SHLD anyone?

[txlaw]

Lampert has been giving long-term shareholders a bigger and bigger share of a shrinking pie. Time is the enemy of a bad business. (In regard to Sears' other assets, as time goes on not only do their retails ops deteriorate but the value of the real estate and brands does along with it.)

 

I'm not so sure that the value of the real estate and brands deteriorate over time. 

 

With respect to brands, the value of a Craftsman or Die Hard, for example, actually increases the more widely these brands are distributed and in the mind of the public.  Selling only in SHLD stores has actually kept the brands down in terms of optimal value.  Lampert is taking action to more widely distribute these brands.

 

With respect to real estate, the realizable value could very well increase with time.  We are still in a real estate downturn.  Owned properties can probably be sold for much more later rather than sooner.  Attractive leases decrease in value over time, but again, the realizable prices may actually increase in a couple of years because of the real estate downturn and because of the shakeout that is going on in the retail sector.

[txlaw]

Sorry, when I said "redistribute", I meant buying back shares, reinvesting in other investments or paying dividends.  I have no problem with anything he does with excess cash, but by not reinvesting in the business cost-effectively, you end up signing its death warrant...and that's what we've seen over the last few years. 

 

Retail is incredibly fickle, and it is very much either a value proposition (Walmart, Target, etc) or experiential (Macy's, Apple Retail Stores, Saks, etc).  When you aren't providing either one, you tend to start losing your market share.  And that loss tends to accelerate the longer the experience or value proposition deteriorates.  The restaurant business is similar.  People excuse the lack of capital costs Steak'n Shake is investing because the value proposition is so damn good.  If Sardar ever raises his prices without investing in the restaurants, you'll see the same thing happen.  Cheers!

 

The flip side, though, is that you will invest money to preserve market share or to maintain revenue and never get a good economic return on that money.  Some would argue that a number of retailers have been doing this very thing for the last couple of years in the face of a shift in consumer shopping behavior, particularly as the percentage of the population becomes more Internet savvy. 

 

You don't put cash generated by a textile factory back into the textile factory when there is a fundamental shift going on in the industry that makes it such that the ultimate return from that cash can be greater through investing in a different business.  Similarly, you don't put money generated by a dying retailer back into the retailer when there is very little probability of saving it.

 

I don't think we should assume that had Lampert put money into Sears and Kmart, people would continue to shop there.  In fact, the future of Sears is probably not as we think of it.  They're trying to "transform" the business.

[biaggio]

I can see them transforming themselves to a smaller brick + mortar foot print (much less stores---sell, sublease, etc to other successful retailers) but have a much larger online/internet based business (ala Amazon)...and actually sell things that people really want (with a decent margin).

 

The physical stores they actually have left will be used to distribute products that are ordered online or to show case products that have to be seen in person like furniture (We were pleasantly surprised with our recent visit to one of their home/furniture stores).

 

All this is dependent on them surviving the immediate future.

 

I don t see retail as being a good or great business i.e too competitive. If SHLD can survive it will be interesting to see the value that ESL can derive from their assets.

[txlaw]

I can see them transforming themselves to a smaller brick + mortar foot print (much less stores---sell, sublease, etc to other successful retailers) but have a much larger online/internet based business (ala Amazon)...and actually sell things that people really want (with a decent margin).

 

The physical stores they actually have left will be used to distribute products that are ordered online or to show case products that have to be seen in person like furniture (We were pleasantly surprised with our recent visit to one of their home/furniture stores).

 

All this is dependent on them surviving the immediate future.

 

I don t see retail as being a good or great business i.e too competitive. If SHLD can survive it will be interesting to see the value that ESL can derive from their assets.

 

That's kind of what I think SHLD should do as well. 

 

As I've said before, I hate the Kmart business.  They should maximize the traffic to stores and then sell them off to Walmart or Target for conversion to better big box retailers.

