SHLD anyone?

[merkhet]

I watched CNBC today -- one of the few times I'll ever do so.  (Also, one of the few times I watched CNBC and didn't feel like it was making me dumber...)

 

What struck me most were three things (about Rainwater):

 

(1) The measure of a man is not how much money you make but rather how many people you know are wiling to go out of their way to help you when you're down. (Hopefully most people on this board already know this...)

 

(2) Rainwater used to say that if it's not worth putting 25% of your assets into it, why bother?

 

(3) John Goff and Barry Sternlicht talking about how they came up with a computer model to bid on properties and it spit out $108M and when the ask came in at $112M,  they wanted to reject it.  Rainwater said "If it's a good deal at $108, it's good at $112," but deferred to them.  Sterlicht mentioned that they left $200M on the table.

 

Not a lot was said about Sears -- I think that I agree that Lampert isn't at his Berkshire moment.  He wants to reinvent Sears.  I thought what was particularly interesting is the discussion about how the internet is changing things -- Eddie or someone else indicated that distribution capability matters in the new retail paradigm... I'm wondering if he's trying to do something with that...

[BTShine]

Does anyone think that SHLD isn't doing as poorly as their income statement suggests? 

 

Whenever I read the filings, presentations and other information on Sears, there are bits of info related to how SHLD is expensing some investments instead of capitalizing the investments; particularly investments in technology and SYWR.  It makes profits look poor in the short term, but in the long term it could pay off.

 

At the shareholders meeting last year the said ShopYourWayRewards hurt margins...I think by 40 bps...while they also mentioned that it's an investment in the company, not just an expense (which I agree with).  This holiday season then brought out even more aggressive SYWR promotions...5% discounts at Kmart and 2% at Sears...which could have hurt margins even more than the 40 bps of last year.  Maybe combined the SYWR and 5% & 2% discounts hurt margins by 100 bps? 

 

What do you all think? 

[bargainman]

Does anyone think that SHLD isn't doing as poorly as their income statement suggests? 

 

Whenever I read the filings, presentations and other information on Sears, there are bits of info related to how SHLD is expensing some investments instead of capitalizing the investments; particularly investments in technology and SYWR.  It makes profits look poor in the short term, but in the long term it could pay off.

 

At the shareholders meeting last year the said ShopYourWayRewards hurt margins...I think by 40 bps...while they also mentioned that it's an investment in the company, not just an expense (which I agree with).  This holiday season then brought out even more aggressive SYWR promotions...5% discounts at Kmart and 2% at Sears...which could have hurt margins even more than the 40 bps of last year.  Maybe combined the SYWR and 5% & 2% discounts hurt margins by 100 bps? 

 

What do you all think?

 

I think that if you had every company try to pass off an investment in technology as an asset Sears probably would not be that far ahead of anyone else!  I mean compare them to amazon, target, walmart.  Do you think any of those companies are investing any less in technology?  I seriously doubt it.  That said your point is one that is brought up in the book "It's earnings that count".  If I remember he looks at earnings as defensive and enterprising (I think).  The enterprising earnings he capitalizes R&D and marketing efforts to some degree.  That's an 'aggressive' way to look at the earnings.  It also assumes that they'll somehow be able to derive significant future benefit from that technology, and with technology it's always a toss up.. You never know if those millions you spent on web servers will be worth a lot or will be a lost cause...  Especially for a company like Sears which really does not have a history of tech wizardry.

[biaggio]

http://www.bizjournals.com/stlouis/morning_call/2012/04/general-growth-to-purchase-11-sears.html?ana=yfcpc

 

General Growth Properties, the majority owner of the Saint Louis Galleria and Plaza Frontenac, has acquired 11 stores from Sears Holdings Corp.    for $270 million, the Chicago Tribune reports

[FCharlie]

http://www.bizjournals.com/stlouis/morning_call/2012/04/general-growth-to-purchase-11-sears.html?ana=yfcpc

 

General Growth Properties, the majority owner of the Saint Louis Galleria and Plaza Frontenac, has acquired 11 stores from Sears Holdings Corp.    for $270 million, the Chicago Tribune reports

