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Brutal Quarter For Sears Holding


Parsad
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Contrary to what the market would have you believe from the recent run up in price, including today, Sears 4th quarter was absolutely atrocious!  Eddie's been far too slow in making changes, and now they are quickly trying to make amends with the rights offering and sale of 11 stores. 

 

They need to close hundreds of Sears domestic stores and sell them.  Kmart and Sears Canada aren't the problem...the U.S. Sears stores are the problem.  Just a terrible quarter with tax asset and goodwill impairments, huge operating loss in domestic stores, and they look like they are still going to be burning cash for the next 2-3 quarters until they start to stabilize this thing. Book is nearly a third of what it was four years ago, so any of you still holding on...be careful!  Cheers!

 

http://www.sec.gov/Archives/edgar/data/1310067/000119312512073963/d304294dex991.htm

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In the long run Parsad, you are quite right.  If they can't get the retail right, there's no guarantee that the hidden value will ever get released, it may just get burned away.

 

But, the conference call's focus on liquidity and flexibility, the store sales, and the rights offering all point to a more direct effort to unlock/realize/monetize the asset values.  I hope they release the valuation study they did to set the offering price; I'd love to see it. 

 

In short, today's announcements basically amount to:

- Liquidity concerns -- not a problem

- Asset values -- probably a lot higher than you think

 

 

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i bought in mid 30s and sold most yesterday. i do believe asset worth is much higher than the market thinks, but have you been to a sears store recently? i couldn't believe they were still in business... tons of housing related products and dead empty. its a rapidly deteriorating business and im just not sure how to account for that in the valuation... so i sold

 

would love to hear valuegeek's take.

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I'd just love to ask Eddie WHY did he wait so long.

 

If he really cared about the quality of the advertising strategy, store decor, customer service and overall iconic brand he MUST have seen the spreading decay and core rot YEARS ago.

 

If he didn't then what the hell was going on at HQ???

 

The only thing that makes sense is he secretly couldn't care less about the retail operations and was just was trying to gather as many shares as possible to control cash flows from asset sales down the road. I'm not saying that is what is going on but I really can't figure out why EVERYBODY saw the deterioration but him.

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I'd just love to ask Eddie WHY did he wait so long.

 

If he really cared about the quality of the advertising strategy, store decor, customer service and overall iconic brand he MUST have seen the spreading decay and core rot YEARS ago.

 

If he didn't then what the hell was going on at HQ???

 

The only thing that makes sense is he secretly couldn't care less about the retail operations and was just was trying to gather as many shares as possible to control cash flows from asset sales down the road. I'm not saying that is what is going on but I really can't figure out why EVERYBODY saw the deterioration but him.

 

Well this is the thing.  For the things Sardar did that I did not like, he did plenty of things that I really did like and that Lampert could have actually learned from.  You have to move incredibly fast if you want to save a sinking ship, especially a big ship!  Think about what Moynihan is doing at BAC, and you'll see the difference with which Lampert is operating relative to others.  Moynihan is not spending a single second hesitating to sell assets and strengthen the core business.  Sardar did the same thing at Steak'n Shake but on a much smaller scale.

 

I think Eddie thought that the brand was strong enough to right itself with some tinkering, and that the depth of the economic problems wouldn't be quite as bad as they turned out.  You combine those two misjudgements with the sheer speed that their competition, and the emergence of online shopping, and you have a perfect storm for Sears to battle through.  It can be saved, but they have to move at warp speed, not tip-toeing into this thing.  They are getting killed, not simply beaten!  Cheers!

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Here is the link for the reinsurance entity and holding company structure. Look at page7. http://www.searsholdings.com/invest/docs/Sears_Re_February_2012.pdf

I'm trying to walk through this, but basically about $3 billion sits in the reinsurance co secured by notes to various assets. Does anyone know how debt has been issued by sears? Ie. has it been guaranteed by the individual operating entities or guaranteed at sears Holdings?

 

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Here is the link for the reinsurance entity and holding company structure. Look at page7. http://www.searsholdings.com/invest/docs/Sears_Re_February_2012.pdf

I'm trying to walk through this, but basically about $3 billion sits in the reinsurance co secured by notes to various assets. Does anyone know how debt has been issued by sears? Ie. has it been guaranteed by the individual operating entities or guaranteed at sears Holdings?

