Number Check on Sears
Note 5/20/08:
Based on the excellent comments and questions coming in below, I want to make this clear: I am agnostic as to how Sears achieves it success and valuation. This column was not to argue the merits of retail, or to even suggest that I am betting on a retail turnaround for Sears, merely what it might look like it such a thing happened. Most of Sears’ current value lies in the underappreciated assets I highlighted in the second valuation, sum of the parts, below. The bottom line here is that there are plenty of assets to create market value, the question is when and why. In my mind, Sears has a whopper of a margin of safety if you can look out a few years, but the retail story is and will be extremely tough. I do not think Sears is a best of breed retailer, nor that they are likely to achieve 10% margins on $50B in sales, a scenario I imagined below. Simply put, Sears is a buy based on market value, not market share, retailing dominance, or any other metric.
With its market price declining daily, giving me the opportunity to pick up even more shares, I thought I’d present a very rough look at how the market is valuing Sears (SHLD) right now, putting reasonable numbers to a rather abstract investment idea.
Reality check number 1: In normal times, Sears is generating a good $50 billion in sales. $50B. The current market value hovers around $10B, or one fifth of sales. Add in net debt ($2.7B in LT debt and capital lease obligations plus a $1.1B pension shortfall) and subtract cash ($1.4B), enterprise value goes up to about $12.5B. Is Sears worth a quarter of its annual sales? Well, that depends on profit margins, which had been improving until late last year and into this one. Right now, margins stink. EBITDA margin came screeching down to 4.4% last quarter, which is awful. Eddie has said in the past that Sears should, or aspires to, obtain a 10% margin, comparable to Wal-Mart and JCPenney.
Can Eddie get better margins out of Sears? I’m not sure, but what’s it worth if he does?
Retailer
Assuming $50B in sales, and an 8% EBITDA margin, short of his goal, Sears is producing $4B in annual EBITDA. Take out normal depreciation, a billion, and EBIT is $3B. Take out another billion in taxes at 35% rate, and $150mm in interest payments, we’ve now got $1.85B left in net income. Add back depreciation, we’re at $2.85B, and subtract Eddie’s usual level of capital expenditures, about $550mm, and we arrive at $2.3B in annual free cash flow that Sears is capable of producing with 8% EBITDA margins. If he gets to 10% margins, watch out kids. There’s another $650mm in fully taxed free cash flow.
What’s an ‘ok’ retailer with $2.3B in free cash flow worth? I’d venture about 10-12 times that number, or $23B - $27.6B. Looks nice on top of the current enterprise value of $12.5B, no? At these prices, Eddie is probably buying back shares in gobs. With 131.7mm shares out at the end of Q1, that number is probably down to 128mm or so. At 10X FCF, backing out the net debt, Sears is now worth $160/share. At 12x FCF, Sears is worth $195/share. The $650mm in FCF from 10% margins would create an extra $50-$60/share in value. So, as an ongoing retailer in a better environment and some margin improvement, Sears could be worth anywhere from $160 to $255/share.
So that’s what Sears could look like, in a steady state, if it improves the retail operations to 8% EBITDA margins, or even his goal of 10%. This can be done, but we’re not sure it it will be done. What’s might Sears be worth summing up its current parts at a reasonable valuation?
Sum of the Parts
Well, Sears has a got a couple of things. First, the real estate bank. Second, you’ve got readily salable brands in Lands End, Craftsman, Kenmore, and Diehard. Third, the Sears Canada operation. There’s more in there, like the Home Services business, but we’ll place no value on those for now, out of conservativism.
Taking our enterprise value, $12.5B, subtract out Canada. What’s that worth? Last year Canada produced about $600mm in EBITDA. Looking at a buyout scenario, a reasonable and conservative multiple for Canada is 6x, or $3.6B. Sears Holdings only owns 70% of that, so they only get $2.5B in the sale.