 

$270 as a percentage of today's market cap is 4.5%

 

Sears Canada is selling 3 store leases for $170 million

 

$170 as a percentage of today's market cap is 2.9%

 

Sears is offering Land's End for $2 billion

 

$2 billion as a percentage of today's market cap is 33.8%

 

Sears is offering it's Dealer Stores in a rights offering, and expects $450 million in proceeds

 

$450 million as a percentage of today's market cap is 7.6%

 

Sears is planning inventory reductions of $500 million from the closure of hundreds of stores

 

$500 million as a percentage of market cap is 8.4%

 

Sears has $750 million in cash as of the end of 2011

 

$750 million as a percentage of today's market cap is 12.7%

 

Total cash and expected cash $4.14 billion ($270m, $170m, $2,000m, $450m, $500m, $750m)

 

$4.14 billion as a percentage of today's market cap is 70.1%

 

Sears needs to put $310million into it's pension this year.

 

Sears and Kmart are closing 173 stores during the first half of 2012.

 

If one logically assumes the 173 stores that close are unprofitable, one would logically assume the remaining business will be profitable again. If we assume that the remaining business generates enough cash to fund the pension, it would seem SHLD is very interesting here, at $55

[BTShine]

FCharlie,

 

Thanks for laying that out. 

 

It looks like SHLD had reduced its inventory by $500 million as of 1/28/12 vs. 1/29/11, so we might be double counting the inventory reduction.  That said, there will likely be a lot of cash on hand if we can sell Lands End for $2 Billion or more.

 

 

[FCharlie]

FCharlie,

 

Thanks for laying that out. 

 

It looks like SHLD had reduced its inventory by $500 million as of 1/28/12 vs. 1/29/11, so we might be double counting the inventory reduction.  That said, there will likely be a lot of cash on hand if we can sell Lands End for $2 Billion or more.

 

It will be interesting to see if SHLD continues to repurchase stock now that they have a huge pile of cash, and if so, at what prices will they repurchase stock.

 

If you look at the remaining business, you're still talking about 700+ owned stores, billions of owned inventory, Craftsman, Die Hard, Kenmore, and one would assume a profitable business. If the business can simply generate enough cash to fund the pension (which implies GAAP profits of zero given the level of depreciation vs. cap ex)... If the business can fund the pension from operations, then at some point, having 70% of your market cap in cash, huge remaining assets, and some level of free cash flow is going to explode this stock higher.

[prevalou]

you don't mention Sears debt:

 

$ 3 400 m

 

and the pension plan deficit: $ 2 200 m

 

So with $ 4 000 m cash it remains  $ 1 600 m liability.

[BargainValueHunter]

you don't mention Sears debt:

 

$ 3 400 m

 

and the pension plan deficit: $ 2 200 m

 

So with $ 4 000 m cash it remains  $ 1 600 m liability.

 

When is the debt due?

[dcollon]

Attached is a quick snapshot of their debt listed on FactSet

SHLD_Debt.pdf

[bargainman]

If you look at the remaining business, you're still talking about 700+ owned stores, billions of owned inventory, Craftsman, Die Hard, Kenmore, and one would assume a profitable business. If the business can simply generate enough cash to fund the pension (which implies GAAP profits of zero given the level of depreciation vs. cap ex)... If the business can fund the pension from operations, then at some point, having 70% of your market cap in cash, huge remaining assets, and some level of free cash flow is going to explode this stock higher.

 

Are you taking account a decline in sales/profitability?  Or are you assuming that the stores will continue to sell at their current level?  Do you think their brands will keep their current market share with a smaller store footprint? 

[FCharlie]

you don't mention Sears debt:

 

$ 3 400 m

 

and the pension plan deficit: $ 2 200 m

 

So with $ 4 000 m cash it remains  $ 1 600 m liability.

