allocator making a baffling play that confuses everybody but in the end it all worked out fine?

 

I don't mean the many Buffett moves that made perfect sense in a backwards investing world (his insurance investments during the go-go tech boom, for example).

 

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?

[OracleofCarolina]

Berkowitz just can't catch a break. Last report I see is SHLD being 8% of assets. Ouch!

[hardincap]

Sears sucks. I have not liked it as an investment for a few years. Lampert isnt acting like he is running a public company and gives investors or shareholders few clues to whats the plan. You just have to hope he is the smartest guy in the room. In everyone of my investments I know what Management wants. They may feel to execute but I know where the ball is meant to go.

 

This should be a private company and I wouldnt buy it at any price until management becomes much more transparent....

 

Maybe you should read his letters more carefully. He is trying to turnaround retail through technology. Every brick and mortar retail store is going to be challenged by online shopping in the coming years, and Lampert is trying to beat the pack. If it doesn't work, well, he can liquidate the company for higher than its market cap value today. People forget Sears is very sensitive to the housing market due to its reliance on appliance sales, and housing is in a depression. As housing recovers, so will Sears' bottom line and liquidation value.

[txlaw]

It's about time.

 

Now we get to see whether the real estate under the crappiest stores is worth anything.  We'll also see if SHLD management has woken up and realized that they need to try to keep appliance market share by transitioning from a depressing full line experience at Sears to a more appliance-and tool-oriented store base.  We'll see what they do with Kmart -- I still think they should all be converted to Targets, Walmarts, and Costcos.

 

It's also time to really push to monetize the Lands' End brand.  Interesting that sales actually went up despite the crappy Sears experience.

 

Now is the time for us value guys -- even those who wouldn't touch SHLD with a 10-foot pole -- to really pay attention to what SHLD does.  I bought some more today.  Wouldn't be surprised to see it tank even further.

[alertmeipp]

It's about time.

 

Now we get to see whether the real estate under the crappiest stores is worth anything.  We'll also see if SHLD management has woken up and realized that they need to try to keep appliance market share by transitioning from a depressing full line experience at Sears to a more appliance-and tool-oriented store base.  We'll see what they do with Kmart -- I still think they should all be converted to Targets, Walmarts, and Costcos.

 

It's also time to really push to monetize the Lands' End brand.  Interesting that sales actually went up despite the crappy Sears experience.

 

Now is the time for us value guys -- even those who wouldn't touch SHLD with a 10-foot pole -- to really pay attention to what SHLD does.  I bought some more today.  Wouldn't be surprised to see it tank even further.

 

Retails turnaround is often hard and very costly.

[Myth465]

How the hell do you turn around a retail business without spending cash. Sears stores suck. They will do ok in nowheres ville but they are dead in the water in most major cities. Walmarts are cheaper and look better, not sure how you beat that, let alone Target, Best Buy, Loews....

 

How can you turn around a retail organization by starving it of capital and buying back stock at whatever price?

Lampert is smart and Sears will probably make money on RE or some other hidden asset, but that asset will be hidden, the plan will stay hidden, and the gains may not accrue to minority shareholders when it is all said and done.

 

I wont invest until I hear a credible plan, not some BS about enhancing value, turning around retail, brand management, and shrinking sharecount.

[Vish_ram]

I think Lampert's strategy would have worked 20 or even 15 years back. We live in an age of internet, with folks comparing prices using smart phones. With the entire industry reducing the number of retail locations or cutting it back, the marginal players like SHLD will get squeezed out. I have never seen or heard of a retailer that shrunk their (revenues) way to profitability & prosperity. The same goes for a retailer that never spruced up the stores. Lampert can only blame the economy for so long, the truth will be out soon.

 

Few months back, when I spent 5K on appliances, I didnt find any compelling prices at Sears online. i've not visited a sears store in 2 years. They've totally lost the my mind share.

 

Here is an option, spin off lands end, craftsman and other good brands and let that co. license to sears holding. THen slowly lead the main sears holding to bankruptcy or liquidate.

 

what is amazing is that the market has been right so far.

[schin]

Did you noticed he stopped buying back shares this quarter even at these depressed prices?

[rijk]

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

[merkhet]

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.