Credit Markets Overstate Sears Bankruptcy Risk

Dec.23.08 | About: Sears Holdings (SHLD)

Credit markets estimate the probability of Sears Holdings (NASDAQ:SHLD) going bankrupt at 26%, according to a December 22nd Credit Suisse research report entitled, “Retail Bankruptcies & Store Closures.” This compares to 18% for Saks (NYSE:SKS), 18% for Dillard’s (NYSE:DDS), 13% for Macy’s (NYSE:M), and 5% for JCPenney (NYSE:JCP). Target (NYSE:TGT), Wal-Mart (NYSE:WMT) and Costco (NASDAQ:COST) are at 1%-2% each.

While Sears’s operating results have clearly deteriorated, pegging a Sears bankruptcy at anywhere north of 5% is unjustified. With Eddie Lampert at the helm, Sears will do whatever it takes to maximize value for shareholders. Lampert would not have increased Sears’s share repurchase authorization by $500 million on December 2nd if he had any liquidity concerns.

This may sound like a broken record by now, but Sears does have immense embedded value in the real estate. Even in the current market, Sears can monetize some of the real estate if necessary – and do so likely well above book value.

For the skeptics among you, the following are some estimates regarding real estate value at Sears Holdings. Our analysis supports the thesis that the company’s real estate value comfortably exceeds net debt under any reasonable assumption.

The Manual of Ideas Estimate of Value of SHLD Owned Retail Square Footage:

Click to enlarge

(1) Based on fiscal 2008 yearend store count.

(2) Average store square footage represents MOI estimate.

Additional real estate owned by Sears Holdings:
  • †10 of 40 domestic supply chain distribution centers
  • †Small minority of 573 domestic store warehouses, customer call centers and service facilities
  • †200-acre headquarters site in Hoffman Estates, Illinois, consisting of six interconnected office buildings totaling two million gross square feet of office space
  • †86,000 square foot office building in Troy, Michigan

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