Hoping Shorts Will Drive Sears Down for Me

Jeff Macke of Fast Money on CNBC recently wrote an article lambasting Sears' Eddie Lampert. It is the quintessential "noise" write up.

Already in the title, Macke messes up by not knowing what Lampert does. Lampert acts as the chairman... The CEO is Bruce Johnson (for now).

In the article, there were a bunch of gems like this:

“A dirty store,” Ken Macke told me, “is a f**k-you to the customer”. I’ve never been in a Sears or Kmart that didn’t all but scream that vulgarity at me the instant I walked in.

As a customer I may hate that too. But I could safely assume that a dingy store means (all things being equal):

1) I can get a better price on what I buy
2) The owners of the company have a high return on invested capital
3) The company is slowly dying (in which case, #1 may still be relevant)

Speaking of dingy places, did you ever buy jewelry at a pawn shop? If so, you certainly got a much better deal than you ever could have at a retail store. The pawn shop assuredly made a killing on the sale too. Everyone wins; unless you believe in bad karma.

Buying stock in Sears (SHLD) at a discount (and to a greater extent, value investing) is similar to buying jewelry at a pawn shop- it may not be popular to do or have a pretty location- but at the end of the day you're getting a great asset at a cheap price.

Another bothersome point made was in regard to how Lampert "effectively cashed out to the tune of $5 billion dollars in January of 2007 with SHLD in the high 170s". I have no idea what this is related to. There was a big options exercise by Third Avenue. SHLD certainly didn't issue shares, and Lampert's fund ESL hasn't had any significant sales of stock.

Regardless, Lampert represents more SHLD stock than anybody on the planet, as such, it is safe to assume that it is do or die for him, his hedge fund, and his company.

Macke states "I weep for the shareholders because, by definition, they were too poorly informed to know better than to trust Mr. Lampert to look out for them." Wow! Apparently Bruce Berkowitz is a jackass for riding the stock down! This despite buying in at a level at which the company could liquidate and the average purchase would still be in good shape. I will again point out that Lampert represents over 50% of the stock, and is looking out for himself, and by extension, all shareholders.

My favorite jab at Lampert is when Macke calls him 'amoral'. Normally, this is a form of respect that I would expect to hear thrown at Carl Icahn (in both cases, despite doing more for shareholders than most managements).

I guess that the bottom line is this: Either SHLD is the most elaborately misconstrued and covered up collapse of a retail giant ever (complete with recent share repurchases and all), or the market is simply too manic in it's valuation of the company. While I own no shares of SHLD, they certainly seem compelling at the moment (especially with the large short interest). While I disagree with many of the points made, I hope that Macke's article sends the stock to $5 bucks a share-I would sell everything I own and live in a cardboard box to buy SHLD stock.

If the lack of numbers in this post bothers you, I would suggest that you go to Noise Free Investing, Can Turtles Fly?, or Compounding Machines for some excellent SHLD analysis... take your pick, all of us value geeks think roughly the same way-some just use more numbers than others!

Comments

[fcharlie:]

I too have no idea what Macke is talking about when he says that Lampert used Goldman to pull $5 billion out of SHLD and into his hedge fund... The only thing i can even think of, is perhaps the idea that Lampert assumed SHLD shares were at bubble levels, and used that popularity to allow him to raise cash for his hedge fund on very favorable terms. That's the only thing i can think of to justify that comment, and it doesn't really justify it.

I also laugh when i hear comments like, "I weep for the shareholders because, by definition, they were too poorly informed to know better than to trust Mr. Lampert to look out for them."...... The funny thing about SHLD, is that everyone who is bearish assumes that everyone who is long the stock bought it at $195 and and held the whole way down. My purchases were primarily between $38.00 and $86.50 and what's even better than that, my daughter, quite the trader she is, made her purchase at $30.00

Everyone assumes that because Sears stores don't have as many customers then they must be going bankrupt. What no one seems to realize is that an old Sears or K-Mart store opened in the 1960's or 70's doesn't have the same expense structure as a new Best Buy, or any new store for that matter. If the fixed cost of operating a store, which include a non-existent mortgage or below market rent, are 75% lower than your competitors, you can do just fine with 75% less foot traffic.

Another thing that no one seems to want to realize, is that gross margins are a double edged sword. When you are a retailer with $47 billion in sales, declining gross margins are deadly, as SHLD (and a long list of other retailers) have seen. However, the day will come when Sears and K-Mart do not have to chase sales as they and everyone else have been doing today. Housing will turn around and people will purchase big ticket items from Sears again. The increased demand coupled with significantly less inventory on hand (domestic inventory is down $1 billion) could easily push gross margins back up..... A 250 basis point improvement in gross margin on $47 Billion in sales creates $1.1 billion dollars of increased profit, and when you think about the paltry (and declining) shares outstanding, SHLD could easily be generating $14-15 per share in free cash flow AGAIN. Don't believe gross margins can improve? They already are at K-Mart. No one seems to have noticed this. All they have noticed is Eddie's letter to shareholders and a "dirty" store.