The brands are a wildcard, here. Very tough to model the value of these brands. All we really know is that they have tremendous brand recognition, and they generate tens of billions in annual sales. That’s about it. The only number we have to start with is the $3.3B on Sears’ balance sheet for brands and intangibles. Let’s call it $3.0B. These brands probably have way more value than than that, but as a conservative guess, I’ll put it there. I could be wrong here, so discount my value at your leisure.
Here’s what we’re left with:
$12.5B - EV
-$2.5B - Canada
-$3.0B - Sell our brands
$7.0B - Real Estate Value.
According to Bill Ackman, Sears has 250mm in real estate square footage. Based on my own analysis of how Sears reported their sq. ft in the 10-K, he’s including some 100 year leases which are akin to ownership, which is fair. In strictly owned sq. footage, the number is substantially less than 250mm. Being familiar with the intensity of Ackman’s approach, I’ll take his word for it, however. If I had a good way to verify this, I would. I don’t, so let’s hope Bill is right.
With $7.0B in value, on 250mm in square footage, the market is placing a value of $28 per square foot on the Sears real estate collection. In the Barron’s article last year, they presented this table:
Target at over $300 sq. ft. Home Depot near $275, JCP near $150/sq ft.
Using this as a baseline, we can reasonably say $100/sq ft. for Sears. May be a tad high, may be a tad low, I can’t say for sure. I think it’s an conservative assumption, however, and that’s my point here.
At $100/ sq ft, the value of Sears’ real estate is $25.0B. With the market valuing it at $7.0B as we pointed out above, there is $18.0B in real estate value not being recognized by the market at this point. That’s $140/share on 128mm shares outstanding:
Current Price: $75
Net Debt: ($19)
Unrecognized Real Estate Value: $140
Value: $196
Thus, I can reasonably estimate that Sears’ intrinsic value, be it as a strict retailer or just a collection of assets, is worth twice its current enterprise value, with much upside. On the upside, it’s obvious that successful retailing can make Sears worth three or four times what it’s being valued at today. On the downside, we see that Sears has assets worth not only today’s enterprise value, but much more.
What am I leaving out? We have a very, very talented capital allocator running the place, Eddie Lampert, with a whole pile of capital to allocate. We’ve got a new structure that’s yet to take hold, promising autonomous control over individual units. There’s a chance that the market might value Sears at better than 10-12x FCF, if retailing works out. There’s a (good) chance the real estate is worth more than $100/sq ft. There’s a good chance the brands are worth more than $3.0B. We ignored some other assets and operations Sears owns. Et cetera.
It’s tough to attack the valuation of a pretty abstract entity like Sears. I still don’t know how in god’s name I would classify this company, the right way to value it, or what lies in the future. The only approach that makes sense is a conservative one that’s probably not correct, but gives us a baseline to work with. The main goal is not to overstate the value of these assets or cash flow streams. That’s why I’m not running around slapping 25x earnings multiples or some random book value multiple to make it look nice. If you go the conservative route and still see tremendous value, the upside options are probably not valued into the price. There’s the key to a potentially successful investment operation.
On top of this, you’ve got the incentive and motivation of Eddie’s career on the line to make something work, with 60% of ESL in Sears. That may be worth more then every asset on the balance sheet.
I could bring you through a more detailed analysis of every part and parcel of the company, every little number and footnote. Believe me, there’s plenty to analyze with a $50B company, I’ve been trying. I always get to the same conclusion: Sears is cheap.
Disclosure: I own shares of Sears (SHLD)
Great post Jeff.
At these prices Sears has huge upside potential. I find it interesting that Lampert has slowed the pace of share repurchases and the incredible turnover at sears HQ.
Sears has the balance sheet to easily at another 1-2B in debt to go out and find something…
NFI
I’d love to see a really rigorous bear case on the stock. Not the intellectually lazy, “it’s a retailder in a recession”, but a well thought out and fact based bear case. Great bull story though.
NFI,
I agree, they could easily add leverage to go out and buy someone (bankrupt Steve and Barry’s?), but I’m not sure Lampert would do that. He’s trumpeted their debt reduction over the past few years, so adding leverage now would go counter to all that. I’d be surprised.