 

$1.1 billion of that debt is seasonal. Only $2 billion of LT debt

 

Pension liability is material, but it's based on projections and discount rates. A 1% change in interest rates would lower that pension deficit by $500 million. The stock market also should continue to improve as the economy continues to improve. Show me 4% Fed Funds and a decent housing market/economy, and SHLD's pension liability will vanish. In the meantime, what's happening today, is that SHLD needs to fund it's pension with $310 million this year. My point is simple. If closing almost 200 stores will bring the core business back to profitability, enough to fund the pension, then why would the business not be undervalued with up to 70% of it's market cap in cash and huge assets still on the books?

[FCharlie]

If you look at the remaining business, you're still talking about 700+ owned stores, billions of owned inventory, Craftsman, Die Hard, Kenmore, and one would assume a profitable business. If the business can simply generate enough cash to fund the pension (which implies GAAP profits of zero given the level of depreciation vs. cap ex)... If the business can fund the pension from operations, then at some point, having 70% of your market cap in cash, huge remaining assets, and some level of free cash flow is going to explode this stock higher.

 

 

Are you taking account a decline in sales/profitability?  Or are you assuming that the stores will continue to sell at their current level?  Do you think their brands will keep their current market share with a smaller store footprint?

 

I'm taking into account an increase in profitability because almost 200 stores are closing. Hard to imagine SHLD is closing profitable stores. I think their brands will increase market share because they are being sold in multiple places, Costco, Ace Hardware, etc.

 

 

[prevalou]

Sears short term debt was seasonal last year, not this year. That is the problem.

I'm not sure the pension gap will vanish with a better economy. The pension fund is invested at 70% in bonds, so an increase in interest rates would be à negative even if the liability side would be positively impacted.

 

[FCharlie]

Sears short term debt was seasonal last year, not this year. That is the problem.

I'm not sure the pension gap will vanish with a better economy. The pension fund is invested at 70% in bonds, so an increase in interest rates would be à negative even if the liability side would be positively impacted.

 

A better economy = higher S&P 500 and higher interest rates. I asked the C.F.O. at the annual meeting about the pension. He said a 1% change in interest rates would impact pension liability by "about $500 million" SHLD has put hundreds of millions into the pension over the years, and the liability has grown. Why? They keep lowering the discount rate and the S&P 500 is lower today than five years ago. It's perfectly reasonable to expect the inverse as things continue to improve. That pension liability is over $20 per share. 1/3 of the stock price.

[prevalou]

yes, it is reasonnable to think a better economy will decrease the liability. On the asset side, will the increase in the stock market (30%of the pension plan assets) compensate the decrease in the bond market (70% of the pension plan liabilities) ? It is a tough question.

[actuary]

If the plan is massively underfunded, then by definition the decrease in liability due to higher interest rates will swamp any hit to assets, even if the assets are 100% bonds. Since pension funds try to match the duration of assets and liabilities, I doubt the shape of the yield curve could change in such a way that long rates rise but the plan funded status declines.

 

Isn't their pension hard frozen? If no more benefits are accruing under the plan, I would think shareholders should prefer they fund it when they can get some yield on the long bond.

[theando]

I have  tried to like Sears and own a small amount. Eddie is thinking through capital allocation for you. He has  not always been  right, but I don't think he has made errors in an effort to lose money for himself or his investors.

 

Sears is an interesting conundrum due to its size. Even though the media would make yo think no one goes there they still have $40B in sales. Then comes the confusion for me...Sears still has lots of sales, but sales are down materially and costs have risen on a relative basis. Store closings as leases run out should generate cash. The question becomes is there a core of stores that can be profitable. I think this is an extremely hard question to answer. In  my opinion they need a turn in housing sooner rather than later to keep  the stores viable. If not we need to see Eddie start cutting to the bone. I think to date he has tried to preserve jobs and the company.

 

They are able to sell assets and close stores to generate cash. Selling one store (effectively) for $270M is an indicator that Sears probably has a lot of asset value (80/20 rule). At  the same time selling assets implies that Eddie likely thinks cash flow will be sub par for at least another year.