 

Sears should stick to a showroom like experience where you can buy merchandise on hand with no shipping cost or order online to be shipped ASAP to your front door or to the store (at no cost).  I'm assuming they will really convert to more of a Hometown format, where they aren't selling clothes, bedding, etc. and where the space utilized is much smaller.

 

In terms of surviving in the near future, Sears has much more liquidity than people think.  They can utilize their existing credit lines, encumber more real estate assets if they need to, and sell those IP-backed ABS's that they are currently holding in the Bermuda subsidiary.

[bargainman]

Keep in mind that Eddie is using AZO stock for redemptions, effectively doubling down on SHLD for the investors that are keeping their money with him.  If bankruptcy or liquidity were an imminent concern, my guess is he might be handling the redemptions differently.

 

2 things to consider

- Eddie is an insider, and knew about the lousy performance coming up, so maybe he couldn't sell.

- SHLD's float is small and has been shrinking, and Eddie owns most of SHLD, so who's he going to sell to?

 

Selling AZO might have been his only option.  Although I suppose he could have distributed SHLD shares 'in kind', since it sounds like that's what he did with AZO anyway..

[DCG]

I continue to think SHLD would be better as a portfolio of brands that are distributed nationally/globally than a retailer. At the very least, they should liquidate K-Mart.

[FCharlie]

I continue to think SHLD would be better as a portfolio of brands that are distributed nationally/globally than a retailer. At the very least, they should liquidate K-Mart.

 

I'm amazed at how many people think Kmart should simply liquidate. When 2011's books are closed, Kmart will have an operating profit. Sears won't. When I look back over time at the operating earnings of Kmart vs. Sears, Kmart is consistently a cash generator three quarters out of the year. Kmart has cumulative operating profits over $1.1 billion for the past five years. Remember, Lampert took control of Kmart with only $700 million. I think you could make the case that Kmart would be better off had it never bought Sears at all.

[maxprogram]

With respect to brands, the value of a Craftsman or Die Hard, for example, actually increases the more widely these brands are distributed and in the mind of the public.  Selling only in SHLD stores has actually kept the brands down in terms of optimal value.  Lampert is taking action to more widely distribute these brands.

 

With respect to real estate, the realizable value could very well increase with time.  We are still in a real estate downturn.  Owned properties can probably be sold for much more later rather than sooner.  Attractive leases decrease in value over time, but again, the realizable prices may actually increase in a couple of years because of the real estate downturn and because of the shakeout that is going on in the retail sector.

 

Brands -- I agree that their value increases when distributing to other stores, which they have just started to do. But as you said, for all these years that they haven't done that, the brands value has decreased in the mind of the consumer. This is anecdotal, but I have asked a handful of people about Kenmore/Craftsman and they said as much -- i.e., they use to only buy Kenmore but don't want to go to Sears for a new washer/dryer when they can get an equivalent Whirlpool at Home Depot.

 

Real Estate -- I have a little background in retail real estate (from the lessor side) so here is my take on this: the first issue is consumer habits. When a certain Kmart location has been falling apart for 20 years, people start going to other "Class A" places/malls/etc. I know from experience that these Kmarts also devalue retail property around their stores because of this effect. So despite real estate values in general increasing over time, the fact that a Kmart has been on the land for so long discounts the value (even once it's gone). This effect will wear out but it takes time.

 

The second issue is this: "They should maximize the traffic to stores and then sell them off to Walmart or Target for conversion to better big box retailers."

 

This could probably only happen on a very small scale. I doubt there are many areas in the U.S. that Sears/Kmart exist where there isn't a Wal-Mart (or Target) within 5-10min drive. Had they done this 10-20 years ago, maybe, but most big-boxes have most of the stores they want. My guess is it would take many years to fully sell and then re-lease the properties.