I think the turnover at HQ stems from their underperformance last year into this one, and the new structure Lampert has implemented. Bound to be turnover when you completely redesign the company. AS with anything in the company, Lampert is still “testing” a lot of execs…
NDH,
I would also. I’ve yet to see a detailed case destroying all of the above value I mentioned and causing the equity to be worth less than it is today…It’s one of the reasons I own Sears with so much confidence. As Berkowitz would say “I can’t kill it.”
Do you know if under those 100 year leases the company has the ability to act as a landlord and sublet or re-rent those locations at above market prices? If not, I’m not 100% sure about including those stores in the valuation unless SHLD was acquired and those leases assumed by the acquirer.
To my knowledge, yes they do. These are leases they signed long ago, and though I’m sure of the escalation clauses under the leases, I know Sears can indeed sub-lease them out. This was speculated to be a plan under Sears’ new REIT arm. The details I’m a little fuzzy on, I wish had someon I could contact with a little more detail on this. I’m going on Bill Ackman (and others’) determination of the square footage as presented last year. AS I mentioned, if I could get some more color on that, I’d like to, so anyone who can do so, please contact me.
Jeff - really appreciate the thoughtful, original analysis, a welcome change from our friend at ValuePlays.
Note that I am both a SHLD shareholder and former executive.
Related to executive turnover, I actually think the reasons it has abated relates much more to Eddie than the operating structure. ESL no longer micromanages the business and defers much more to the senior management, Bruce in particular. It helps that Bruce is a numbers-driven operations type, something that counter-balances Eddie’s numbers driven blue sky thinking. By stepping away from the business, the pressure and daily swirl decreased considerably. I know it was humbling to ESL, but it was the right thing to do.
Related to the new operating structure, I would argue it is actually de-levering the business by bringing on more high-salaried senior executives while sales and performance continue to decline. For example, the company added 10 new SVPs and Presidents in the last 6 months, all earning 400k+. A small investment in the business for sure, but it wasn’t offset by other head count or cost reductions that weren’t related to business performance. Time will tell if it is the right strategy, but so far, there are few benefits other than more meetings, more opinions, more consensus building.
Now, to the evaluation - I agree with your assumptions on many fronts and do think it is undervalued. However, I believe there are too many “ifs” to justify $196 - if it turns around the retail component, if the new operating structure takes root, if the merchandising improves, etc. Frankly, those ifs have been on the radar since Eddie bought the companies 6 years ago - and were bigger issues well before his ascendancy. Sears as a retailer has not shown any proclivity to change and as smart as Eddie is, I think it’s a problem much bigger than data and spreadsheets can solve.
Real estate is the biggest question mark and I actually believe the value has DECLINED significantly since Barrons published its analysis. Independent analysis from developers and leasing specialists indicates anywhere from a 15-30% decline in enterprise value of its locations, putting EV around $28. Why? Well, one is the value of its Kmart locations which are general dogs. ESL believes he can operate a store profitably given the 100 year leases, which might be true, but the value of that location continues to decline. Will it come back? Maybe, but there are so many ifs and assumptions (population growth, density, brand demandetc.) you might as well hit the craps table. Many Sears locations, while better than Kmart, are still in dog malls; Kohls, Target, and HD opened where population is growing, not declining, making their real estate more valuable. And Sears generates roughly 1/3 the sales per square foot as competitors. Yes, that’s the opportunity, but the opportunity is predicated on too many ifs beyond ESL’s control.
Will all of this change? Who knows. We’re likely in this slow growth predicament for the foreseeable future (wasn’t it Buffet who predicted a sideways market for the next 10 years back in 2005?). The true value in SHLD is in the break-up, not as a retailer. Unfortunately, Eddie still believes its a retailer and given his near-term options, it’s probably the best approach. In that case, it’s probably fairly valued with a slight upside.
Thoughts?
JWW,
II very much appreciate your thoughts, especially from a former insider.
First, I can’t stress enough that these numbers are rough, ballpark figures. I’m not saying 196 is some magical number or anything. However, the 196 is not predicated on any retail success. That’s a pure liquidation number, he sells off the brands, Canada, and real estate today. The hypotheticals on a successful retail operation were just that, hypothetical. I’m not entirely confident it can be pulled off, frankly, but the numbers are good to look at.