 

Now we come to the one portion operation that has taken me off of a bullish stance currently, Sears Canada. This was the hidden gem of the company.  It was consistently generating $450M+ in EBITDA. There  has been a rapid decline in sales and especially in profitability. Canada may have a bit of a housing bubble. My other concern are the statements by Target and WalMart that they are pushing aggressively into Canada. Sears' ownership of Cantrex may be a cushion as this is an  independent distributor model. This would seem to give  them an advantage in sparsely populate rural areas, but with WalMart you always need to be leery. If Sears  Canada doesn't revert to generating significant cash flow, I would become less optimistic on the ability of even Eddie Lampert to do much more than liquidate. I also believe that liquidating a company of this size/reach may be profitable, but also quite painful.

 

This is less financial analysis, but more a framework of how I currently view Sears. My view on the stock price is probably similar to others. The limited float and fluctuating short interest drives the stock price all rapidly up and down and to extremes. My other belief is that this is now a very levered call option on an economic recovery/turnaround and the leverage implied may actually make the large swings in price more understandable.

[theando]

One  more quick note. I will be attending the Sears meeting this year in Hoffman Estates. If anyone has reasonable questions I would be happy to try and ask them. I don't know what type of response we will get, but it never hurts to ask.

[bargainman]

Ok, I was surfing the web and found this:

 

http://jobs.aol.com/articles/top-10-companies-hiring/#photo-1

 

Sears is #1 on the list!  Supposedly they say they have 2,552 openings!  And get this quote:

 

"My favorite thing about working with Sears.. is the stability.  The company has been around for over 100 years.. has great benefits..  work life balance is excellent.  They have really great quality people who are easy to get along with""

 

That's borderline hilarious. I wonder if it's true or if it's a statement provided by SHLD's PR department...

[keerthiprasad]

Ok, I was surfing the web and found this:

 

http://jobs.aol.com/articles/top-10-companies-hiring/#photo-1

 

Sears is #1 on the list!  Supposedly they say they have 2,552 openings!  And get this quote:

 

"My favorite thing about working with Sears.. is the stability.  The company has been around for over 100 years.. has great benefits..  work life balance is excellent.  They have really great quality people who are easy to get along with""

 

That's borderline hilarious. I wonder if it's true or if it's a statement provided by SHLD's PR department...

 

I live in Chicago and have spoken with many people who work or have worked at sears in the last few years (mostly in tech).  Every single one of them says that there is no organization, the leadership is poor and they are looking for other jobs lol.  The quality of people they are able to attract is very low these days too.

 

[hardincap]

One  more quick note. I will be attending the Sears meeting this year in Hoffman Estates. If anyone has reasonable questions I would be happy to try and ask them. I don't know what type of response we will get, but it never hurts to ask.

 

how was the meeting? anything worth noting? thanks.

 

[txlaw]

http://abcnews.go.com/Business/wireStory/sears-execs-retailer-financially-strong-16262264

 

Pretty interesting to read that Lampert said the following:

"We can't deny that we're, one, a real estate company, and two, a customer company," Lampert said.

 

"We still have the paradigm of trying to improve our operations but realizing we have a (real estate) asset base that deserves a return."

[txlaw]

One  more quick note. I will be attending the Sears meeting this year in Hoffman Estates. If anyone has reasonable questions I would be happy to try and ask them. I don't know what type of response we will get, but it never hurts to ask.

 

how was the meeting? anything worth noting? thanks.

 

Would also love to see any notes on the meeting.

[theando]

I am still on the road. I will try to get some detailed notes together. The first thing I would note was the security at the meeting was very tight. I would estimate at least 50 guards stationed throughout the meeting. Overall, I think Eddie and the team are trying to transform the stores and business. Liquidation is not the focus.  The marketing focus going forward seems to be the Shop Your Way Rewards program. If that gains traction then I think it is possible for sales to stabilize and possibly even turn. They would certainly benefit from a turn in housing as well. I asked about the deterioration at Sears Canada from $400M in ebitda to 0. Eddie did not have an answer as to the cause or potential for rebound. That answer scared me art SCC was a great asset as recently as 12 months ago and the deterioration came without much warning.

 

He did answer a question related to taking the company private at the expense of existing shareholders. He noted that he has operated public companies like AZO etc and always wants their investors to profit along with them. I do not think he would take it private at the expense of existing shareholders unless he was forced into a really tough situation.