SHLD anyone?

[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.

 

the bonds have been crushed signaling no confidence in the shld business plan. he needs to buy back debt and forget about the stock.

 

For some reason, I am having trouble getting bond quotes at the moment.

 

Help?

[wallynet]

A couple of articles to add further opinions:

 

http://seekingalpha.com/article/316117-what-will-become-of-sears-holdings-after-latest-round-of-store-closings

 

http://seekingalpha.com/article/316129-sears-holiday-hangover

 

Happy new year for everyone.

[manualofideas]

Here is a good place to get bond quotes:

http://cxa.marketwatch.com/finra/BondCenter/AdvancedScreener.aspx

[Uccmal]

Can anyone enlighten me as to how much of the total debt in Sears ESL holds?

 

The obvious route to take is bankruptcy, as per the one article above. 

 

The longer I think about this situation the graver it becomes.  My wife's mom gives everyone Sears gift cards for X-mas and she sent out a note today to everyone to use their cards quickly.  If lay persons are thinking like this then you can watch the entire business take a further hammering on today's news.  The gift card and points businesses will get killed. 

[twacowfca]

"When a management team with a reputation for brilliance tackles a business with a reputation for  bad economics, it is the reputation of the business that remains intact."

 

 

        --WEB

[oddballstocks]

It seems that part of the thesis is that Sears can sell off their real estate holdings to Target, Costco, Best Buy etc and realize the value of the underlying land.

 

The problem I see with this is outside of a one light town everywhere there is a Kmart or Sears that I've seen there is also a Target/Costco/Best Buy/Lowes in a much better more prime location within a mile or so.  It seems that we've hit the point of retail saturation.  I'd actually be interested in seeing a list of Sears/Kmart locations with distances to the nearest locations of potential tenants.

 

I think the best possible outcome is if Sears dumped their retail and licensed their brands.  I know their brands don't hold much or any mindshare with us, but they hold more than the namesake locations.  I believe craftsman still has some loyal followers, same with Lands End.

 

This will be interesting to see how it plays out.  I personally won't touch this with a 50ft pole, the reason?  SHLD has all of the looks of another investment that turned into my biggest loss.  I invested in Seahawk Drilling under the premise that the rigs were worth almost 2x the market cap just for scrap alone.  Even in a dire situation I figured I could realize at least my investment back under a liquidation.  The business eventually put themselves in such a bind that management sold to a competitor for less than scrap.  My thesis was dead on, the buyer touted their amazing buy in the acquisition slide.  The buyer actually scrapped the rigs and realized the liquidation value I was betting on.  I believed I had a margin of safety in buying assets for cheap, my mistake was that I had no control of the asset conversion, and that in the process of trying to save the business and turn things around management put themselves into a position which destroyed the margin.  I fear that SHLD is doing something similar.

[given2invest]

All of that SHLD real estate will eventually be sold to Amazon for future warehouses.

 

 

[Guest Hester]

I think the problem with SHLD is that Eddie Lampert is a capital allocator, not an operations guy. It would take the Steve Jobs or Yahweh of retailing to turn the business around. Just buying back a bunch of stock doesn't really help if the business is dying.

 

Liquidation value of the real estate as a downside I think was and is a fantasy. To sell all their commercial stores would be so difficult, especially after 2008, and winding down a business of the scope and scale of Sears/K Mart would be incredibly difficult. Firing a few hundred thousand employees would be a tough task.

[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.

 

the bonds have been crushed signaling no confidence in the shld business plan. he needs to buy back debt and forget about the stock.

 

For some reason, I am having trouble getting bond quotes at the moment.

 

Help?

 

lt debt is 60% of par.

 

That seems damned cheap. Honestly, I can't imagine that there isn't money to be made at prices like that. It does seem crazy to not buy back debt on the cheap, rather than the common. It would certainly do a lot to improve their book value.

[Parsad]

"When a management team with a reputation for brilliance tackles a business with a reputation for  bad economics, it is the reputation of the business that remains intact."

 

 

        --WEB

 

Hi Twa,

 

I agree with Buffett's comments, but how is Saks and Macy's doing better than Sears?  Part of it is that the department store business' economics and moats have diminished, but a great deal is also execution.  Sears has not executed well at all.  Cheers!

[netnet]

"When a management team with a reputation for brilliance tackles a business with a reputation for  bad economics, it is the reputation of the business that remains intact."

 

 

        --WEB

 

That is even more apt given that WEB had his own similar and admittedly misguided foray into retail--his department store purchase in the 1960's. 

[prevalou]

The question for me is why this anouncement at this time of the year (low volumes) with a presentation giving a maximum of bad news ?