To your other thoughts:
“By stepping away from the business, the pressure and daily swirl decreased considerably. I know it was humbling to ESL, but it was the right thing to do. ”
This is a good piece of information that I was not completely aware of, and I think it’s the right move. Eddie shouldn’t be in there micromanaging on an operational level.
“For example, the company added 10 new SVPs and Presidents in the last 6 months, all earning 400k+”
Was this due to the new structure, Eddie’s wishes, or Bruce’s wishes? I’m just curious there. Eddie doesn’t seem like a “consensus building” type of guy, as you well know.
“Independent analysis from developers and leasing specialists indicates anywhere from a 15-30% decline in enterprise value of its locations, putting EV around $28.”
That was the number I came up with as well, if you look above. Remember, though that our number, 28, is a market price, not value. That’s how the market is currently looking at the real estate. I was trying to argue that, in better times, $28/sq ft is a very low number. Remember, when Eddie first got control of KMart he sold off a bunch of locations, and running the numbers there, ev/sqft is much higher than $28. I don’t have the number offhand, but I’ve looked at it. The question is whether he sold off good units or bad units, which I’m not sure of.
“Many Sears locations, while better than Kmart, are still in dog malls; Kohls, Target, and HD opened where population is growing, not declining, making their real estate more valuable.”
This is precisely why I discounted the ev/sq ft. value to $100. I could have tried to take some median number, which would have to come to about $200 or something, but that’d be high. I am cognizant of the fact that the locations are not as valuable as, say, Home Depot’s. It’s a good point though, that you’re making.
“The true value in SHLD is in the break-up, not as a retailer. Unfortunately, Eddie still believes its a retailer and given his near-term options, it’s probably the best approach. In that case, it’s probably fairly valued with a slight upside.”
Your first sentence is true if Eddie can’t turn it around. He might not be able to, odds are against probably, so you’re right, the current value lies in breakup.
The point is, with the assets being valued as they are today at market, what do I lose if I’m wrong? What do I lose if Eddie can’t turn the ship, and the assets are just sold? I have trouble picking a number lower than $75/share.
Additionally, I want some upside. If all I cared about was downside, I’d buy t-bills, right. The exercise I presented is just a rough way to show that the upside surely exists. One thing I know about the stock market is that it has trouble valuing optionality. If it’s not a sure thing, the market will often discount it to zero. So, while I agree that Sears might only be slightly undervalued based on it’s current “for sure” prospects, I’m comfortable making a bet where my downside is little and I can make some money if one of those options hits. I believe the real estate and those brands are formidable wildcards.
That’s how I think of Sears, at this point. It can be hard to tell people you’re making a bet that you recognize has a decent probability of not working out.
I’d appreciate hearing further thoughts from you either in this forum, or send me an e-mail: circleofcompetenceblog@gmail.com
Thanks.
jeff - spot on from where i sit. yes, real estate has considerably more enterprise value, but the market isn’t viewing it as such. as i said, i’m a shareholder (at lower levels) and believe there’s more upside here. the problem is when and how. i’m patient, though.
my gripe in all the things i read is about the eddie premium and his considerable ability to allocate capital and extract value. as an investor, its hard to argue there. as an operator, his track record is abysmal. should he have foreseen the housing bubble? absolutely. as such, he should have sold more of the assets and pared debt sooner in order to drive greater free cash flow. the company would be much better positioned AND investors would have extracted greater value from the REIT. Hindsight is 20/20; ESL knows this and only looks forward. But the company is still unwinding much of the chaos he created these last few years.
ESL’s reduction in day-to-day operations is totally self-induced. He made the decision to do so (with some board involvement, I’m sure) with strong counseling from industry confidants. He knew he wouldn’t get the best talent if he didn’t allow people to do their jobs. The operating structure is a result of his frustration with a general lack of accountability. If the product doesn’t sell, merchandising blames marketing; marketing blames operations; operations blames supply chain; supply chain blames merchandising. There wasn’t one person with whom he could hold accountable for a businesses performance. The other reason is that SHLD has businesses that are as large as some companies - for instance, its appliances business is larger than BBB and yet, BBB has a President and a Board. Thus the new structure with an operating President for each of the large businesses and full accountability for performance.