I agree with the author. I hope the stock stays in the dumps. At the rate Lampert is buying back shares, there won't many shares left to go around when things turn around........

Okay shorts, basher's and eddie haters, i've chummed the waters, and I look forward to all of your lies and false information.

Mar 01 07:33 PM

[InnocentsAb...:]

Gosh. I keep seeing this stuff about Sears. Only know what I can see. I drive by the local Sears every night on my way home. The parking lot is not overfull, but it is not empty.

I am suspicious that it is enough of an American traditional retail venue that, barring unforeseen circumstances, it will remain in operation as it is for a number of years.

Probably all depends on the retail management and quality thereof. That I can't answer to, but if one plans to invest in it, getting a good idea of the competence of the management seems a good first step.

Mar 01 09:53 PM

[Histo:]

I think the shorts are FOOLS! Please keep shorting SHLD.

This company makes money!!!, and has annual sales of nearly 50 Billion!!

I think that makes them relevant in the eyes of consumers. All you haters will lose your ass. You don't have the "balls" for a war with Eddie and friends. You will be begging to cover when the crunch eases even a little bit?

Suckers

Mar 01 10:38 PM

[sclarksons:]

I challenged Macke to articulate how the five billion swindle took place, and what record he had of it.
I did so because I have read every SEC filing on sears and kmart for the last three years, and most of them for the last ten.

I asked him via email, and twice on the website where his article was published.

He challenged me to do my own homework.

It must have been journalistic creative interpretation of the facts, and an unwillingness to admit stretching the truth after being called out on it.

Or maybe he's basing his article on some shortseller's rumour.

Mar 02 09:59 AM

[fcharlie:]

I emailed Macke as well, asking the same question.... No response.

Mar 02 10:17 AM

[Jeffrey Moore:]

So you are the guy he says is an 'anonymous emailer'!

yeah, the guy is a total tool, but as I said in the article, I hope that he can get the price down for me.

at one point in his article commenting, he said something about making a diner bet on SHLD going to the single digits before it doubled-I accepted, and then asked where he got this 5 billion info (because I too have read a ton of filings for SHLD).

No surprise, but I still have no response from him.


On Mar 02 09:59 AM sclarksons wrote:

> I challenged Macke to articulate how the five billion swindle took
> place, and what record he had of it.
> I did so because I have read every SEC filing on sears and kmart
> for the last three years, and most of them for the last ten.
>
> I asked him via email, and twice on the website where his article
> was published.
>
> He challenged me to do my own homework.
>
> It must have been journalistic creative interpretation of the facts,
> and an unwillingness to admit stretching the truth after being called
> out on it.
>
> Or maybe he's basing his article on some shortseller's rumour.<br/>
>
>

Mar 02 11:07 AM

[ScroogeMcduck:]

Anyone who owns stock in SHLD is a fool this stock i going lower its PE is 20x earnings who would pay that high for a lousy company like sears. I walked through sears during Christmas rush and it was a ghost town a store the size of macys and i was the only person in there. Shld time is sloowly coming to an end if i were invested in them i would cut my losses its gonna get alot worse b4, if ever it gets better. a director just dumped 67 mil of stock at like $50 a share what more incentive do u need

Mar 02 11:07 AM

[Jeffrey Moore:]

Being told that my points are retarded means a lot... Especially coming form a guy that doesn't capitalize, use punctuation, or say things like "ur".

I think it is pretty apparent that if a store spends little on capex, that they can pass savings along to the customer-Wal-Mart anyone?

Not that insider selling is a good way to analyze a company's performance, but since you brought it up, let's look at it: A director selling $50 million in stock, or two of the better capital allocators of our time sitting on (and adding to) well over 1/2 of the outstanding shares... hmm... who do I side with?

Regardless, your welcome for the laugh. :-)


On Mar 02 11:10 AM ScroogeMcduck wrote:

> oh and buy the way jeffery ur analogy about getting a better prices
> on items becasue the store is dirty is the most retarted thing ive
> herd in a while thanks for the laugh

Mar 02 12:22 PM

[Jeffrey Moore:]

By the way: writing 'form' instead of 'from' and 'or say things like...' is my way of being 'ironical'. ;-)

Mar 02 12:26 PM

[sclarksons:]

I was in fact accused of being an anonymous emailer,

I also replied again to Jeff Macke and "Big Jim" letting them know that I own or manage several thousand shares of SHLD, and again, asking Macke to describe the "transfer of 5 Billion from Sears to his hedge fund"

My final two comments were very straightforward, kind, and were blocked.

Okay, I got a little challenging on the earlier comment, telling him that he was either short the stock, stupid, or being pimped out by a shortseller.

I hold to that scenario.