 

The most recent debt issue identified selected operating companies as the guarantor subs.

 

This thread: http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/for-all-of-you-sears-holdings-longs!/msg69125/#msg69125 hits on the issue a little bit.  Last year's 10k and the filings for the debt do add some detail about which subs are guarantors and how the assets and liabilities get split between the guarantor and non-guarantor subs.  Although looking at the Sears RE presentation, it may all be about ensuring the asset base of the insurance operation rather than a scheme by Lampert to bankrupt the "bad" sears and run off with the good assets through the back door.

 

What are the chances they've been quietly cultivating a world class insurance sub that can turn into Lampert's Berkshire Hathaway?  My gut tells me it's probably unlikely, but not out of the question.

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Bloomberg has a pretty comprehensive piece out about Eddie, SHLD, Ziff and his trading history between ESL Investors and ESL Partners L.P.:

 

http://finance.yahoo.com/news/lampert-gains-160-million-acquiring-050101774.html?l=1

 

Lampert's investors got more bad news on Dec. 27, when Sears said its same-store sales fell 5.2 percent during the holiday season and that management would shutter as many as 120 locations. The stock dropped 27 percent that day to $33.38, and declined to $29.20, the lowest closing in more than three years, on Jan. 6, a day after Standard & Poor's cut the company's credit ratings two notches into deeper junk territory.

 

On the following Monday, Lampert bought 4.46 million Sears shares from ESL Investors at the $29.20 price for about $130 million, according to a Form 4 with the SEC on Jan. 11. The Ziff partnership also paid Lampert's management fee on Jan. 11 by transferring an additional 573,184 Sears shares, with a market value of about $18.9 million, to his firm in lieu of cash, the filing showed.

 

Since then, Sears has soared amid speculation Lampert might take the company private and yesterday's announcement that the retailer would raise as much as $770 million by selling real estate and separating some smaller-format businesses. The 5 million shares that Lampert and his management unit received from the Ziffs are now valued at about $309 million.

 

A precedent for this type of internal transaction occurred five years ago. After peaking on April 17, 2007, Sears shares began to slip and then plunged 10 percent on July 10, the largest decline in more than four years, as the company said profit for the second fiscal quarter would fall as much as 46 percent from the same period in 2006.

 

Three weeks later, on Aug. 1, Lampert transferred 3.41 million shares held by the Ziff partnership to his main hedge fund, according to a Form 4 filed with the SEC. In return, the hedge fund sent $466.7 million to the partnership, or $136.79 a share. The fund has an unrealized loss of almost $256 million on the stock received from the Ziffs.

 

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What are the chances they've been quietly cultivating a world class insurance sub that can turn into Lampert's Berkshire Hathaway?  My gut tells me it's probably unlikely, but not out of the question.

 

could they not eventually spin the RE off and continue to handle insurance needs of SHLD but also expand their charter at that point creating a public insurance company and investment vehicle?

 

Yes they could.  But, Sears RE predates Lampert, which makes me think it's purpose and continued operations are about the insurance needs of the business rather than a Berkshire Hathaway type transformation to insurance as a significant contributor to corporate profitability.  There's really no way for us to know. 

 

If Lampert's ultimate goal is to remold SHLD into an investment vehicle something like Berkshire Hathaway, how might he do that? 

  • Spin the retail operations off into their own business
  • Own the real estate that the sears retailer uses (or any other use if the retail business is considerably smaller) and take the rent as an income stream
  • Own the income stream from the licensed brands
  • Have an insurer and use the float

Assuming the retail can be made to work and that the brands have long-term value, that combination might make for an attractive investment vehicle.  The insurance float plus a steady stream of rent and royalties might make for the beginnings of a nice mini-Berkshire.  In a way pieces of this are already in place, but not in an overt way.  And, the cash-burning results of the retail operation are still the big issue to get right.