It’s a good move from Eddie, for sure. When I first read about his micromanagement, I winced a little. It surprised me that a Buffett disciple didn’t decentralize as much as he hadn’t until this year…
On your gripe, unfortunately it sounds like you’re a shareholder in the “median area.” One Sears investor was there from the Kmart days. Their cost basis is, you know, $14/ share and they’re sitting pretty no matter what, they hail Eddie.
Then there’s shareholders like myself who bought after the plummet. We’re optimistic about the future, by definition.
Everyone in between seems to feel a little jaded because their stock was once worth $190/share, going to the moon, and is frustrated by Eddie’s mistakes since then. It’s easy for someone like me who just got here a few months ago and has been buying on the way to down to be optimistic.
No doubt, a lot of mistakes have been made. I think Eddie bit off more than he could chew buying Sears, to be frank. This is coming from a massive fan of his work. However, he’s figuring it out, slowly. His first foray into retailing has been tough. The success has mostly come from work in the financial arena, doing the obvious restructuring moves that made him a lot of money. Those were shrewd moves.
From a pure retailing standpoint, the success hasn’t arrived yet. I think the future is bright. He’s testing, testing, and I think he’s onto something with the new structure. I think decentralization has its merits, for sure, and Eddie should be there to make capital decisions, not operating decisions. They need a permanent CEO, that’s for sure, Bruce or not. The potential to outsource those brands is tremendous, in my opinion. We’re talking classic American brand power. Use it in a different way, and ventures like that could throw off serious cash flows.
You’re right on the business sizes. Huge. But if you think about that intuitively, right, these huge businesses, how is the market valuing these things? $10B, really? Eddie made a comment that they are the $50B retailer with no customers (according to skeptics). I tend to agree there.
It was a tough time to try and turn around a badly damaged retail operation, right into the headwind of an economic downturn. Other retailers came into it with a stronger position, and they’ve thrived. Sears hasn’t. We’ll see how the new look for Sears, combined with economic improvement, works down the road. The potential is there for some tremendous growth, and it’s only a few years away. We’ll see how it works out.
Nice analysis. I agree with you that there are many ways to skin this cat (for SHLD to be worth $150-200). I think the 8% EBITDA margin is a bit aggressive. My research shows that its average EBITDA margin over the past 10 years is 3.83% and its median is 4.8%.
FY 1999 5.3
FY 2000 5.5
FY 2001 2.5
FY 2002 2.0
FY 2003 -1.7
FY 2004 2.6
FY 2005 4.5
FY 2006 5.7
FY 2007 6.8
FY 2008 5.1
Even its average over the last 4 years is 5.53%. I think its a bit aggressive to see it ever go to 8%…
I know they’ve yet to achieve 8%. I was merely pointing out that if Eddie comes close to achieving his goal, how much cash flow the retail business could produce in its current state. His stated goal was 10%. He probably won’t even get 8%, but I wanted to show what that might look like if he started getting there. You’re right though, its unlikely.
I believe Eddie needs his old pal Julian Day back. That guy’s an operator!
In your valuation, don’t forget to treat operating leases as debt. For retailers, this typically greatly increases total debt. In SHLD’s most recent 10K, the pertinent data can be found in the table titled Contractual Obligations and Off-Balance Sheet Arrangements. Here is a link to an explanation of this topic:
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/AccPrimer/lease.htm
I didn’t include the op. leases in my valuation because I didn’t want to double count. Those operating leases are already hitting my free cash flow year after year, so even though I’m not adding them into the enterprise value, they are still hitting value when I capitalize them at 10x or 12x…Alternately I could pull that expense out, capitalize those cash flows, and take it out at PV like I did with LT debt…
I do suppose you could make an argument for adding the op. lease into my sum of the parts valuation, but then you’re still getting into some other things there…
I would, though, include the leases if I was calculating their debt structure or return on capital numbers..