[txlaw]

Real Estate -- I have a little background in retail real estate (from the lessor side) so here is my take on this: the first issue is consumer habits. When a certain Kmart location has been falling apart for 20 years, people start going to other "Class A" places/malls/etc. I know from experience that these Kmarts also devalue retail property around their stores because of this effect. So despite real estate values in general increasing over time, the fact that a Kmart has been on the land for so long discounts the value (even once it's gone). This effect will wear out but it takes time.

 

The second issue is this: "They should maximize the traffic to stores and then sell them off to Walmart or Target for conversion to better big box retailers."

 

This could probably only happen on a very small scale. I doubt there are many areas in the U.S. that Sears/Kmart exist where there isn't a Wal-Mart (or Target) within 5-10min drive. Had they done this 10-20 years ago, maybe, but most big-boxes have most of the stores they want. My guess is it would take many years to fully sell and then re-lease the properties.

 

Interesting. 

 

I know that Kmarts are often located in less than stellar areas.  Perhaps the Kmarts being rundown are part and parcel of the area in which they are located being rundown, rather than the Kmarts themselves causing the devaluation in the real estate.  I'm just skeptical that it's the Kmart itself that is causing the devaluation in real estate.  You may be right though that the underlying real estate value has decreased over the last couple of years.

 

You're also right that there are often Targets and Walmarts within 5-10 minute drives of Kmart.  But I also know that whether a store within the same area makes sense depends on the density and traffic of the area.  Where I live, there are definitely multiple Targets within less than 10 minutes drive of each other.  That's because there's more than enough traffic for two stores within such short distances of each other.

 

And what about other retailers?  Costco?  Or Kohl's?  Surely some big box retailers who think they have a shot at starting a successful store would jump at the chance to take over leases at below market prices?  Grocery stores maybe?  The point being is that the low cost space can be sold or leased to someone else who can optimize the space.  I use Walmart and Target as the natural purchasers because they are the closest competitors to Kmart.

[bargainman]

Speaking of Target and Walmart I think this has been posted before, but it's an interesting visualization of their growth over the years:

 

http://projects.flowingdata.com/walmart/

http://projects.flowingdata.com/target/

 

also one for costco

http://projects.flowingdata.com/costco/

 

Walmart:

How many stores does Walmart have?

Walmart reports unit counts each month and the most recent can be found by clicking here. At the end of fiscal year 2010 Walmart has over 4,300 stores and clubs in the U.S., and more than 8,400 units worldwide.

 

Target:

Today, Target operates nearly 1,750 stores in 49 states, including more than 240 SuperTarget® stores that include an upscale grocery shopping experience

 

Costco:

As of September 3, 2010, Costco has 572 warehouses

 

Sears:

There are 870 full-size Sears stores in the U.S. and 188 in Canada

Kmart:

As of January 29, 2011, Kmart operated a total of 1,307 (6 closing by early 2011) Kmart stores across 49 states, Guam, Puerto Rico, and the U.S. Virgin Island

[prevalou]

Sears versus Office Depot : why not a comparaison with Staples? The secular decline is less certain here...

Sears versus european iceberg: sometimes it is better not to hurry . In the european case, there is a complex political process where population has to agree with. If not the consequences of a quick action could be bad. Concerning Sears,  it is difficult from the outside to know if 500 or 700 or 1000 stores should be closed. What are the long term IRR of these stores ? Nobody knows except Lampert and his team.

[BargainValueHunter]

Somebody is short-term bullish...

 

http://finance.yahoo.com/news/How-Sears-trade-looking-optmonster-544866890.html?x=0

 

optionMONSTER's Heat Seeker tracking system detected the purchase of 1,500 February 32.50 calls for $1.44 and the sale of 3,000 February 17.50 puts for $0.58. Volume was more than twice open interest in both strikes.

 

also an interesting take on what would be a Volkswagen-style short squeeze situation...