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I think the poor operating results make complete sense considering that Eddie has purposely (and rightly in my opinion) refused to reinvest in his big box stores.  Once you accept that premise, it is an inevitability that the stores will at some point stop producing cash and start burning it.  Unfortunately for Sears, that happened right as the financial panic/recession of 2008/2009 also brought down real estate values.  My personal view is that Eddie waited and was willing to suffer operating losses in many of his stores as a carrying cost on real estate values improving from those levels, which they have. 

 

Ultimately, the coming store closures (I think they'll close 500-800 stores in the next two years) will produce large amounts of cash and reveal the currently masked earnings power of the other businesses beneath.  For example, imagine a store worth $6M with $1.8M of net working capital that is losing $0.4M annually. 

 

As discussed previously, the key to understanding the company is through deconsolidation. 

 

I would recommend taking a look at the presentation the company posted on their website regarding Sears Reinsurance.

 

Congrats on sticking to your convictions and long term orientation. There is a very good lesson to be learned here, for all the skeptics who were lambasting the co and Lampert. 

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Speaking of conviction who here added to SHLD when it was down in December?

 

I did not have the courage, though in retrospect I really did not have any info to rationalize adding. I was worried regarding liquidity. Balance sheet sucked. It probably still a gamble, despite recent incredible rise due to short squeeze.

 

Any thoughts on how high this thing can go based on short squeeze- I know this is not how we should think as value investors but I am tempted to bail with a small gain

 

 

 

 

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Speaking of conviction who here added to SHLD when it was down in December?

 

I did not have the courage, though in retrospect I really did not have any info to rationalize adding. I was worried regarding liquidity. Balance sheet sucked. It probably still a gamble, despite recent incredible rise due to short squeeze.

 

Any thoughts on how high this thing can go based on short squeeze- I know this is not how we should think as value investors but I am tempted to bail with a small gain

 

 

 

 

 

I added to SHLD twice in December, (stock and LEAPS).  http://mevsemt.blogspot.com/2011/12/kmart-smart.html and http://mevsemt.blogspot.com/2011/12/more-sears.html

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congratulations mvsemt, I remember reading your blog on SHLD.

 

Was the added investment soley just based on your original thesis or were you thinking something else. Balance sheet and possible problem in short term financing and possible BK scared me though my original thesis (the hidden assets-real estate, brands etc) was still intact.

 

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Speaking of conviction who here added to SHLD when it was down in December?

 

I did not have the courage, though in retrospect I really did not have any info to rationalize adding. I was worried regarding liquidity. Balance sheet sucked. It probably still a gamble, despite recent incredible rise due to short squeeze.

 

Any thoughts on how high this thing can go based on short squeeze- I know this is not how we should think as value investors but I am tempted to bail with a small gain

 

 

 

 

 

I added to SHLD twice in December, (stock and LEAPS).  http://mevsemt.blogspot.com/2011/12/kmart-smart.html and http://mevsemt.blogspot.com/2011/12/more-sears.html

 

nice move. that's a quick 800% gain. Congrats!

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Biaggio, to answer your question - Yes, my Sears purchases in December were basically based on my original thesis (and the fact that the stock had fallen to prices I considered too good to pass up!).  Obviously my thesis has evolved and been refined over time, but the truth is it really hasn't changed materially. 

 

Here's a link to my first Sears purchase (from November 2010), which is a decent introduction to how I approached the investment: http://mevsemt.blogspot.com/2010/11/transaction-alert-sears-holdings-2013.html.  And here's my most recent SHLD post for anyone interested: http://mevsemt.blogspot.com/2012/02/cause-loser-now-will-be-later-to-win.html

 

Alertmeipp, thanks for the kind words! 

 

 

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Sears Canada Inc. announced today that it will return to commercial real estate developer and landlord, The Cadillac Fairview Corporation Limited (Cadillac Fairview) three stores within shopping centres the developer owns and manages, for a total consideration of $170 million.

 

http://finance.yahoo.com/news/sears-canada-announces-return-three-130000853.html

 

It'll be interesting to see what else Eddie has planned in terms of asset sales or other transactions... 

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-I only read the headlines this morning thinking that they were abandoning properties for nothing. I am surprised at the amount of $170 million for 3 stores.

 

-the shorts are getting crushed again today...up almost 10% again today.

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