Actually you are missing the point by Dr pete. This a bit of accounting techncality. You are not double counting but you are, actually, under estimating SHLD’s debt. If you are valuating the store leases as assets, becasue they are long term in nature, you have to recognize it liabilities.
Look at it this way: SHLD bought these stores and took a mortgage, what will you do with that mortgage , you have to treat as LTM debt. The fact that the ownership did not change hands is irrelevant in this case as SHLD is owning the store from an economic point view, they have ownership over the majority of the building economic life.
on the valuation aspect:
I think your valuation of Real estate is too optimistic. store vacancies are on the rise while there are tons of space coming to the market. in the next few quarters, up to 10-12, i do not see how SHLD can monetize their real estate.
moreover, stores to keep their value need capex investment something SHLD is not doing. do not think sotres and building are depreciating assets and they need maintenance capital and updating to preserve their value.
then here is the rub the longer the SHLD continue to try to right their retail operation the less intrinsic value remain in the collection of assets, as losses will be financed by assets sales. this what potentially can make SHLD as value trap.
For the record: I hold SHLD but i recognize the risk of my ownership and do not believe for a second that SHLD ” can not be killed” and you should not too. I just hate those fund managers no matter how smart they are, or how value oriented they are, with their pump and dump speeches.
I don’t own SHLD, don’t intend to, don’t intend to short it either. I think they’re a horrible retailer. I think the stock does have value thru the real estate and brands, but I doubt the value is enough to vault it back to $180 or even $100. I doubt the value is so low to justify $25 or $50 a share either. In other words, it seems pretty reasonably valued right now. However, I do think SHLD has problems that could deteriorate the value going forward.
Your first mistake is to refer to SHLD as a $50B retailer. It was a $55B retailer the year Eddie combined Sears and KMart. It was a 50.7B retailer last fiscal year. It will be a 47B retailer this year. And those numbers would actually be worse if not for some nice currency benefits from their Canadian sales (benefits which should level out in the 4thQ and next year). SHLD has never increased SSS in the Lampert Era (and they certainly don’t add stores in the Lampert Era either) and really their is no reason to believe they’ll make the investment to increase them going forward either. Could Eddie shrink them down to 30B retailer and reach his 8% number? Maybe.
Kmart is the most immediate and disturbing problem with their shrinking sales and potential to go cash flow negative.
–Kmart is about the only retailer selling foodstuffs showing a decline in SSS. They aren’t just losing out to WalMart and Costco, they’re getting dogged by Big Lots and Family Dollar too.
–Kmart SSS have continued to decline despite adding Sears brands to the stores (Craftsman and Diehard to all stores and Appliances to about 25% of stores). This hurts two ways both in the failure to increase SSS for Kmart and hurting the potential value of the brands (if SHLD can’t expand the value of their brands to Kmart how much is that brand really worth to a Home Depot?).
–Kmart pays very low wages so they will be impacted by the increase in the minimum wage this summer.
As for the Real Estate question. Who knows? Credit Suisse put an estimate of $4.3B on the RE earlier this year, but that value may have deteriorated as CRE continues to deteriorate in general. Given the glut of CRE, Sears certainly couldn’t maximize value right now and would have to manage the sale of property over time. That would certainly add overhead and detract from any liquidation value.
As for Brands, Sears appliances have been losing market share steadily for years and there is no reason to see that trend change either. That means brand value declines each year too. I don’t know about Craftsman and Diehard. I think Lands End probably is maintaining value the best right now thanks in part to it’s online presence.
Lastly, for those who like the anecdotal, KMart had some unfortunate publicity locally. It seems someone took it upon themselves to remove several catalytic converters from shoppers’ cars in the KMart parking lot (catalytic converters are quite valuable if you have the right fence) . Talk about kicking somebody when they’re down.