- ebitda less than half last year (it can be a lot less, we don't know, just can imagine the worst)

-revolving credit facility used ( precision: last year it was not)

-no shares repurchases (generally sears repurchases shares even at higher prices)

- net inventory liquidation will bring 140 to 170 m$ (we don't know what real estate Will

-no mention of sears Canada ( we can imagine the worst given last quarter)

 

Is it innocent? Just disclosure as soon as Sears is informed?  ( last year preanoucement was In january)?Does Esl want to take the loss In 2011? Or is there other explanations ?

[Vish_ram]

the challenge is,

 

1) Lampert is not liquidating SHLD right now, hence basic liquidation analysis doesn't matter.

 

2) The market is going to price in never ending losses till Lampert reverses the current strategy. Any inventory valuations doesn't matter now. It might matter if a 3rd party can take over the company, but given the high insider ownership ,it is a moot point.

 

3) RE prices matter if Lampert is going for quick sale of RE assets.

 

SHLD is like a candle burning furiosly on both sides, all Lampert is doing is to pour kerosene to it. We've seen funny things happen. In crisis, the vendors can demand upfront cash, causing severe liquidity issues. We may reach that state when SHLD trades below 10.

 

I think that the short puts are speculative at best, what if a put doesn't trade at all (it has happened to me all the time, the spread widens to crazy levels). If you owned a share, you can sell it and get out gracefully. Short puts make sense if survival is guaranteed.

 

I think there are other easy ways to lose money in the market.

 

Every time SHLD gets down to these levels I go through the basic liquidation analysis and find myself shocked at how low SHLD is being valued relative to it's assets. Are there any others out there who still own SHLD, or have all given up hope? Seems like there's only going to be three shareholders left (Lampert, Tisch, Berkowitz) if this pessimism keeps up.

 

Inventory (at cost) net of accounts payable is higher than the market cap. At retail price, owned inventory is significantly higher than the market cap.

 

Real Estate (at cost) is significantly higher than the market cap

 

Pension and mediocre cash flows are the largest problems here, although cash flow is enough to fund the pension even at these high levels.  Too many stores are losing money, yet they stay open, even though it would seem the company could make a lot of money if the lagging stores were closed... Shares outstanding keep shrinking. The company has recently put nearly all of it's stores up for lease, sale, or partial lease... A move that would have been very exciting in the past, but today, no one seems to care... Berkowitz, Lampert, Tisch seem to be the only ones left in this one, and judging from their statements in interviews and at the annual meeting, none appear concerned at all.

 

There's huge temptation here to go in big. Is it possible for these three to be wrong? If so, how is it possible that everyone else is wrong??

[tooskinneejs]

"We've seen funny things happen. In crisis, the vendors can demand upfront cash, causing severe liquidity issues."

 

This happened with Circuit City back in 2008.  Circuit City was experiencing declining sales but still looked healthy from a balance sheet perspective.  As of August 31, 2008, it had shareholders' equity of over $1 billion, positive working capital (current assets less current liabilities) of $481 million, and a debt to equity ratio of only 0.26.

 

Yet two months later, in November 2008, the company filed for bankruptcy protection.  Why?  Because suppliers got nervous, cut off credit, and demanded cash up front for shipments.

 

http://en.wikipedia.org/wiki/Circuit_City_Stores#Bankruptcy_and_liquidation

 

I'm not saying that this will happen with Sears, but as vish_ram said, it is a possibility.  The black swan event.

[benhacker]

Peter,

 

I have some shld bonds in my account that are trading at less than .40c on the dollar.

 

Can you share the CUSIP of these bonds?  Are they the '42 / '43's or something else like SSRAP?  I can't figure out a way to trade the '42 / '43 maturity bonds, and nothing else I see (other than SSRAP for brief periods today / yesterday) is trading that low.

 

On a side note, during the recession, Eddie did buy back some bonds, but not very much, especially given some of the long bonds got <35% of par.  He kept buying stock at that time.

 

Ben

[BargainValueHunter]

I wonder what the values are now compared to 2007 (when this article was published)...

 

http://www.businessweek.com/magazine/content/07_16/b4030071.htm

 

BusinessWeek has learned that Sears has created $1.8 billion worth of securities based on the brand names Kenmore, Craftsman, and DieHard. In essence, it has transferred ownership of the brands to another entity, which it then pays for the right to use the brands. The deal, carried off last May, was the biggest "securitization" of intellectual property in history, according to Eric Hedman, an analyst at Standard & Poor's (MHP ), which, like BusinessWeek, is a unit of The McGraw-Hill Companies. (MHP ) The story hasn't gotten out until now because the bonds haven't actually changed hands—Sears is holding them in its Bermuda-based insurance subsidiary—and because Sears has never disclosed them, nor has it had to do so. But that could change if Sears were to decide to sell them to outside investors and collect the cash.

 

$1.8 billion?  Hmmm...