Mar 02 05:29 PM

[Kelley:]

That Macke piece was a regurgitation of every other negative commentary about SHLD out there. Talk about not doing one's homework.

Sears has done a lot to improve its on-line presence. This is where big changes can be made for a smaller amount of dollars. No one seems to give that any attention. Moreover, SHLD recently beat estimates, and all people can talk about is Eddie's rant in the shareholder letter. I read the letter, and it didn't seem like a rant to me.

Ah, perception. I forgot. Same thing happened when Ackman showed up at the shareholders meeting last May. Journalists wrote how Ackman "pressured" and "grilled" Lampert to answer questions relating to SHLD. Haha. I was there. Ackman stood up, asked his questions and sat down. It was a non-event. He even stood up a second time and told Lampert he appreciated the job he was doing.

My other favorite Eddie bashing? I hear often that he doesn't know retail. Really, folks? Check out AZO. They just made an historic high today.

I cannot guarantee that I won't lose money on my investment in SHLD. However, I feel confident in the upside. I feel even more confident when I read recycled and incomplete "analysis."

Jeffrey, fcharlie and sclarksons - thanks for calling out the Macke spin!

Mar 03 11:07 AM

[Jeffrey Moore:]

Here is a question for all fellow SHLD lovers.

The original article has been edited so that the points that I make are no longer relevant-as in, Jeffrey Macke changed his writing on Minyanville.com! I am trying to find someone that has a screen shot of the original article, or even knows of a way to access the article before the changes were made, so that I can do a "before and after" write up.

Just take a look at the new article, he changed CEO to Chairman and completely got rid of the $5 billion dollar cash out into Eddie's hedge fund!

It is awesome that a bunch of angry SHLD fans got him to go back on what he said!

thanks in advance.

Mar 05 01:43 PM

[Jeffrey Moore:]

do you have any way to find the old article? email me with any info.

thanks,


On Mar 02 10:17 AM fcharlie wrote:

> I emailed Macke as well, asking the same question.... No response.
>
>

Mar 05 01:55 PM

[Jeffrey Moore:]

do you have any way to find the old article? email me with any info.

thanks,


On Mar 03 11:07 AM Kelley wrote:

> That Macke piece was a regurgitation of every other negative commentary
> about SHLD out there. Talk about not doing one's homework.
>
> Sears has done a lot to improve its on-line presence. This is where
> big changes can be made for a smaller amount of dollars. No one seems
> to give that any attention. Moreover, SHLD recently beat estimates,
> and all people can talk about is Eddie's rant in the shareholder
> letter. I read the letter, and it didn't seem like a rant to me.
>
>
> Ah, perception. I forgot. Same thing happened when Ackman showed
> up at the shareholders meeting last May. Journalists wrote how Ackman
> "pressured" and "grilled" Lampert to answer questions relating to
> SHLD. Haha. I was there. Ackman stood up, asked his questions and
> sat down. It was a non-event. He even stood up a second time and
> told Lampert he appreciated the job he was doing.
>
> My other favorite Eddie bashing? I hear often that he doesn't know
> retail. Really, folks? Check out AZO. They just made an historic
> high today.
>
> I cannot guarantee that I won't lose money on my investment in SHLD.
> However, I feel confident in the upside. I feel even more confident
> when I read recycled and incomplete "analysis."
>
> Jeffrey, fcharlie and sclarksons - thanks for calling out the Macke
> spin!

Mar 05 01:55 PM

[Jeffrey Moore:]

do you have any way to find the old article? email me with any info.

thanks,


On Mar 02 05:29 PM sclarksons wrote:

> I was in fact accused of being an anonymous emailer,
>
> I also replied again to Jeff Macke and "Big Jim" letting them know
> that I own or manage several thousand shares of SHLD, and again,
> asking Macke to describe the "transfer of 5 Billion from Sears to
> his hedge fund"
>
> My final two comments were very straightforward, kind, and were blocked.
>
>
> Okay, I got a little challenging on the earlier comment, telling
> him that he was either short the stock, stupid, or being pimped out
> by a shortseller.
>
> I hold to that scenario.
>

Mar 05 01:55 PM

[Jeffrey Moore:]

do you have any way to find the old article? email me with any info.

thanks,


On Mar 01 10:38 PM Histo wrote:

> I think the shorts are FOOLS! Please keep shorting SHLD.
>
> This company makes money!!!, and has annual sales of nearly 50 Billion!!
>
>
> I think that makes them relevant in the eyes of consumers. All you
> haters will lose your ass. You don't have the "balls" for a war
> with Eddie and friends. You will be begging to cover when the crunch
> eases even a little bit?
>
> Suckers

Mar 05 01:55 PM

[Jeffrey Moore:]

after some searching, I found what I needed, and did a quite write up on the situation:

ragnarisapirate.blogsp...

Mar 05 03:40 PM

[Kelley:]

I am glad you found the original! Thanks for keeping us up to date on the changes. Nice!

Mar 06 08:31 AM