“Actually you are missing the point by Dr pete. This a bit of accounting techncality. You are not double counting but you are, actually, under estimating SHLD’s debt. ”
It won’t change the valuation by a material amount. I’ll show why:
If we take the PV of their operating leases, based on the schedule in the notes of the K, I come to about $4.6B, using 7% as my discount rate, an approximate cost of debt based on what they’re currently paying. This also assuming that the category (5+ years) is evenly paid out over years 6-11. Not perfect, but we don’t know the exact expense for each year, so it’s as close as I can come.
Add that $4.6B to my estimate of their EV, 12.5, and their new EV is $17.1B.
So, now that my operating lease expense is capitalized as debt, as asked, I can add the yearly expense back to free cash flow in my NPV model.
I chose 10x FCF as a baseline above That’s a simplified way of doing a NPV analysis at 10% discount rate with no growth, Sears generates 2.3B from now till kingdom come.
So if I do that DCF out, but now instead of 2.3B a year, they have 2.3B plus the yearly lease obligations, operating and capital, (using the same schedule I described above) the present value of those cash flows is higher. In this model, I get about $30B, instead of $23B. Note that the terminal cash flow is $2,300/.10 or $23,000 at year 10, before discounting.
Now value is $30B vs. $17.1B in enterprise value, versus $23B vs. $12.5B that I had above. The value discrepancy closes by less than 10%, mainly due to the differing discount rates.
Thus, the only real mistake is that I didn’t treat both types of leases in a consistent manner.
So, I understand that it is mainly an accounting choice, and I appreciate both of you catching me on this point, to at least have a chance to explain my thinking. You are correct that the leases should be treated the same way, either as debt or as a yearly expense. It doesn’t materially affect my valuation, though. As I mentioned above, also, if I were going through debt structure and ROC calculations, I’d include the operating leases as debt, to be sure.
Regarding the comment from Berkowitz, and my agreeance “You can’t kill Sears.” I want to make a point there, on Mr. Berkowitz. He’s owned Sears for years and will continue to own it for years, if you look at the track record of his fund. He is anything but a “pump and dumper.”
Secondly, the comment that I “can’t kill Sears” is obviously a slight exaggeration. You can kill any company with enough effort, and there are risks of ownership everywhere, sure. To say it in a more complete fashion, “I can’t kill Sears based on the my estimation of the likelihood of future events, weighted for the applicable probabilities.”
Regarding deterioration, I don’t care what happens ” in the next few quarters.” All I want to see is signs of improvement over time. I’m willing to hold on for 3-5 years. I’m not sure why you think they won’t be able to monetize real estate in 12 quarters. That’s 3 years…
To be sure, this will not be a fast working investment. Just be careful extrapolating the recent past out too far. The economy stinks, real estate stinks, etc. Sears is being hit by the economy just like any other retailer. A rising tide will lift all boats.
Sears will not look like what it does today, in 3 or 5 years, I promise that much. My only purpose here was a little looking at the numbers, asset values, etc. It was probably a mistake of putting some numbers on the retail ops, because I don’t want people to get the feeling that I care how they succeed. I don’t, I’m agnostic on how the value comes out of this investment. They aren’t a great retailer, that’s indisputable. But the assets are certainly there. How they will be ultimately monetized, turned into value the stock market recognizes, I do not know. It won’t sit there and idle with someone like Lampert at the helm, with his whole career and wealth on the line.
Lampert went from hero to zero in the public eye. I disagree.
[...] Number Check on Sears by Circle of Competence “With its market price declining daily, giving me the opportunity to pick up even more shares, I thought I’d present a very rough look at how the market is valuing Sears (SHLD) right now, putting reasonable numbers to a rather abstract investment idea.” USG Earnings Conference and Notes by College Analysts “From a purely operational standpoint, USG’s results were objectively poor but very good contextually. Wallboard volume shipments were down 11% quarter-over-quarter and plant utilization sits just under 70%; until capacity recovers into the mid-80%s, USG won’t have the operating leverage to put up big EPS numbers, and that day is still far off.” [...]
[...] terrific bargain. In fact, after a little reading, the brands are probably worth much more than I originally estimated, so my valuation should stand [...]
very interesting