 

The KCD bonds have a higher credit rating than Sears' regular bonds. Moody's Investors Service (MCO ) has given KCD an investment-grade rating of Baa2, four rungs better than Sears' junk rating of Ba1. How so? If Sears were to go bankrupt, regular bondholders wouldn't be able to get their hands on the Kenmore, Craftsman, and DieHard trademarks, the company's crown jewels. They would go instead to the insurer. Sears says there is nothing unusual about securitizing assets; many companies, including most of the largest retailers, evaluate alternatives to create value from their brands, real estate, and other assets.

 

I would love for author of this article to do an update!

 

 

[prevalou]

a lot of critics point now to underinvestment in Sears and Kmart stores and it is their explanation about the poor same store sales.

What about Macy's ? capital expenditures more than halved since 2006 (3$ per sf now) but its sales are improving. Nobody seems to care here about dwindling capital expenditures.

 

Maybe there are other explanations. Electronics and appliances are a big portion of sales at Sears, a small portion at Macy's. Electronic brick& mortar seems to be in secular decline. Bad merchandizing is a possible explanation, too

 

[prevalou]

concerning Circuit City bankruptcy , I wonder if it can be assimilated with Sears. Circuit City inventory was not very diversified (electronics) and subject to a rapid obsolescence. So It was normal suppliers demanded cash upfront. Sears inventory is diverse and in the aggregate more stable.

[txlaw]

John Hempton's take on SHLD:

 

http://brontecapital.blogspot.com/2011/12/sears-holdings-liquidation-sale.html

 

I disagree with him on several accounts.

 

Hempton repeats a misconception that many people have about the SHLD real estate play.  They assume only owned stores represent the real estate value in SHLD.  That is not the case.  Lowest cost leases also represent a chunk of the value in the real estate that, in theory, should provide increasing positive cash flow as cash burning/break even stores are closed and the space is sublet to more productive businesses.

 

Another misconception that Hempton repeats is that the plan was to liquidate the business in its entirety.  This is also wrong.  Why in the hell would Sears just liquidate a retail business that has 30% share of the appliance market?  That makes no sense. 

 

The smarter course of action for Sears, which Lampert is trying to take, is to maintain appliance market share by creating these new "specialty store" formats.  We all know that full line hasn't been working and has been a negative for the appliance/tool business.  However, there is a line to walk with suppliers, as one can't just close up a bunch of sales-generating stores at once.  For K-Mart, Lampert has been trying to optimize the cash flow from these crappy stores and keep customer traffic from declining.  Hopefully, those K-Mart locations get bought out by good retailers that provide the same services and that will draw much more traffic.

 

Finally, I think it's actually been sort of remarkable that shutting down stores hasn't been an ongoing phenomenon at SHLD with much greater firings over the last few years.  We'll see whether it will be difficult to close up these locations.  One thing that Hempton ignores is that if Sears space were to be better utilized, that might actually result in net job creation for the location.  For example, when a Sears is replaced by a Whole Foods, I'm thinking that's actually a plus in terms of creating jobs.  It's also not impossible that some of the Sears employees actually go work at the new place, although I'm not sure about that.  Can't help but get the feeling that Hempton is crying crocodile tears for the SHLD employees.

[Baoxiaodao]

Retailing is a tough business. I once watched a video of a guy telling how the great fortune was made in retailing, like A&P and Walmart. But the question is, how much destruction those winners had brought?

 

Eddie is a financier. It is still not too late to admit his mistake and quit this game.

[prevalou]

I agree with taxlaw.

Moreover after reading chairman's letters, I don't see a will from Lampert to liquidate the business. In 2006, after Sears merger, Lampert talked about a new start up consisting in Sears +Kmart. In 2010, there was a net addition in the number of stores for instance.

It is not a foregone conclusion that hedge fund people can't manage retailers (Bezos was a hedge fund guy too)

[txlaw]

Retailing is a tough business. I once watched a video of a guy telling how the great fortune was made in retailing, like A&P and Walmart. But the question is, how much destruction those winners had brought?

 

Eddie is a financier. It is still not too late to admit his mistake and quit this game.

 

Gary Hoover video, right?

 

Retailing is certainly a tough business.  That's why the smart thing to do is to optimize and maintain the Sears appliance/tools retail business, optimize the customer traffic for the Kmart locations as best as can be done for Kmart and then sell to others who can really utilize that traffic, more widely distribute the brands that SHLD has, and utilize the value in the real estate (owned and leased). 

 

I agree that Lampert needs to bring in real operators to counterbalance his financial wizardry.  But he most certainly should not "quit this game," whatever that means.

[bookie71]

Sears reminds me of Montgomery Wards, it was the powerhouse and then Sears came along.  Sears has Costco amd Walmart

http://en.wikipedia.org/wiki/Montgomery_Ward

 

[Baoxiaodao]

Retailing is a tough business. I once watched a video of a guy telling how the great fortune was made in retailing, like A&P and Walmart. But the question is, how much destruction those winners had brought?

