Some thoughts on Sears (SHLD) from articles from the web.
Felix Salmon points out that “Eddie Lampert has given up on the idea of running it as a hedge fund, and in any case Sears is losing money, which means that Lampert can’t invest its free cash flow.” While I like Felix’s writing, I could not disagree more. Lampert has given up trying to be a “retail head”, not a hedge fund manager and losing money does NOT mean Sears is “cash flow negative”.
Evan Newmark in the WSJ has a typical Sears article. He points out that Sears’ “analysts” can’t seem the get is right (true), high profile investors are in the stock (more on that later), the retail side is suffering and shorting the stock at this point is dangerous. The article essentially boils down to a “extrapolation of current events” to future ones.
Jeff Annello over at Cicle of Competence points out “the panic over their cash balances, debt, and decreased cash flow couldn’t be further from the mark. The company ended the quarter with $1.4 billion in cash. In context, their quarterly interest expense comes to $66 million, and the net loss was $56 million. The company is not circling the drain. The fact is, in a bad economy disadvantaged retailers suffer; I’m not sure what is shocking Sears onlookers so much. CEO Bruce Johnson even predicted the company would have higher EBITDA this year than the last.”
He finished pointing out “The story is quickly summed up by Mohnish Pabrai, who to my pleasure, recently disclosed a position in Sears (from the Chicago Tribune)
“Hedge fund investor Mohnish Pabrai has been watching Lampert since he worked his magic at Kmart and until recently viewed Sears shares as too expensive. But last fall—a time when the shares began their decline to below $100—his Irvine, Calif.-based Pabrai Investment Funds began buying and as of March 31 held 517,607 shares, according to Securities and Exchange Commission filings.
“There are two ways to look at Sears,” Pabrai said. “One is as a retailer. The second is as a collection of assets being managed by the greatest capital allocator. And I view it as the latter.”
Remember this: Short-sightedness can be blinding. Those who saw Berkshire Hathaway (BRK.A) as a textile (and a “failing” one at that)* maker were trumped by those who saw it as a collection of assets being managed by a brilliant capitalist.”
* Comment added by me
Concentrated Value has a thought provoking post in which he points out “As of May 23, 2008, Sears Holdings has 132,013,524 outstanding common shares. ESL Investments currently owns 65,639,184 shares giving the fund a 49.7215% ownership stake in SHLD. Notice how SHLD buybacks have significantly slowed as ESL closed in on the 50% ownership stake. Is Lampert timing the buybacks to coincide with a larger event?
Directors & Executive Officers as a group (19 persons) own 55.3% of Sears Holdings. The Tisch family alone owns 4,219,101 shares.
Eddie Lampert’s stake in Auto Nation is 40%. His fund has been aggressively buying shares in 2008. Will Lampert declare a 50% ownership stake in SHLD and AN at the same time?
From Acxiom’s (AXI) 2007 10-K:
“Our client base consists primarily of Fortune 1000 companies in the financial services, insurance, information services, direct marketing, publishing, retail and telecommunications industries. Some of our major clients include American Express (AXP), Bank of America (BAC), Baxter International (BAX), Capital One, CitiGroup (C), City of Chicago, DeLuxe, Discover Card (DFS), eFunds, Federated Department Stores , GE (GE), General Motors (GM), Guideposts, HSBC Bank USA (HSBC), HSBC Technology & Services (USA), IBM (IBM), Information Resources, Inc., JP Morgan Chase (JPM), Philip Morris (MO), Primedia, R.L. Polk, RR Donnelley, Sears, Sprint (S), TransUnion and Washington Mutual (WM).”
RBS Partner’s recently took up a 4.2% stake in the company. Everyone knows Lampert is a data mining geek constantly scrutinizing sales data. Acxiom’s value proposition is the enormous amount of data it owns on consumers and their buying habits. How do you value all the large longitudinal data sets currently provided by Acxiom? If large diversified retailer purchased Acxiom, would it provide a competitive advantage?
Deep value investors (Fairholme, Pershing Square, Force Capital, Perry, RBS, Legg Mason) and insiders own over 80% of the shares. They are not selling; in fact, Fairholme practically doubled its shares since their last filing. Would Fairholme make an $800M bet on SHLD on the allure of Lampert alone? Would Ackman buy $600M in SHLD if he did not see something? The same guy that reportedly read over 100,000 pages during his analysis of short sale of MBIA (MBI) and Ambac (ABK).”
Sears boils down to a company with a very concentrated shareholder base who also happen to be some of the most successful investors today. Should one think “Lampert does not know what he is doing” then one also has to then say Berkowitz, Ackman, Pabrai, Perry etc. have also been hoodwinked or enjoy losing money with a colleague. It is obvious neither are true.
Far too often people think a current situation is a irreversible path. That is good because without such erroneous thought processes, value investing would not exist.
Disclosure (“none” means no position):Long SHLD, AN, None
6 replies on “More Thoughts on Sears Holdings (SHLD)”
Great Post Todd, good job bringing it all together.
Quick note, you listed my blog as Concentrated Value. I’m flattered but Circle of Competence would be correct.
Thanks!
DUH!!!!!!!!!!!!
sorry…corrected
todd, i love your writing; that being said, you need an editor; “Competence” not Confidence; keep up the blogs; also, your front page does not fully load anymore on some Internet Explorer browsers although it works on Firefox
Todd,
I appreciate your reverence for Eddie Lampert. He is clearly brilliant and we can all only try to emulate his successes. However, I think you might be getting a bit carried away with your defense of SHLD here. It’s entirely possible that Eddie takes it private fairly soon and then you and all the other smaller shareholders will lose out. He will make deals with Ackman and Berkowitz to get them to approve it and avoid getting blocked in court again (like SCC), but I can definitely see Eddie taking SHLD private in the not to distant future. The retail strategy is not yet completely broken, but the wheels are coming off faster than expected and that is going to speed up the plan a bit here I believe. I think you will see Eddie continue to buy back shares for awhile longer and then you will see him take it all private and begin to dismantle what is not working. He will keep what is still profitable (brands, home services, online)and close or sell off what is not (most of the retail stores.) If he has to ultimately dismantle SHLD it is far better for him to do it privately than do it in the public eye. You don’t agree?
Todd,
Can you shed some light on the previous poster’s comments? I have thought about the same thing, but I am wondering how legally feasible it is that ESL takes SHLD private. Can he actually use the company’s cash flows to increase his ownership % and then take it all private? Is that even legal? It would seem to me that he would be asking for some kind of lawsuit if he did. Isn’t the board of SHLD legally liable for approving the buybacks? Would it not be a complete sham for them to continuously approve buyback after buyback only to then be taken private at a level under the approved buyback prices?
“Do not just give a gift, grant a wish”. Know this slogan? Yeh! It is Sears!!!!!! Clothes, footwear, tools, electronics, jewelry, beauty products, appliances, furniture, and bedding – everything is there! But the company has lots of drawbacks as well. All the dissatisfaction with the services and products are on http://www.pissedconsumer.com. There you can post your complaints to share with others.