 

http://www.creditbubblestocks.com/2011/12/short-volatility-idea-sears-holdings.html

 

At a stock price of $19 the equity value would be about $2 billion . . . . The company has been buying back $500MM-$1billion of stock per year, so either it never gets this low, or the public float rapidly disappears. Lampert, his hedge fund, Berkowitz & Tisch own 80% of the company already (Berkowitz owns 15% and could face redemptions though). Any way you slice it, the public float is only 20% of the shares or about $750 million worth at the current price ($35 per share). If it goes below, the public float could be bought in pretty easily. They have $3 billion undrawn on the revolver (only $500MM currently drawn). The company has only $1.5 billion of bonds outstanding and they don’t come due until 2018.

The real kicker is that 10% of the stock is sold short. This is half the public float! The company can easily buy back 10% of their stock at these prices (less than $400MM) and the shorts will need to cover a further 10% of the stock . . . this account for the entire 20% public float.

 

Even if Berkowitz’s fund was forced to cough up an additional 5% of the company, this looks very asymmetrical. The options trade is much more asymmetrical because the stock is hard to borrow (because heavily shorted) so the puts are artificially expensive – probably priced 50% higher than they would be otherwise.

 

Volatility is also bid up today due to the big price drop. I don’t see many ways to lose here (the stock would have to fall to below $19 despite huge buybacks which have been steady since the stock was triple here, and a huge short interest that is almost sure to get squeezed), and the (limited) upside is more than 50% for a year . . .

[texual]

The market cap is too low, and the repurchases can go a long way. I assume they are buying back as much stock as they can legally, but I've been saying that for a few years, as they slowed down.

 

Is this the moment that everything goes Fairholme/ESL's way or do they get proven wrong and lose everything? I've got no idea, time will tell.

 

I'd like to know how Berkowitz feels about SHLD now. He doesn't talk about SHLD much and uses two examples: BRKA and AAPL as comparisons. Can he use those today? He could get more active or join the board. Fairholme may help with a cash infusion (Bruce mentioned that once, when talking about SHLD and how AAPL almost went bust had it not been for a richer, lending hand with MSFT) and I sense that may happen at SHLD to some extent.

 

Both of these men depend on the success of SHLD. I think Berkowitz said that if the retail op comes around its a grand slam home run. What if the retail crumbles fast? Is that also not going to influence credit ratings? What about customers who see Sears in the news for doing horribly? What happens if SHLD just gets really bad, like -10% next year in same store sales, who knows.

 

He cannot shut down 500 stores without the entire thing crumbling. Customers stop shopping at places going out of business, employees get wind of layoffs and are less motivated to do this company any favors.

 

Monish said the employees got in the way of value investors and ESL, and he sold his stake. I think this was a few years ago and is now even more true. I don't see how you can shut down this size operation and suggest its like the Berkshire mill's. Sears as a retailer to me is finished.

 

Question: Berkowitz likes to talk about how ESL just repurchases all the shares until there are two left, one for ESL and one for Fairholme. Does anyone understand what that actually means? What does that imply about the market value and price of shares? Who will buy them when the company is not valued by the market?

 

So just say Fairholme owns 20m shares and ESL owns 70m and the rest are repurchased, what next?

[farnamstreet]

Interesting new site from Sears Brands

 

http://etrainer.fitstudio.com/

 

From this press release.

http://finance.yahoo.com/news/Sears-Reinforces-Status-prnews-749584316.html?x=0

[vinod1]

I would think they should have at least got their online platform to work reasonably well. I am trying to buy a Treadmill and wanted to go with Sears because they are the only ones that I know of that will also install (maybe services are really the main attraction?). As much as I tried I could not put an order in, it is giving me weird errors and contacting their customer service via Chat I got the following:

 

I am sorry, the item you are looking for is currently out of stock, however, it will restocked soon.

I suggest you to visit our website, frequently to get the update the information regarding the product.

 

I had similar problem just trying to schedule an install they allow you to start off by selecting a product (treadmill) to install but in the next step where you have to select the product again you do not have any exercise equipment category to select.

 

Vinod

[ERICOPOLY]

I am trying to buy a Treadmill and wanted to go with Sears because they are the only ones that I know of that will also install (maybe services are really the main attraction?).