 

Eddie is a financier. It is still not too late to admit his mistake and quit this game.

 

Gary Hoover video, right?

 

Retailing is certainly a tough business.  That's why the smart thing to do is to optimize and maintain the Sears appliance/tools retail business, optimize the customer traffic for the Kmart locations as best as can be done for Kmart and then sell to others who can really utilize that traffic, more widely distribute the brands that SHLD has, and utilize the value in the real estate (owned and leased). 

 

I agree that Lampert needs to bring in real operators to counterbalance his financial wizardry.  But he most certainly should not "quit this game," whatever that means.

 

Txlaw, I realized I made the judgement too early. You never know what the ending is until the ending is there. I apologize. Even though I am a million miles behind Howard Marks, I am very proud that I am in the same 'I dunno" school as he is. Face the reality. Investing is all about resource allocation. Let's say Eddie sold Sears plus Kmart at the peak, he would have done much much better with his stock-picking skills. I think even you cannot deny it. He was kind of bound by this investment.

 

I never put a dime in business like retailers(delti excluded) and juniors. I learned from Kuppy that 98% of Junior are suckers. I also learned that retailing is a very hard business from the presentation and the audio book about A&P. So I stayed away from them. I do believe to become rich you need to avoid trouble. In fact, I even do not want to hear it. This has served me well after my failure at FMD and Delta Financial(I almost lost my shirt on them).

 

I think now it is not about fixing the business. Sears will have a confidence problem. It really does not matter how much cash it has. Retailing is a marginal business and the operating leverage is huge. Eddie was very successful for many years and he tried to use the same financial method to solve Sear's problem. To a man with a hammer, everything looks like a nail. How could you turn around a retailer by buying back stocks? This is the simple question. However, when things were going well. No one bothered to ask.

 

In the end, I admit that I have no idea about Sears' financials. I wrote this after reading the WSJ article.

 

 

[txlaw]

Baoxiaodao,

 

Some comments below.  And thanks for your input, btw.  Always good to get viewpoints from other smart investors.

 

Let's say Eddie sold Sears plus Kmart at the peak, he would have done much much better with his stock-picking skills. I think even you cannot deny it. He was kind of bound by this investment.

 

I think you are correct.  He probably could be doing much better for his investors had he sold at the top and deployed into new opportunities.

 

However, I believe part of ESL's selling point is the strategy of taking huge stakes in public companies and being a super long term owner.  At least, that's how he portrayed his strategy in the video where he was on a panel with Larry Summers.  He has locked himself into being a SHLD holder for the long run just by virtue of running his hedge fund.

 

I also think Lampert may have an urge to be like WEB, who is clearly a hero to him, and do more than just manage investments.  I'm sure Lampert is enamored with the idea of being in charge of a non investment-management business, particularly one with a storied past like Sears.  In that respect, he is very much like WEB, who is a scholar of business.

 

There could also be a "tax laundering" strategy involved with SHLD, the kind that is only available to the super wealthy.  (See some of the discussions that I have had with Ericopoly in the past about corporate taxation.)

 

Eddie was very successful for many years and he tried to use the same financial method to solve Sear's problem. To a man with a hammer, everything looks like a nail. How could you turn around a retailer by buying back stocks? This is the simple question. However, when things were going well. No one bothered to ask.

 

I think you are right to criticize Lampert for buying back stock, particularly at the sky high levels that he bought stock.  However, not necessarily for the reasons you're thinking, as the buyback of stock is unrelated to salvaging whatever is left of the retail business.  The buyback reminds me of when WEB wanted to buy up all of BRK's stock:

 

Berkshire was not worth more than forty bucks as a business.  You couldn't have sold the textile mills and insurance business for more.  And half the money was in a lousy business.  I mean a really lousy business: twenty bucks a share of the forty bucks.  And I didn't know what I was going to do, I literally didn't.  I mean, I was rich enough already.  But in effect, I was betting that I could do something.  I was betting on myself.  And though it sounds egotistical, anybody who might have though it was worth more than forty bucks was purely paying for me.  Because the company was not worth that.

 

Lampert may have been betting on himself when he was buying up stock at nosebleed prices.

 

So the question I have asked myself is this: How much is SHLD worth assuming that Lampert cannot turn the retail ops around and must put the company into runoff?  The answer I have come up with is this: Runoff value is more than what SHLD is currently trading at. 

 

Every time SHLD has gotten close to what I believe runoff value is, I have always sold it because I was never sure how long Lampert would take to really begin to maximize value.  But now I think Lampert will be forced to be the rational person that he is and take appropriate actions to maximize value.  That's why I was a bit perplexed at the market reaction when the announcement was made.  I have never understood why people valued SHLD based on FCF from retail ops, given the future deterioration I thought was inevitable. 

 

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.