 

Costco both delivered and installed our exercise bike and elliptical machine.  Ordered online.

 

We had a problem with the elliptical machine going "clunk, clunk, clunk" after a while -- so Costco arranged to have a person come to our house to repair it.  Didn't cost us a penny.

 

 

[vinod1]

I am trying to buy a Treadmill and wanted to go with Sears because they are the only ones that I know of that will also install (maybe services are really the main attraction?).

 

Costco both delivered and installed our exercise bike and elliptical machine.  Ordered online.

 

We had a problem with the elliptical machine going "clunk, clunk, clunk" after a while -- so Costco arranged to have a person come to our house to repair it.  Didn't cost us a penny.

 

Thanks! Just ordered one from Costco.

[txlaw]

Interesting insider filings made today:

 

http://www.sec.gov/cgi-bin/own-disp?action=getissuer&CIK=0001310067

[Guest]

Does that mean Crowley owns 10% of sears?

[oldye]

 

Had a feeling this would start to happen

 

 

http://www.bloomberg.com/news/2012-01-12/sears-supplier-loans-halted-by-cit.html

 

[biaggio]

Interesting insider filings made today:

 

http://www.sec.gov/cgi-bin/own-disp?action=getissuer&CIK=0001310067

 

It appears that shares of SHLD transfered to shareholders of ESL, RBS. i.e. Mr Lampert now owns those shares directly? Is that right?

 

Thanks for update oldye + Txlaw

[Guest Hester]

 

Had a feeling this would start to happen

 

 

http://www.bloomberg.com/news/2012-01-12/sears-supplier-loans-halted-by-cit.html

 

That is very interesting.

 

Reflexivity, anyone?

[mevsemt]

I don't know how to feel about this... on one hand you've got CIT halting loans to suppliers, and on the other you have Eddie buying shares (for his personal account nonetheless)...

 

http://blogs.wsj.com/deals/2012/01/12/edward-lampert-buys-150-million-more-sears-stock/?mod=yahoo_hs

[biaggio]

I don't know how to feel about this... on one hand you've got CIT halting loans to suppliers, and on the other you have Eddie buying shares (for his personal account nonetheless)...

 

http://blogs.wsj.com/deals/2012/01/12/edward-lampert-buys-150-million-more-sears-stock/?mod=yahoo_hs

 

mevsemt did you read the filing attached to article? Was that an actual market purchase or was it just a transfer of shares + payment in lieuof management fees...Form 4 a bit complicated for my simple mind.

 

I am very interested to see if he buys more with price falling.

 

More pain to come I am afraid.

[frankhkii]

http://www.sec.gov/Archives/edgar/data/860585/000120919112003365/xslF345X03/doc4.xml

 

Notes:

 

4.5mm was bought from ESL.

8. This price represents the price per Share of private purchases from Investors.

 

570K shares was transferred in lieu of management fee.

3. RBS Partners, L.P. ("RBS"), the managing member of ESL Investors, L.L.C. ("Investors"), acquired these Shares in a distribution from Investors in lieu of a cash payment for management fees.

5. RBS distributed these Shares, which were received in lieu of a cash payment for management fees from Investors, on a pro rata basis to its partners.

 

480K shares were bought in the open market.  It will be interesting to see if/how much more he buys.

10. This price represents the approximate weighted average price per Share of purchases that were executed at prices ranging from $29.13 to $29.65 per Share. The Reporting Persons undertake to provide, upon request by the Securities and Exchange Commission staff, the Issuer or a security holder of the Issuer, full information regarding the number of Shares sold at each price.

11. This price represents the approximate weighted average price per Share of purchases that were executed at prices ranging from $30.15 to $30.50 per Share. The Reporting Persons undertake to provide, upon request by the Securities and Exchange Commission staff, the Issuer or a security holder of the Issuer, full information regarding the number of Shares sold at each price.